Income Tax Case No 1863 75 SATC 125
04 February 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
The appellant, a mining
and prospecting enterprise, appealed against a tax assessment issued by the
respondent (CSARS), in respect of the 2003-2006 years of assessment, however,
the objection raised numerous issues. The matters dealt with in this appeal,
includes amongst others, application of the meaning of the word ‘disposal’ as
envisaged in para 11 of the Eighth Schedule to the Income Tax Act 58 of
1962, allowable deductions in terms of s 11(a) of the
Income Tax Act 58 of 1962, and application of s 58 of the Income Tax
Act 58 of 1962.
The appeal related to the following
2003 tax year:
Capital Gains Tax in respect of the alleged disposal of the C Mining Dump
The appellant, being the taxpayer, argued
that it did not dispose of the C Mining Dump, nor the rights thereto, within
the meaning of the word ‘disposal’ as envisaged in par. 11 of the Eighth
Schedule to the Income Tax Act, and also that it did not own the C Mining Dump
but had only acquired the rights to certain platinum bearing materials thereon,
consequently, the provisions of the Eighth Schedule to the Act were
inapplicable to the transaction concerned as were the penalties imposed in
terms of the provisions of section 76 of the Act.
SARS being the respondent, argued that
the disposal of the taxpayer’s 50% ownership of the chrome tailing rights to D
Company as contemplated in par. 11(1) of the Eighth Schedule to the Act for a
consideration paid by D Company to the taxpayer, in the sum of R3.5 million,
fell within the purview of par. 11(1) of the Eighth Schedule to the Act.
2004 tax year: fair value adjustment
The appellant asserted that the fair
value adjustment amount in question constituted an allowable deduction in terms
of section 11(a) of the Income Tax Act and was made up of office
expenditure and salaries incurred by the taxpayer when it took over the staff
and premises of E Mining (Pty) Ltd for its own purposes, to raise capital from
the public during a reverse take-over bid aimed at rescuing the latter in order
to secure its listing on the Johannesburg Stock Exchange.
The appellant further argued that the
assessment was factually incorrect in that E Mining (Pty) Ltd never issued
shares to the taxpayer in lieu of any loans that it advanced to it. While
arguing that the deduction of fair value adjustment was fully justified, the
taxpayer noted that it had been mistakenly claimed by way of an adjustment and/or
a write-off of a loan converted into shares and stated that the reason for the
mistake was fully set out in correspondence with SARS.
The respondent argued that the amount
in issue was not deductible in terms of section 11(a) of the Act reason
being that the taxpayer had tendered two different versions to SARS, regarding
the circumstances which led to the accrual of expenditure/loan advance as the
‘Fair Value Adjustment’.
2005 tax year:
Capital Gains Tax- Alleged ‘disposal’ of Chrome Tailings Right
The appellant contended that the
assessment in question was based on the incorrect assumption that it had
acquired certain mineral rights from F Company and G Company for no
consideration and thereafter had disposed of these rights between itself, the L
Consortium, D Company and NO company for a deemed consideration of R8 million.
The appellant further argued that the aforesaid assumption was factually
incorrect as no disposal of mineral rights per se had occurred within the
meaning of par. 11 of the Eighth Schedule to the Act.
The respondent argued that the mineral
rights acquired from G Company and F Company, have been acquired for no
consideration, as the appellant not laid out capital when the mineral were
acquired and further that the appellant by depriving itself of an asset in
favour of the L Consortium, had been involved in the transfer of an asset
(mineral rights and intellectual property) and thus ‘there was a disposal of a
2005 tax year:
Capital Gains Tax and Donations Tax – Disposal of an income share
The appellant argued that SARS’ application of par 38 of the
Eighth Schedule to the Act to the transaction concerned, as being a disposal of
an asset to a connected person in relation to itself, for a consideration which
did not reflect an arms’ length price, was factually and legally incorrect. The
appellant stated that on the conclusion of the transaction in issue, the
parties were totally unrelated and the transaction was primarily aimed at
severing their relationship with the least cost implications to each other,
with each party retaining all existing rights and benefits. Further the
transaction constituted a bona fide agreement concluded between parties acting
at arms’ length and consequently the provisions of par. 38 of the Eighth
Schedule were inapplicable.
The respondent argued that capital
gains tax was levied in terms of par 38 of the Eighth Schedule on the
‘disposal’ of an ‘asset’ and where such disposal was for no consideration par.
38 required the proceeds to be determined at the ‘market value’ of such asset
and in terms of section 58 of the Income Tax Act, SARS may deem a ‘disposal’ of
‘property’ as a donation when it has been disposed of for an ‘inadequate
consideration’. Consequently, the taxpayer was liable for Donations Tax in
terms of section 54 of the Act in respect of the said transaction as there had
been a disposal of the taxpayer’s 38% participation shares to L Co for no
consideration. Further, the taxpayer’s 38% participation right in the L
Consortium, was an unconditional
personal right which constituted an incorporeal asset, part of which was
disposed of for no consideration, thus bringing the transaction within the
scope of par 38 as being an ‘asset disposed of for’ ‘a consideration not
measurable in money’.
Donations Tax –
The taxpayer contended that SARS’
application of section 58 of the Income Tax Act to the transaction was flawed
in that no gratuitous ‘disposal’ of ‘property’ had taken place within the
meaning of section 58 of the Act.
2006 tax year:
Accrual of management fees
The appellant, in terms of the L
Consortium Agreement, became entitled to a management fee of 3.5% of the
consortium’s net operating profit before tax and such fee could only be
determined once payment had been received by the L Consortium in respect of the
sale of the ‘consortium concentrate’ in terms of certain off-take agreements
which provided for payment on the tenth day of the fourth month following the
delivery of the concentrate.
The appellant argued that it was quite evident that the accrual of the
management fees had only occurred once the L Consortium’s net income had been
determined and on which such fees could be calculated. Moreover, the management
fees income had been duly disclosed in the taxpayer’s financial statements for
the 2007 financial year and could not be taxed twice.
The appellant argued that SARS’
inclusion of the said amounts in the 2006 year of assessment was contrary to
the ‘accrual’ principle because the taxpayer had not acquired an unconditional
legal right to claim payment of a determinable amount.
Respondent contended that as the
taxpayer became unconditionally entitled to the fees in issue in the 2006 tax
year, the whole amount ought to have been included in the taxpayer’s gross income
in the 2006 tax year on an accrual basis and not in the 2007 tax year.
2003–6 tax years:
Deduction of overseas travel expenses
The appellant argued that the overseas
travel expenses in issue were deductible in terms of section 11(a) of
the Income Tax Act as they were incurred in order to raise working capital for
the company’s operations, inter alia, through loans from private investors and
from public funds through a possible listing on the London Stock Exchange.
Respondent argued that the overseas
travel expenditure sought to be deducted was capital in nature in that such
expenditure was more attached to the cost of establishing, enhancing or adding
to its income earning structure as opposed to being attached to the cost of
performing its income earning operations and the reasons given for travelling
overseas were invariably given among others of establishing a new office in
London or investigating the possibility of a listing. Consequently, insofar as
such expenditure related to the raising of working capital, it formed part of
the cost of performing its income-earning operations and therefore constituted
an allowable deduction in terms of section 11(a) of the Act.
2003–6 tax years:
Penalties in terms of section 76 of the Income Tax Act
The taxpayer contended that SARS’ imposition of penalties had been based
on the alleged non-disclosure of income or incorrect statements on the relevant
tax returns which allegedly resulted in the avoidance of tax but in the present
case no such non-disclosure or incorrect statements had been made and no tax
had been raised in addition to what had been properly declared in the relevant
The appellant further contended that
the penalties in question were not applicable as it was not guilty of transgressing
section 76 of the Act and SARS’ decision to apply the provisions of section 58
of the Act in regard to a so-called ‘deemed donation’ did not entitle it to
raise penalties for failure to submit a Donation’s Tax Return in circumstances
where the taxpayer, on reasonable grounds, disagreed with the opinion of SARS
as to whether or not a donation had taken place pursuant to the provisions of
section 58 of the Act.
Respondent that section 76(1) of the
Act applied equally to all issues that constituted the basis of the present tax
appeal as there had been either a default or omission or the making of
incorrect statements. If any of the above elements were present the taxpayer
was obliged to pay additional tax, being an amount equal to twice the
difference between the tax calculated in respect of the taxable income returned
by it and the tax which would have been properly chargeable.
SARS further contended that the fact that any omission, default or the
making of incorrect statements had been due to the taxpayer’s accountants was
no defence as the taxpayer as the taxpayer remained ultimately responsible for
its own tax affairs.
section 89(2) of the Income Tax Act
The appellant argued that SARS in
raising interest retrospectively created an anomalous situation in that it
became entitled to interest in respect of taxes not legally due at the time of
the transaction concerned nor payable during the period prior to its Notice of
2006 tax year:
The appellant argued that the L
Consortium incurred expenditure in respect of the construction of its
processing plant and the taxpayer’s 25% share of such expenditure amounted qualified
for deduction in terms of section 36 of the Income Tax Act.
The court held that, the s
11(a) deduction claimed in terms of the Income Tax Act 58 of 1962,
in respect of office expenditure, was incurred by the taxpayer on behalf of
another company, on loan account, in order to be converted into shares. The
purchase expenditure relating to the acquisition of equity and to obtaining a
listing, is capital in nature and that the taxpayer had not proved that the
expenditure in issue should not be so regarded. The court directed the
Commissioner to recalculate the accrual of the taxpayer's entitlement to
management fees. The court further held that the taxpayer’s claim that certain
expenditure incurred on overseas travel was deductible in terms of s 11(a), was not supported with proof, and therefore
the disallowance by SARS was not set aside. The court dismissed the
taxpayer's appeal against the imposition of penalties in terms of s76. With
regard to the assessment on donations tax, the court held that the transaction
in question was not a donation in that consideration was given. As to the
assessment to capital gains tax, it was held that the taxpayer had not
discharged the onus of proving that the amount in question was not subject to
tax. The appeal was entirely dismissed.
Please click here to access the full case.