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A (Pty) Ltd v the Commissioner for the South African Revenue Services

Thursday, 04 July 2013   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical


This appeal concerned the question of whether proceeds on the disposal by the appellant of certain shares, were of a capital or revenue nature. The respondent, being the Commissioner for SARS, had included the proceeds of the disposal of the shares in the appellant’s gross income on the basis that the proceeds were not of a capital nature. Appellant objected to this assessment on the ground that the proceeds were indeed of a capital nature, and that its liabilities formed part of the base cost of the shares disposed of, for the purposes of CGT, however, the respondent argued that the payments made in regard to the equity kicker did not stand to have been incurred by Appellant. 


The appellant, a special purpose vehicle, had the sole purpose of acquiring and holding the FG Shares.No other business was transacted, no physical director’s meetings were held and the appellant’s only other obligations were those associated with the funding obtained to acquire the FG shares and the normal statutory obligations such as filing tax returns and the preparations of financial statements. The appellant disposed of certain FG shares in the 2005 year of assessment. The Appellant alleged that the proceeds on the disposal of these shares stood to be classified as of a capital nature and the expenditure actually incurred and paid by appellant to KL (Pty) Ltd (‘KL’) and by KL to D Limited (‘D Ltd’) as a so called ‘equity kicker’ in respect of loans from D Ltd to KL and from KL to the Appellant were to be excluded from the capital gain made by Appellant on the sale of the FG shares. 


It was held that the question arising in this case was, what was the intention of the taxpayer both at the point of acquisition and at the sale of the shares in issue? The appellant did not have to show that the shares were ‘held for keeps’ but that did not relieve it of the burden of proving that the purchase was intended to be an investment of some significant duration. In the present case the shares in issue were not part of an investment share portfolio which may need more rapid responses to protect the overall investment but a once-off transaction. The evidence did not discount the possibility of an early realisation and it could not be concluded on the strength of the available evidence that the probabilities were in favour of the shares being initially acquired as a capital asset.  

The court further held that the intention of the taxpayer, on acquisition of theShares, did not show that there was always an intention to realise the shares for a significant profit and the question was not if but when a sale would occur and hence a profitmaking intention was always a dominant purpose within the mind of those who controlled the taxpayer. When both the purpose at the time of acquisition and sale of the shares are considered, it could not be concluded, on the probabilities, that a long-term investment had been realised to best advantage. On the contrary, the mixed intention had converted into a clear purpose of selling to ‘cash in’ on the profit, accordingly the gain from the disposal of the shares in issue stood to be classified as a revenue gain in the hands of the taxpayer.

Held in regard to the ‘equity kicker’, that it was expenditure incurred in order to implement the transaction which was of a revenue nature and this obligation fell ultimately to be discharged by the taxpayer and hence was to be allowed as a deduction from its taxable income. Further, with regard to the indemnification agreement, the evidence indicated that the taxpayer had assumed an unconditional liability and the court was entitled to conclude that the amount in issue was expenditure, actually incurred, during the relevant year of assessment, because in that year of assessment an unconditional liability to pay that amount had been created. In regard to the interest levied by the Commissioner, the interest levied was to be remitted in terms of s 89quat(3) of the Income Tax Act 58 of 1962. Consequently, the 2005 assessment against the appellant was revised and set aside.

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