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TC-IT 13472 SG – 18 November 2014

26 November 2014   (1 Comments)
Posted by: Author: Pieter Faber
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Author: Pieter Faber (SAIT Technical Executive: Tax Law & Policy)

Introduction

This is an appeal by the taxpayer to the Gauteng Income Tax Court in respect of the taxpayer’s 2008 year of assessment where SARS disallowed the taxpayer’s reduction of the proceeds from the sale of shares.

Facts

The appellant, Mr Z, acted as agent for A company in November 2003 in respect of an offer to purchase received from F, in respect of shares held in BCD (Pty) Ltd. A sale agreement was concluded and the 47,3 per cent interest was sold to F on the understanding that A Company would have no minority shareholder  protection. Mr Z was also a shareholder in BCD (Pty) Ltd and in August 2007, also sold his 27,005 per cent interest in BCD (Pty) Ltd to F for R841 655 833.

During the relevant offer to purchase in 2003, Mr Z had failed to disclose to A company that F would have extended minority protection rights to it and that it was therefore not compelled to sell its minority shares in BCD (Pty) Ltd company to F. A company instituted a damages action against Mr Z in October 2007 and they finally settled the dispute and obligation by 31 October 2007 for an amount of damages of R694 888 271, which was also made an order of court.

For his 2008 tax return, Mr Z in calculating the capital gain on the shares that he sold in BCD Pty Ltd, deducted the compensation payment made to A company from the proceeds received from F and only indicated the net amount of R216 218 233 as the proceeds. This was done following accounting and tax advice that was given to Mr Z that paragraph 35(3)(c) of the Eighth Schedule to the Income TA Act (No. 58 of 1962) allows for the proceeds to be reduced by any amount that was reduced from such proceeds as a result of any other event.

During December 2012, SARS audited Mr Z and raised an assessment for the amount deducted from the proceeds. In addition SARS raised an understatement penalty in terms of section 223 of the Tax Administration Act 28 of 2011 of 75% which equated to R46 907 820, on the basis that the taxpayer had no reasonable grounds for the tax position taken. SARS also raised interest on both amounts payable to SARS.

SARS’ grounds of assessment was that the words any other event must be interpreted in context of the more specific stated matters in that paragraph and be restricted to any other events that are similar to the specifically stated events.

Held

Reduction of proceeds

The court first dealt with the submission on whether only the difference in amounts was the actual amount received and whether the compensation payment was causally linked, which the court concluded that it was not and was in respect of two distinct matters.  The court further concluded that paragraph 35 is unambiguous as to whether the appellant received or accrued the full sale proceeds of R841m and the obligation to pay the compensation did not result in a lesser amount being received for the sale of shares as contended by the taxpayer.

The taxpayers second submission was that the full amount received or accrued could be reduced in terms of paragraph 35(3)(c) as the 2003 sale of shares was "any other event” which could reduce the proceeds of the 2007 sale. SARS submitted that the ejusdem generis rule applied and that the general term "any other event” was restricted by the less general wording in paragraph 35(3)(c). The court agreed with the following SARS’ citations in point from the Commissioner of Customs v Joffre 1934 WLD 8 at [10]:

"….it becomes necessary to consider how the ejusdem generis rule is applied…

...But the general word which follows particular and specific word of the same genus nature as itself takes its meaning from them, and is presumed to be restricted to the same genus as those words; or, in other words, as comprehending only things of the same kind as those designated by them, unless of course, there be something to show that a wider sense was intended.”

and at [11] 

"a definition given by Lord Campbell of the ejusdem generis rule – "That where there are general words following particular and specific words, the general words must be confined to things of the same kind as those specified.” 

SARS submitted that on this basis the words "any other event” should be limited to the two specific groups of things specified in paragraph 35(3)(c), namely to changes to the disposing agreement and secondly to the release from the obligation to pay. The court at [32] agreed with SARS’ submission on the law and concluded that the taxpayer could only have relied on other events that fell within these two categories, which the payment for the breach of the fiduciary capacity did not.

Penalties and interest

The court accepted the common cause position that the provisions of the Tax Administration Act would apply retrospectively to this matter and in specific section 221, in respect of understatement penalties. The SARS had imposed a penalty of R46m on the basis that the behaviour applicable to the taxpayer was that he did not take "reasonable care” or that "no reasonable grounds exist for the tax position taken”. 

The court in addressing the matter relies on the following comment in Juta:

"The test as to whether the grounds are reasonable, is objective, in relation to the actions of the taxpayer. A mere subjective belief by the taxpayer that a deduction should be allowed, without taking advice on the matter, is unlikely to be reasonable. On the other hand, the reliance by the taxpayer on expert advice, even if this is wrong, will on most cases constitute reasonable grounds for the action taken.” 

On this basis the court concluded that the taxpayer had acted reasonable as he did in fact take advice from specialists. The court found that the behaviours applied by SARS were therefore not applicable but at most a substantial understatement as it was common cause that the relevant understatement fell within that definition. The court, however, found that the taxpayer had no extenuating circumstances and would not be entitled to further remittance under section 270(6D). 

In respect of the interest levied in terms of section 89quat, the court held that subsection (3) provides the Commissioner with a discretion and that based on the finding of the reasonableness of the taxpayer’s actions, such interest should also be remitted..

Conclusion

The taxpayer’s appeal against the assessment was dismissed, the understatement penalty was reduced to 10 per cent and the interest was remitted in full on the basis that his actions, based on the facts, were reasonable.

Please click here to view judgement.

Comments...

Jacobus A. Coetzee says...
Posted 27 November 2014
The taxpayer's return when the proceed occurred and assessed was in the 2008 tax year. Will the tax administration act of 2011 of understatement penalty still apply on a 2008 return?

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