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Does the Founders Hill Judgement Really Overturn Established Tax Principles?

Tuesday, 30 August 2011   (0 Comments)
Posted by: Author: Andrew Hannington
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Does the Founders Hill Judgement Really Overturn Established Tax Principles?

Not really, maintains one tax expert—the outcry by a number of commentators notwithstanding…

It is assumed by many taxpayers that the interposition of a realisation company to realise property results in the profit being capital in nature.Hence there has been an outcry in reaction to the recently published Supreme Court of Appeal case,CSARS v Founders Hill (including one such view that appeared in last month’s issue of Money web’s Tax Breaks). In reaction to this case commentators have remarked that"the judgement overturns long-standing principles in the income tax laws” and that "this case would have profound tax consequences for land owner s and property developers”.

However, if one looks at the case law pertaining to property realisations and, specifically property realised by a realisation company, this case does not in anyway depart from the principles previously established in law.General principles: distinction between capital and revenue The definition of gross income contained in Section 1 of the Income Tax Act specifically excludes an amount, received or accrued to a person, which is capital in nature.What is "capital in nature” has not been defined in the Act, hence one of the foremost issues dealt with by the Courts over the years has been the distinction between capital and revenue.

In determining whether an amount received upon realisation of an asset is capital or revenue in nature, the starting point is usually the intention of the taxpayer. It is along standing principle in tax law that where an asset is realised at a profit as a mere change of investment there is no difference in character between the amount of enhancement and the balance of the proceeds.However, where the profit is, and I quote: "a gain made by an operation of business in carrying out a scheme for profit making, then it is revenue derived from capital productively employed and must be income”.

It is a well established principle that a person is entitled to realise their assets to best advantage, and to accommodate these assets to the exigencies of the market in which they were selling without converting what is capital to revenue.However, determining whether a person has merely realised an asset to their best advantage or embarked on a scheme of profit making is subjective and depends on the individual facts of each case.The question often posed is whether,based on the extent of the activities not AECI’s alter ego. It was formed solely for the purpose of acquiring the property and then developing and selling it at a profit, and therefore the realised profits were revenue in nature.


In our view the Court was correct in finding that the profit realised by Founders Hill was revenue in nature.This judgement does not overturn longstanding principles established in law.In fact, it reinforces and clarifies these long-standing principles.It is clear from the Berea West case, a case dating back to 1976,that the mere use of a realisation entity does not guarantee that the profits realised by such an entity are always capital in nature.It is only in certain special circumstances that a realisation entity will stand in the shoes of the person that has sold assets to it, and hold them in turn, as capital assets.But, as clarified in Founders Hill,special cases do not create general rules.

Where these special circumstances do not exist, the general principles must still be applied in determining whether the activities of the taxpayer are such that a taxpayer has crossed the Rubicon and started trading, as was the case in Founders Hill.

Source: By Andrew Hannington (Tax breaks)



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