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Commissioner SARS v South African Custodial Services (Pty) Ltd [2012] JOL 28496 (SCA)

Monday, 21 May 2012   (0 Comments)
Posted by: Stiaan Klue
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In August 2000, the taxpayer and the Minister of Correctional Services concluded a concession contract in terms of which the taxpayer would design, construct and operate a prison. The taxpayer would have the right to occupy the land for the duration of the concession but would have no title to, ownership interest in, liens, leasehold rights or any other rights in the land and the State would at all times remain the owner of the land. The taxpayer sub-contracted the design, construction and commissioning of the prison, as well as the running thereof to third parties. It earned fixed and variable income from its running of the prison in terms of the concession contract, the fixed fee income being payment for the construction of the prison.


In response to an assessment issued by the appellant for the 2002 year of assessment, SACS requested a reduced assessment in terms of section 79A of the Income Tax Act on the basis that certain expenses that qualified for deduction had not been claimed as deductions in its tax returns for the relevant period.

On 4 May 2007, SARS sent a letter to the taxpayer which was described as containing revised assessments for the 2002-2004 tax years. SACS subsequently lodged a notice of objection dated 19 September 2007, in which it described the year of assessment to which it applied as "2003-2004; alternatively 2002”.  In his response, the appellant contended that as no objection to the 2002 assessment was received within the three year period after the date of assessment, that assessment was final and conclusive. According to the appellant, the date of assessment was 1 June 2004, the letter of 4 May 2007 was not a revised assessment, and therefore three years after the date of assessment the 2002 assessment became final. SACS, on the other hand, argued that the letter of 4 May 2007 was indeed a revised assessment and consequently that the assessment for the 2002 year of assessment had not become final.

The second issue related to the construction of the prison by SACS. The latter contended that in the construction of the prison, it carried out a trade; the materials that were used to construct the prison constituted its trading stock; those materials, when they were built into the prison, acceded to the prison – and hence became the property of the State – and that, as a result, the materials were deemed to be trading stock held and not disposed of by it in terms of section 22(2A) of the Act; and that consequently, being expenditure actually incurred, and not being of a capital nature, the cost of the construction of the prison was a permissible deduction from SACS’s income in terms of section 11(a) of the Act.

As SACS incurred a number of fees payable to various parties in order to bid for the tender and to raise the loans that it required to finance the construction of the prison, it claimed to be entitled to a deduction in respect of the various fees and the interest paid on the loans, in terms of section 11(bA) of the Act.


Held that an assessment is defined in section 1 of the Act as "the determination by the Commissioner, by way of a notice of assessment (including a notice of assessment in electronic form) served in a manner contemplated in section 106(2) . . . of an amount upon which any tax leviable under this Act is chargeable”. The court referred to case authority which states that a purposeful act is required, whereby the document embodying the mental act is intended to be an assessment. Referring the May 2007 letter, the court found that it did indeed constitute a determination by the appellant. The letter was titled a revised assessment, and the body of the letter ran along similar lines. It therefore recorded a determination. There was thus no merit in the point that the original assessment for the 2002 year of assessment had become final in terms of section 79A(2) of the Act, and the first point was decided in SACS’ favour.

The second issue was essentially whether the construction of the prison was a permissible deduction from SACS’s income in terms of section 11(a) of the Act for the reasons referred to above. Section 11(a) provides that, for "the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived . . . expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature”. The issue turned on section 22, and particularly section 22(2A) of the Act. Section 22 concerns itself with amounts to be taken into account in respect of values of trading stocks. It had to be decided whether SACS’s activities fell within the terms of section 22(2A). The latter section provides that where a person carries on construction in the course of which improvements are effected by him to fixed property owned by any other person, such improvements and any materials delivered by him to the relevant property which are no longer owned by him shall, until the contract under which such improvements are effected has been completed, be deemed for the purposes of the section to be trading stock held and not disposed of by him. The question to be answered was whether SACS ever held trading stock in the form of materials and equipment that were built into the prison or, put differently, did it ever effect improvements to the fixed property of the State by delivering materials and equipment to that property which it then built into the prison, thus losing ownership of the materials and equipment. As SACS had sub-contracted the building of the prison to another party, it never provided the materials or the equipment that were built into the prison, and never owned them at any stage. Therefore, SACS was not entitled to the deduction contended for by it in terms of section 22(2A), read with section 11(a). The appeal was upheld in respect of this point.

Turning to the final issue of the deductibility of fees and interest paid by SACS, the court held that both were deductible in terms of section 11(bA) of the Act. SACS thus succeeded on this issue.



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