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ABC (Proprietary) Limited v The Commissioner for the South African Revenue Services

Thursday, 29 August 2013   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical


In this matter, it had to be established whether, or not, the proceeds with the disposal of a plantation (owned by the appellant) were subject to the provisions of section 26(1) of the Income Tax Act (the Act). In terms of section 26(1), the provisions of the First Schedule to the Act must be applied in the calculation of taxable income derived from carrying on pastoral, agricultural or other farming operations. 

If the First Schedule applies, the receipt or accrual with the disposal of the plantation is deemed, in terms of paragraph 14, to be of a non-capital nature and therefore it will form part of the farmer’s gross income. This represents the manner in which SARS (the respondent) treated the transaction in the additional assessment that was issued. 

The appellant objected to this assessment, stating that the provisions of section 26(1) could not apply to the sale of the plantation as it was acquired for investment purposes and not to carry on a trade. Therefore, according to the appellant, only the capital gain arising from the disposal of the plantation should be included in taxable income. 

Consequently, the tax court had to determine whether the appellant carried on ‘pastoral, agricultural or other farming operations’ during the relevant years of assessment and if it did, whether the proceeds with disposal of the plantation were ‘derived from such operations’.  


The appellant submitted that the plantation was acquired for investment purposes and that it contracted with a third party ("E”) to carry on farming operations on E’s own behalf and for E’s own benefit. According to the appellant, the plantation never formed part of its business operations as it did not farm. After the land was acquired, it granted the usufruct to E and retained the bare dominium. The appellant earned no income and neither incurred any expenses relating to the operations that were exclusively undertaken by E. In return, E only had the obligation to safeguard the appellant’s investment by maintaining the plantation and with the termination of the agreement E was obliged to return the same quantity and timber to the appellant.

In terms of the agreement the passive ownership of the land and plantation were separated from the farming operations which had been carried out by E since E only had the use of the land and of the plantation as well as the right to yield income from the plantation for the duration of the agreement. 

The respondent claimed that the key issue in this matter was to determine if a close and direct connection exists between the owner of the property (the appellant) and the income generated from the farming activities conducted thereon. Since the appellant retained a direct interest in the failure or success of the farming operations, it was argued that the appellant conducted farming operations. 

In support of this statement, the respondent held that the appellant had control over the management and standard of the farming activities and benefitted directly from the fruits of this management. It was submitted that section 26(1) could still apply, although the appellant contracted with E to manage the plantation. The respondent claimed that the appellant retained a direct, real and commercial interest and involvement in its plantation business for the whole period under review and therefore taxable income was derived directly from the farming operations. 

Another objection to the appellant’s case was based on the sales agreement concluded between the appellant and the entity from which the plantation business was acquired ("D”). In terms of the purchase agreement, the appellant agreed to acquire the business ‘as a going concern’. This means that the appellant acquired the exclusive right to deal with the plantation as its own business, including the right and freedom to carry out farming activities and to derive proceeds therefrom.


The evidence presented to the court needed to be evaluated in order to determine if the appellant retained a direct interest in the plantation and farming business and if it was to such an extent that it can be regarded that the appellant itself was conducting farming operations. The court was provided with testimonies from the appellant’s witnesses who insisted that the appellant made an investment and never engaged in farming operations. In contrast, the documentary evidence provided by the respondent suggested that the appellant was a farmer.

The court placed a higher value on the documentary evidence provided by the respondent, stating that the onus was still on the appellant to support the statements of its witnesses with objective facts or evidence. 

The court also referred to the sales agreement between the appellant and E, which stated that the business was sold as a going concern and subsequently VAT was levied at zero percent on the sale. The fact that the appellant reversed this entry and subsequently paid the VAT, made no difference to the intention of the parties on the date that the agreement was signed. 

The documentary evidence presented to the court (including contracts and financial statements) indicated that the appellant was conducting a business of plantation farming, that it sold the plantation business as a going concern and then employed E to manage the plantation business on its behalf. Therefore, the court ruled that section 26(1) of the Act did apply to this transaction and that the proceeds with the sale of the plantation were correctly included in the appellant’s gross income in terms of paragraph 14(1) of the First Schedule. 

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