Is there a capital gain on a non-business related damages payout received from a landlord?
12 August 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: Would a
damages payout to an individual, received as a result of a negligent landlord,
be subject to CGT in an individual’s hands?
A: The taxpayer
will bear the onus of proof if the matter is disputed by SARS. The general principle in this regard has been
quoted (with approval) from Silke by Judge Kroon in the Stellenbosch Farmer’s
winery case as follows:
"An amount received by way of damages or compensation for
the loss, surrender or sterilisation of a fixed capital asset or of a
taxpayer’s income-producing machine is a receipt of a capital nature.
. . .
In order for compensation for the cancellation of a trading
contract to constitute a sum of a capital nature, it is sufficient if the
contract constitutes a substantial part of the business, and the cancellation
need not have the effect of destroying or materially crippling the whole of the
taxpayer’s income producing structure.”
The Judge then found that "the taxpayer, which did not carry
on the business of the purchase and sale of rights to purchase and sell liquor
products, did not embark on a scheme of profit-making, and that it did
discharge the onus of establishing that the receipt of R67 million was of a
Based on the information provided the taxpayer would be able
to discharge the onus – due to negligence of a third party and not business
We don’t have enough information to comment on whether or
not the right to the compensation constituted an asset and the possible capital
gain consequences. In terms of paragraph
59 of the Eighth Schedule a natural person must disregard a capital gain or a
capital loss determined in respect of a disposal that resulted in that person
receiving compensation for personal injury, illness or defamation of that
person or a beneficiary of that special trust.
Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.