Most Read Contributor in South Africa, September 2016
The question whether there can ever be a recoupment by a partner to the extent that he disposes of his interest in a partnership as opposed to a partnership disposing of assets, has always been contentious. In this context it was always contended by taxpayers that there cannot be a recoupment to the extent that a partner disposes of a partnership interest, even though a partnership is not a separate legal entity and income that has accrued to partners in common is deemed to have accrued to each of the partners individually in their proportionate profit sharing ratios. Recently, however, the Supreme Court of Appeal in the case of Chipkin v CSARS came to the conclusion that there can in fact be a recoupment. In the particular instance, the business of the partnership entailed the acquisition of an aircraft and the operation thereof. Subsequently the taxpayer transferred 99,9% of his interest in the partnership to an existing partner, and, in consideration for this disposal, a bank released the taxpayer from the outstanding balance of the loan which the taxpayer incurred when it funded its original capital contribution to the partnership.
It was indicated by Cloete J A that, when somebody becomes a partner, he also acquires an undivided share in all of the partnership assets. That enabled the appellant to claim an allowance in respect of the aircraft owned by the partnership. It was held that, in terms of the general wide meaning of the concept of recoupment, that the waiver of the loan by the bank at the same time when the taxpayer transferred the bulk of his interest to one of the remaining partners, resulted in a recoupment. It was indicated that the Act does not recognise a partnership and that it only recognises income that accrues to partners in common. In view of the fact that a portion of an allowance is granted in the determination of each partner’s taxable income, the Court held that it is possible for one partner to recoup the amount of the allowance previously granted to such partner even if the other partners do not suffer any recoupment. One should thus consider each partner’s own individual tax position. It was also indicated that a recoupment occurs whenever a taxpayer recovers what the taxpayer expended and in respect of which the taxpayer may have claimed the deduction. The question whether or not the asset in question may still be in use, is irrelevant.
The impact of the case is far reaching. This would especially be the case in professional partnerships where partners leave and are admitted on a daily basis. In these circumstances the partners would then be deemed to have disposed of, and potentially recouped, expenses previously claimed in circumstances where their profit sharing ratios change pursuant to the admission of a new partner or the retirement of an existing partner. Consideration received by a retiring partner may potentially even be said to constitute a recoupment by such partner in respect of allowances and/or expenses which were previously claimed by the retiring partner in his capacity as a partner of the partnership. If the argument is that the disposal of a share in the partnership is "poorly disguised manner" of disposing of ownership of a share in the underlying partnership assets, a number of partners may have existing unintended tax liabilities pursuant to the way in which changes in partnership interests may have been dealt with.
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