Tax law bound to change to stop loophole
21 May 2012
Posted by: SAIT Technical
By Matthew Lester (Tax Talk 19 May 2012)
Taxpayers seldom succeed in appeals to the Supreme Court of Appeal (SCA). In the recent NWK decision many tax pundits openly criticised the judgment of Judge Carole Lewis as it shifted boundaries in tax planning that had existed for 100 years.
And in the recent Founders Hill case the SCA overruled the lower court when interpreting the meaning of "property development” (quite rightly, in my humble opinion).
However, the most recent tax case, C: SARS v Tradehold Ltd (May 8 2012), suggests taxpayers may have some prospect of success in the SCA.
A fundamental principle of capital gains tax (CGT) is to impose an "exit charge” that deems taxpayers to have disposed of all their assets, other than immovable property and assets of a branch, when exiting South Africa.
This is achieved through special rules that trigger the "disposal” of assets at market value when an individual emigrates or a company sets up a seat of management in a foreign tax jurisdiction.
Tradehold sought cover in the Luxembourg-South Africa double-taxation agreement. This provides Luxembourg an exclusive right to tax capital gains on the alienation of assets of a company effectively managed in Luxembourg.
The SA Revenue Service argued "alienation” did not cover a deemed disposal of assets under the CGT legislation.
The Tradehold argument was accepted by the Tax Court, but SARS appealed the judgment. The SCA didn't buy the SARS argument either, and Tradehold won.
An important technical point may have been ignored by all. The deeming provision is effective on the day before exit (para 13(1)(g) of the 8th schedule. In other words, the day before exit Tradehold was a resident of South Africa and not covered by the double-taxation agreement.
I wonder what the outcome would have been if the case had been argued on the basis that the transaction was entered into solely or mainly to obtain a tax advantage. And if the principles laid down by Judge Lewis in the NWK case had been applied.
There is no way that SARS can tolerate the tax-planning opportunity created by this judgment. So we can expect that the exit-deeming provisions will be overhauled, possibly by as soon as June 2012 when the draft income tax amendments for 2012 are presented to parliament.