The timing of disposals of assets and the resulting accrual of the proceeds have been contentious aspects over the years. In a recent case decided in the Cape Tax Court it was held that s 24(1) applies to cash transactions. As a result, the date when an agreement for the disposal of certain property is entered into plays an important role in determining the timing of the seller's tax liability arising from the sale of the property.
The timing of accruals of amounts to taxpayers has been a topic considered by the courts on many occasions. The WH Lategan v CIR case in which this was considered dates back to 1926. In practice, this question however remains relevant and is often debated by taxpayers when entering into agreements for the sale of assets. This article provides a brief overview and analysis of the a case decided in the Cape Town Tax Court (M v C:SARS, Case 14005) on 30 May 2017.
Transaction and dispute
The taxpayer sold 25 stands in the course of its trade. The agreements were entered into during the 2013 year of assessment while the taxpayer only received the payment against the transfer of the properties during the 2014 tax year. SARS assessed the taxpayer on the proceeds during the 2013 year on the basis that it became entitled to the amounts during this year and, alternatively, that the proceeds were deemed to have accrued to it in that year in terms of s 24(1) of the Income Tax Act. The taxpayer contended that it only became entitled to the amounts when the requirements to legally transfer the proper ties (for example, FICA compliance, compliance with the Land Use Planning Ordinance 15 of 1985 (Cape) and rates clearance from the local authorities) were satisfied.
Following some debate as to the timing and sequence of the transfer of the properties and payment, the judge concluded that the taxpayer's entitlement to payment vested at the later of the dates when any suspensive conditions were satisfied or the statutory permissions required for the transactions were obtained. This would be the point when the contract became enforceable at the instance of either party. Compliance with FICA was not regarded as part of the suspensive conditions or statutory permissions required. On this basis the purchase price in respect of 24 of the 25 stands accrued to the taxpayer during the 2013 tax year. SARS' alternative argument was based on the application of s 24(1), which states that:
"if any taxpayer has entered into any agreement with any other person in respect of any property the effect of which is that ... in the case of immovable property, transfer shall be passed from the taxpayer to that other person, upon or after the receipt by the taxpayer of the whole or a certain portion of the amount payable to the taxpayer under the agreement, the whole of that amount shall for the purposes of this Act be deemed to have accrued to the taxpayer on the day on which the agreement was entered into". (own emphasis added)
The argument for the taxpayer was that the title of s 24 referred to 'Credit agreements and debtor allowances'. As the transactions were not credit agreements, s 24(1) should not apply. The judge however found the view that the above provision also applied to cash sales was supported by an earlier case, SIR v Silverglen. Based on this, it was held that all the amounts in terms of the agreements were deemed to have accrued to the taxpayer in 2013 when the agreements were entered into.
In the context of capital gains tax, the timing of a disposal of an asset is specifically linked to the conclusion of an agreement, or if the agreement is subject to suspensive conditions, the fulfillment of these conditions (para 13 of the Eighth Schedule). Even though no similar provision exists for assets disposed of in the course of trade, this judgment suggests that the date on which the agreement is entered into is also an important event from the perspective of determining the timing of the seller's tax liability. (June 2017)
Pieter van der Zwan, the author of this article,
presents a monthly tax webinar with 2020 South Africa and the
Join us on the 2nd Tuesday of every month from 3:00 - 4:00 PM (GMT+2)
Register at: https://attendee.gotowebinar.com/register/3197166886957639428
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.