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When proceeds accrue

Monday, 17 July 2017   (0 Comments)
Posted by: Author: Heinrich Louw
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Author: Heinrich Louw (CDH)

Judgment was delivered in the tax court on 30 May 2017 in the matter of M v Commissioner for the South African Revenue Service (case number 14005, as yet unreported). The case dealt with the familiar question of whether proceeds had accrued in a particular year of assessment, even though payment was only received in a subsequent year of assessment.

While the judgment is not by any means ground-breaking, it serves as additional authority for some of the established principles, and touches on some finer points, regarding the suspension of performance.

 In this case the taxpayer had sold certain immovable properties during its 2013 year of assessment. It was a term of the agreements of sale that the buyer would only make payment of the purchase consideration against transfer of the relevant immovable property – a term that is relatively common. Transfer was only given in the 2014 year of assessment. 

The South African Revenue Service (SARS) assessed the taxpayer on the basis that the purchase consideration accrued during the 2013 year of assessment, and should have been included in gross income for that year. It was not in dispute that the accruals were not of a capital nature. Alternatively, SARS argued that the purchase consideration is deemed to have accrued in terms of s24(1) of the Income Tax Act, No 58 of 1962 (Income Tax Act) – the application of which we do not consider for present purposes. 

The taxpayer disputed SARS’s assessments and the matter eventually proceeded to the tax court. 

The taxpayer contended that the purchase consideration only accrued when it became entitled to receive payment, which was upon transfer.

We know from the cases of WH Lategan v CIR 2 SATC 16 and CIR v People’s Stores (Walvis Bay) (Pty) Ltd 52 SATC 9 that an entitlement to payment constitutes something that can “accrue”, even though actual payment is only due in future.

We also know that the proviso to the definition of “gross income” in s1 of the Income Tax Act provides that where a person becomes entitled to any amount payable in the future, the amount is deemed to accrue during the year that the person becomes so entitled to the amount, as opposed to the future date for payment. 

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