Tradehold Wins CGT Case
28 September 2012
Posted by: Author: Peter Dachs
Tradehold Wins CGT Case
DTA was the turning point; amendments can be expected
The Supreme Court of Appeal(SCA) ruled in favour of the taxpayer in C:SARS v Tradehold Limited [132/11 (2012) ZASCA 61]on 8 May 2012, but National Treasury is likely to propose amendments to close what it sees as a loophole brought about by a Double Taxation Agreement (DTA).
The respondent, Tradehold, is a South African incorporated investment holding company which is listed on the JSE Limited. Briefly, the facts were that on 2 July 2002, at a meeting of Tradehold's board of directors in Luxembourg, it was resolved that to the Tax Court against the additional assessment raised by the Commissioner in this regard. The Tax Court relied on Article 13(4) of the DTA entered into between South Africa and Luxembourg, which provides that "gains from the alienation of property other than that referred to in Paragraphs 1, 2, and 3, shall be taxable only in the Contracting State of which the alienator is resident”.
The Tax Court held that, since none of the exceptions in Article 13 were applicable, and did not accept the Commissioner's argument that a deemed disposal of property should not be treated as an alienation of property for purposes of Article 13(4), Tradehold's appeal was upheld on this basis.The issue before the SCA was, inter alia, whether a deemed disposal as contemplated in paragraph12 of the Eighth Schedule to the Act constitutes an ‘alienation’ as contemplated in Article 13(4) of the DTA.
In upholding the decision of the Tax Court, Acting Judge Boruchowitz stated that a DTA modifies the domestic law, and will apply in preference to domestic law to the extent that there is any conflict. In considering whether the term ‘alienation’ as used in the DTA includes gains arising from a deemed (as opposed to actual) disposal of assets, the SCA held that:
•"… the term ‘alienation’ should be given a meaning that is congruent with the language of the DTA having regard to its purpose;
•on the basis that Article 13 of the DTA has a wide ambit and applies in respect of capital gains derived from the alienation of all property, it is reasonable to suppose that the parties to the DTA were aware of the provisions of the Eighth Schedule and must have intended Article 13 to apply to capital gains of the kind provided in the Eighth Schedule;
•it is of significance that no distinction is drawn in Article 13(4) between capital gains that arise from the actual or deemed alienations of property; and
•there is no reason in principle why the parties to the DTA would have intended that Article 13 should apply only to taxes on actual capital gains resulting from actual alienations of property
The SCA accordingly found that the term ‘alienation’ as used in the DTA is not restricted to an actual alienation, but is rather a neutral term having a broader meaning, including deemed disposals of assets giving rise to taxable capital gains. On this basis, the SCA held that from 2 July 2002, when Tradehold relocated its seat of effective management, the provisions of the DTA became applicable and Luxembourg accordingly had exclusive taxing rights to Tradehold's capital gains.
This judgement prompted Finance Minister Pravin Gordhan to issue a statement in respect of the judgement on 9 May 2012. The minister stated there in that the capital gains tax system has, since its inception in 2001, been based on the principle that South African residents were taxed on all of their assets, irrespective of where these assets were located. Therefore, whilst it would be unfair to tax a resident's capital gains accumulated before the taxpayer became a resident, equally, not taxing capital gains accumulated while a taxpayer was a resident would be equally unfair.
He further stated that the SCA judgement that a DTA applied to a deemed disposal and thus did not allow for an exit charge, appears to disturb the balance that has been achieved.
The minister concluded by stating that National Treasury is studying the judgement, and that, if necessary, it would propose amendments to the tax laws to clarify that a DTA does not apply to exempt capital gains upon a person ceasing to qualify as a ‘resident’. However, to maintain stability in the tax system, the minister confirmed that he would propose that any such amendment take effect only from 8 May 2012.
Source: By Peter Dachs (Taxbreaks)