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Dr A v CSARS ITC 13132 WCTC 8 Dec 2014

08 January 2015   (0 Comments)
Posted by: Author: Pieter Faber
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Author: Pieter Faber (SAIT)

Introduction

This is an appeal to the Western Cape tax court against the inclusion of grapes delivered for wine making to a co-operative as "produce held and not disposed of” in respect of the taxpayer’s 2009 year of assessment. 

Facts

The taxpayer carried on a vineyard farm and for the purposes of paragraph 2 of the First Schedule to the Income Tax Act included in his 2006, 2007 and 2008 returns for those years of assessment the value of the grapes harvested by the taxpayer and delivered to a co-operative for the purposes of producing wine, as produce held and not disposed of at the end of the year.

The taxpayer is a member of the co-operative and delivers grapes together with other farmers to the co-operative. The grapes are then pooled and wine is produced from it by the co-operative. The farmers share in the proceeds from the sale of the wine depending on the amount and quality of the grapes produced.

The taxpayer in its 2009 tax return took the position that as all the grapes harvested had been delivered to the co-operative it held no produce and did not include an amount for closing stock as in previous years. The grapes were at this date still in the process of wine making and not ready for sale or delivery.

SARS conducted an audit on the taxpayer for the 2009 tax year and included an amount of R789 338 in respect of closing stock from farming operations. The amount was determined by taking the amount of grapes harvested in tonnes and converting it to an estimation of liquid to be derived from the grapes and multiplying the result with the estimated distilling wine price.

The court has to determine whether:

-          Grapes in process constitute "produce” of the taxpayer at year end?

-          The grapes were "held and disposed of” by the taxpayer?

-           The method of the value determination is correct?

Held

The first matter to be decided was whether the grapes delivered to the co-operative constituted "produce” as the taxpayer contended that as it had been crushed and mixed with additional chemicals, it was no longer identifiable as grapes. 

The term "produce” is not defined in the Act and the court applied the normal grammatical meaning. The court concluded that as the making of wine forms part of wine farming, it logically follows that the crushed grapes remain a result of the farming operation just like the uncrushed grapes.

In respect of the "produce held and not disposed of”, the court concluded that it was common cause between the parties that a member does not transfer ownership of the grapes to the co-operative as the latter merely acts as agent. The court concluded that the taxpayer merely obtained joint ownership of an undivided share citing the following:

"In the case of mingling (confusio) the original owner of the fluids or metals become co-owners of the mixture in proportion to the value of their material used in the final mixture. Each owner thus has an undivided share in the common mixture.”

The court held that "held” extends beyond physical possession and extends to any form of dominium, including an undivided share. The conditions set out in the delivery agreements with the co-operative did not result in a disposal of the grapes, the taxpayer merely exchanged his right to exercise control over the grapes for a monetary claim subject to contingencies. The court held that expanding the legal manifestation of a right does not in this instance, lead to a change in the substance of a right. The grapes were therefore held and not disposed of at year end by the taxpayer.

In respect of the value determination, SARS conceded that the calculation in the assessment contained errors and it could not justify its methodology. The court held that as SARS did not amend it grounds of assessment nor did it provide reasons to the taxpayer for the basis of the calculation, it was not in a position to make an alternative determination. The court accordingly remitted this matter back to SARS for determination. The court also held that notwithstanding that SARS were successful on the legal basis of the assessment, the taxpayer was successful on the amount determination and therefore SARS was not entitled to levy interest on the assessed amount until it had been revised. On the same basis no cost order was made by the court.

Please click here to access the judgement


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