ABC (Proprietary) Limited v The Commissioner for the South African Revenue Services
29 August 2013
Posted by: Author: SAIT Technical
Author: SAIT Technical
In this matter, it had to be established whether, or not, the proceeds
with the disposal of a plantation (owned by the appellant) were subject to the provisions
of section 26(1) of the Income Tax Act (the Act). In terms of section 26(1),
the provisions of the First Schedule to the Act must be applied in the
calculation of taxable income derived from carrying on pastoral, agricultural
or other farming operations.
If the First Schedule applies, the receipt or accrual with the disposal
of the plantation is deemed, in terms of paragraph 14, to be of a non-capital
nature and therefore it will form part of the farmer’s gross income. This
represents the manner in which SARS (the respondent) treated the transaction in
the additional assessment that was issued.
The appellant objected to this assessment, stating that the provisions
of section 26(1) could not apply to the sale of the plantation as it was
acquired for investment purposes and not to carry on a trade. Therefore,
according to the appellant, only the capital gain arising from the disposal of
the plantation should be included in taxable income.
Consequently, the tax
court had to determine whether the appellant carried on ‘pastoral, agricultural
or other farming operations’ during the relevant years of assessment and if it
did, whether the proceeds with disposal of the plantation were ‘derived from
The appellant submitted that the plantation was acquired for investment
purposes and that it contracted with a third party ("E”) to carry on
farming operations on E’s own behalf and for E’s own benefit. According to the
appellant, the plantation never formed part of its business operations as it
did not farm. After the land was acquired, it granted the usufruct to E and
retained the bare dominium. The appellant earned no income and neither incurred
any expenses relating to the operations that were exclusively undertaken by E.
In return, E only had the obligation to safeguard the appellant’s investment by
maintaining the plantation and with the termination of the agreement E was
obliged to return the same quantity and timber to the appellant.
In terms of the agreement the passive ownership of the land and
plantation were separated from the farming operations which had been carried
out by E since E only had the use of the land and of the plantation as well as
the right to yield income from the plantation for the duration of the
The respondent claimed that the key issue in this matter was to
determine if a close and direct connection exists between the owner of the
property (the appellant) and the income generated from the farming activities
conducted thereon. Since the appellant retained a direct interest in the
failure or success of the farming operations, it was argued that the appellant
conducted farming operations.
In support of this statement, the respondent held that the appellant had
control over the management and standard of the farming activities and
benefitted directly from the fruits of this management. It was submitted that
section 26(1) could still apply, although the appellant contracted with E to
manage the plantation. The respondent claimed that the appellant retained a
direct, real and commercial interest and involvement in its plantation business
for the whole period under review and therefore taxable income was derived
directly from the farming operations.
Another objection to the appellant’s case was based on
the sales agreement concluded between the appellant and the entity from which
the plantation business was acquired ("D”). In terms of the purchase
agreement, the appellant agreed to acquire the business ‘as a going concern’.
This means that the appellant acquired the exclusive right to deal with the
plantation as its own business, including the right and freedom to carry out
farming activities and to derive proceeds therefrom.
The evidence presented to the court needed to be evaluated in order to
determine if the appellant retained a direct interest in the plantation and
farming business and if it was to such an extent that it can be regarded that
the appellant itself was conducting farming operations. The court was provided
with testimonies from the appellant’s witnesses who insisted that the appellant
made an investment and never engaged in farming operations. In contrast, the
documentary evidence provided by the respondent suggested that the appellant
was a farmer.
The court placed a higher value on the documentary evidence provided by
the respondent, stating that the onus was still on the appellant to support the
statements of its witnesses with objective facts or evidence.
The court also referred to the sales agreement between the appellant and
E, which stated that the business was sold as a going concern and subsequently
VAT was levied at zero percent on the sale. The fact that the appellant
reversed this entry and subsequently paid the VAT, made no difference to the
intention of the parties on the date that the agreement was signed.
The documentary evidence presented to the court (including contracts and
financial statements) indicated that the appellant was conducting a business of
plantation farming, that it sold the plantation business as a going concern and
then employed E to manage the plantation business on its behalf. Therefore, the
court ruled that section 26(1) of the Act did apply to this transaction and
that the proceeds with the sale of the plantation were correctly included in
the appellant’s gross income in terms of paragraph 14(1) of the First
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