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Kluh Investments (Pty) Ltd v CSARS WCHC A48/2014 (9 Sep 14)

Monday, 15 September 2014   (0 Comments)
Posted by: Author: Pieter Faber
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Author: Pieter Faber (SAIT Technical Executive: Tax Law & Policy)


This is an appeal to a full bench of the Western Cape High Court from the tax court (ITC 13002 19 Aug 13) in respect of the taxpayer’s 2004 year of assessment whereby SARS assessed the sale of the taxpayers plantation as gross income.


The taxpayer, a resident company, is used as a special purpose vehicle by its Swiss holding company, Fihag Finanz und Handels AG (‘Fihag’). Steinhoff Southern Cape (Pty) Ltd (‘Steinhoff’) wanted to gain access to a particular planation in Knysna owned by the Thesen group but from a policy perspective did not want to buy the land leading to the initial transaction on 2 May 2001 being blocked due to this policy. Steinhoff approached a third party, Fihag who was a strategic business partner, whereupon it was agreed that the taxpayer would purchase the land, plantation and some residual assets from Thesen for R29,5m and Steinhoff would purchase the saw mill assets. Based on an oral agreement the taxpayer would allow Steinhoff to operate, manage and exploit the planation for its own profit and loss without payment of a fee on condition that on notice in future it makes available a similar quantity and quality plantation to the taxpayer. 

Steinhoff accordingly cancelled the original agreements it had entered into on 2 May 2001 with Thesen and the taxpayer (on 29 June 2001) and orally agreed to purchase the assets on the same terms as was previously agreed with Steinhoff, with a partial advance payment and occupation occurring on this date as well. However, the agreement was only reduced to writing on 5 October but with an effective date of 29 June 2001, which allocated the R11.95m of the purchase price to the plantation. During 2003 Steinhoff reconsidered it position and agreed with the taxpayer to purchase the land for R15m and the plantation for R144.7m. However, due to various disputes between the parties, including on the VAT treatment of the sale, the sale agreement was only finalised on 1 June 2004 once settlement of the disputes had been reached. As part of the settlement terms the taxpayer would pay Steinhoff a R12m bonus management fee for the exemplary manner in which it managed the plantation. The sale of the land and planation was treated as a sale of capital assets subject to capital gains tax with the base cost determined as the market value on the basis that the asset was a pre-valuation date asset.

During August 2010 SARS issued an additional assessment to the taxpayer on the basis that the sale of the plantation was a revenue in nature in terms of section 26 Income Tax Act read with paragraph 14 of the First Schedule and therefore the difference between the sale price of R144.7m and the initial cost of R11.95m should be included in gross income. The taxpayer lodged an appeal to the Income Tax court on the basis that it was not conducting farming operations. The appeal was dismissed by the tax court on the basis that there was a sufficient connection between the amount received by the taxpayer and the farming operations carried on by Steinhoff in an agency capacity.

Paragraph 14 applies independently

SARS’ first argument was that it was not necessary to apply section 26 separately as a precondition before the deeming provision in paragraph 14 applied and due to the closeness of the proceeds to the farming operations, once paragraph 14 applied by mere disposal of a plantation, the amount was to be included in gross income. This SARS submitted, applied irrespective of whether farming operations as per section 26 was conducted by the taxpayer.

Steinhoff as contract farmer

SARS’ alternative argument was that the taxpayer’s commercial interest in the condition and value of the plantation coupled with the performance of operations by Steinhoff, as independent contractor for its own profit but in accordance with agreed standards, with an obligation to restore the equivalent plantation at the end gives rise to the application of section 26 and paragraph 14.


Assessment of evidence

Before the High Court there were various disputes regarding how to assess the evidence, the court held that the necessary evidence before the court was in fact common cause between the parties and it merely had to conclude on those facts in relation to the specific law. The court recognised that the onus was on the taxpayer to prove that the amounts were not gross income but felt it convenient to rather address the legal questions on the two alternative basis raised by SARS as to why section 26 and paragraph 14 did apply to the proceeds. The court furthermore rejected the tax court’s conclusion that the facts presented in the resolutions, invoices and financials as to what was sold were relevant in resolving the dispute at hand and concluded that such evidence was only useful as to the credibility of the witnesses, as the matter at hand was a legal question. 

Paragraph 14 applies independently

The court found that this interpretation of the law by SARS and the tax court was incorrect and that paragraph 14 can only apply once the facts conclude that section 26 applied, for which the latter had two distinct requirements. Firstly, the person must carry on farming operations during the year of assessment and secondly the particular item of income must have been derived from such farming operations. The court stated that the tax court had only addressed the second issue without addressing the first. The court further stated that SARS did not contend and in fact conceded that the taxpayer was not on the ordinary principles engaged in a profit making scheme (i.e. buying and selling plantations) which would have resulted in a different enquiry. 

Steinhoff as contract farmer

The court found that from the uncontested evidence the taxpayer at no stage conducted farming operations on its own account which was distinctly different to the cases cited by SARS’ counsel where such farming operations were conducted either prior to or after the lease arrangement or sale. The court also rejected SARS’ contention that the various documents indicated that the taxpayer had appointed Steinhoff to manage the farming operations on its behalf based on the common cause facts clearly indicating otherwise. The court agreed with the taxpayer’s submission that at most Steinhoff was managing the taxpayer’s investment and at the same time managing its own farming operations. It concluded that Steinhoff could not have been regarded as managing the farming operations for a fee as the taxpayer stood to make no profit or loss from the farming operations and merely risked a decreased investment value if Steinhoff failed to maintain the agreed standard.


The court accordingly rejected SARS’ first submission that paragraph 14 applies distinct from the requirements in section 26 and the taxpayers appeal was upheld. The court also rejected SARS’ submission that Steinhoff acted as contract farmer and the taxpayers appeal was upheld.

The court did not give judgement in respect of two matters namely as to the levying of interest and whether the capital gain was correctly calculated. These matters would revert back to the income tax court for hearing once the main matter was determined as agreed by the parties. The court awarded the cost of two counsel in respect of only the High Court proceedings as the tax court did not make an award for those proceedings which the High Court felt was appropriate.  

Please click here to view full judgement.



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