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New Adventure Shelf 122 (Pty) Ltd v CSAR [2017] ZASCA 29(28 March 2017)

Monday, 08 May 2017   (0 Comments)
Posted by: Authors: Joon Chong and Khodani Tshidzumba
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Authors: Joon Chong and Khodani Tshidzumba (Webber Wentzel)

Facts

During the 2007 tax year, New Adventure Shelf 122 (Pty) Ltd (the "Appellant") sold a piece of immovable property near Stilbaai at a price which resulted in it receiving a substantial capital gain as envisaged in the Eighth Schedule of the Income Tax Act 58 of 1962 (the "Act").This capital gain was taken into account in the assessment of the Appellant’s liability for tax in respect of that year, i.e. for 2017.

The purchaser failed to pay the full purchase price, which then led to the cancellation of the agreement several years later in 2011.In terms of the cancellation agreement, the property was returned to the Appellant. The Appellant retained what payments had been made by the purchaser as predetermined damages for breach of contract.

The Appellant's arguments

As a result of the cancellation of the contract, the Appellant had in fact received much less than the agreed price at which it had sold the property. This meant that it had been taxed on a capital gain that it had not received in 2007 and all it could obtain as a result of the cancellation of the sale was an assessed capital loss, with no corresponding gain to set off against the loss.

The Appellant applied to the Commissioner of the South African Revenue Services ("SARS") to withdraw its assessment under s 98(1)(d) of the Tax Administration Act 28 of 2011 ("TAA") – which at the time provided for an assessment being withdrawn should SARS be satisfied, inter alia, that it imposed ‘an unintended tax debt in respect of an amount that the taxpayer should not have been taxed on’ or that the recovery of the debt under the assessment ‘would produce an anomalous or inequitable result’. SARS was not prepared to withdraw the assessment.

The Appellant then applied to the Western Cape Division of the High Court, Cape Town seeking an order reviewing SARS’s decision and directing it to do so. The application was dismissed. The Appellant decided to appeal the matter at the Supreme Court of Appeal.

The Appellant argued that unlike "normal" income tax, the assessment of capital gains tax was not necessarily an annual event. The Appellant argued that the only way to match capital gains in one tax year with capital losses arising out of the same transaction in a later tax year, is to allow a redetermination, as envisaged in paragraph 25[1] of the Eighth Schedule of the Act.

In addition, the Appellant also argued that paragraph 35[2] should be interpreted to apply to the determination of capital gains in a particular year, and also a redetermination in a later year of a capital gain already accrued.

Effectively, the Appellant argued that the cancellation of the sale agreement in 2011 should result in the redetermination of the capital gains in the 2007 assessment.

SARS' contentions

SARS took the view that the 2007 assessment had to be regarded as final and could not be re-opened.

Under section 81(1) of the TAA, a taxpayer aggrieved by an assessment may object ‘in the manner and under the terms and within the period prescribed by this Act’. Section 81(2)(b) goes on to provide that the prescribed period for objections may not be extended ‘where more than three years have lapsed from the date of the assessment’. Section 81(5) provides that should no objections be made to an assessment, it ‘shall be final and conclusive’. Consequently, the now disputed assessment seemingly had become final and conclusive under section 81, and if that is so it is fatal to the relief the appellant seeks.

The Appellant argued that section 81 does not apply in respect of tax levied on a capital gain.

Legal question

Does the cancellation of the sale entitle the Appellant to have its tax liability for the 2007 year re-assessed?

Judgment of the SCA

The court held that the cancellation of the sale did not entitle the appellant to have his tax liability for the 2007 year re-assessed. The cancellation of agreement and its consequences were factors relevant to an assessment of any capital gain or, more likely, capital loss that accrued during that current tax year and not the year that the capital gain had initially accrued.

The court held that proceeds of a disposal "during a year of assessment" is to be reduced by three items - (i) by any amount already included in the taxpayer's gross income; (ii) by any amount which the taxpayer has to repay the purchaser; and (iii) by any amount reduced as a result of a cancellation or variation of the agreement. These three items reduce the proceeds and capital gain arising from the disposal in that (current) year.

The court held that paragraph 25 provides for the redetermination "in the current year of assessment" should certain events occur, i.e. in the tax year in which the events giving rise to the redetermination take place. The court referred to paragraphs 3 and 4 as support for this interpretation.

The court followed the High Court's conclusion that the appellant was not entitled to the relief that it sought and dismissed the appeal with costs.

Although the outcome of the judgement appears to be unfair to the taxpayer, it is submitted that the interpretation adopted by the court is probably correct. The court mentioned in its obiter that:

"in any event even if in certain instances it may seem ‘unfair’ for a taxpayer to pay a tax which is payable under a statutory obligation to do so, there is nothing unjust about it. Payment of tax is what the law prescribes, and tax laws are not always regarded as ‘fair’. The tax statute must be applied even if in certain circumstances a taxpayer may feel aggrieved at the outcome."


 

[1] Paragraph 25 deals with the determination of base cost of pre-valuation date assets.

[2] Paragraph 35 deals with the determination of proceeds of a disposal.


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