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Is there a capital gain on a non-business related damages payout received from a landlord?

Wednesday, 12 August 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: Would a damages payout to an individual, received as a result of a negligent landlord, be subject to CGT in an individual’s hands?

A: The taxpayer will bear the onus of proof if the matter is disputed by SARS.  The general principle in this regard has been quoted (with approval) from Silke by Judge Kroon in the Stellenbosch Farmer’s winery case as follows:

"An amount received by way of damages or compensation for the loss, surrender or sterilisation of a fixed capital asset or of a taxpayer’s income-producing machine is a receipt of a capital nature.

. . .

In order for compensation for the cancellation of a trading contract to constitute a sum of a capital nature, it is sufficient if the contract constitutes a substantial part of the business, and the cancellation need not have the effect of destroying or materially crippling the whole of the taxpayer’s income producing structure.” 

The Judge then found that "the taxpayer, which did not carry on the business of the purchase and sale of rights to purchase and sell liquor products, did not embark on a scheme of profit-making, and that it did discharge the onus of establishing that the receipt of R67 million was of a capital nature.”

Based on the information provided the taxpayer would be able to discharge the onus – due to negligence of a third party and not business related. 

We don’t have enough information to comment on whether or not the right to the compensation constituted an asset and the possible capital gain consequences.  In terms of paragraph 59 of the Eighth Schedule a natural person must disregard a capital gain or a capital loss determined in respect of a disposal that resulted in that person receiving compensation for personal injury, illness or defamation of that person or a beneficiary of that special trust.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision. 



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