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Income Tax Case No 1863 75 SATC 125

04 February 2014   (0 Comments)
Posted by: Author: SAIT Technical
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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 principal issues: 

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 right. 

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 – Deemed donation 

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 tax returns. 

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.

Interest under 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 Assessment. 

2006 tax year: Capital expenditure

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.

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