Most Read Contributor in South Africa, September 2016
When disposing of an asset, it is critical to determine whether
the proceeds of the disposal are of a capital nature, since if they
are, they will be taxed in terms of the capital gains tax regime at
a much lower effective rate than if they were of a revenue
Certain shares, if held for a continuous period of three years
prior to disposal, are deemed to yield capital proceeds in terms of
section 9C of the Income Tax Act. In the case of shares which fall
outside the provisions of section 9C, we must turn to the case law,
which over the years has become rather extensive in this area. The
enquiry is essentially one into the intention of the taxpayer in
acquiring, holding and disposing of the asset. If the
taxpayer's intention was such that they 'entered into a
scheme of profit-making' the proceeds received on the disposal
will be deemed to be revenue in nature. If, on the other hand, the
asset was acquired 'for better or for worse', or relatively
speaking 'for keeps' (i.e. only to be disposed of if some
unusual, unexpected or special circumstance warranting or inducing
the disposal, supervened)', then the proceeds will generally be
deemed to be of a capital nature.
The latter test, which has unsurprisingly become known as the
'for keeps' test, originated in the Appellate Division (now
the Supreme Court of Appeal) in the 1978 case of Barnato
Holdings Ltd v Secretary for Inland Revenue, 1978 (2) SA 440
(A) and has often been cited since. A recent judgment by Judge
Dennis Davis in the Western Cape Tax Court ITC 1867 75 SATC 273
however, brings the continued usefulness of the 'for keeps'
test into question.
The facts of the case were fairly involved but the taxpayer, a
special purpose vehicle formed with the sole purpose of holding
certain shares, argued that it had acquired the shares as a
strategic, long-term investment and that it had not changed its
intention. The court was satisfied, on the evidence before it, that
the taxpayer had intended to hold the shares for 'at least
three years, arguably slightly longer'.
Davis J considered the 'for keeps' test in relation to
this investment horizon and acknowledged that in modern market
conditions the test had become outmoded. The learned judge cited
numerous examples of shares on the NYSE (among them PanAm, Compaq
and Arthur Andersen) which would have featured in many balanced
portfolios in 2000 but which have now disappeared. He suggested
that among other factors, the pace of technological innovation
mitigates against companies remaining successful for extended
periods. The very idea of holding shares 'for keeps'
according to Davis J was no longer necessarily a sensible
investment strategy and was representative of an 'old, static
Unfortunately for the taxpayer, while Davis J accepted that it
was not necessary to show an intention to hold the shares 'for
keeps', there was still a burden of showing that the investment
had been made for 'some significant duration'. On the
facts, the court found that the possibility of an early realisation
had always been in the minds of those controlling the taxpayer, and
the proceeds of the disposition were therefore held to be revenue
The taxpayer took the matter on appeal where it succeeded before
a full bench of the High Court (Western Cape Division), namely
Capstone 556 (Pty) Limited v CSARS  ZAWCHC 123. The
appeal court did not expressly address the 'for keeps' test
but it agreed that the three year investment horizon was in line
with the intention to hold shares as an investment. The fact that
the opportunity for an early sale had arisen and been taken did not
change the taxpayer's intention.
Where does this leave the 'for keeps' test? It would
appear that, at least in the circumstances of the Capstone
case, the intention to hold a share for a relatively short period
and the early disposal of that share when an opportunity presents
itself is not a bar to showing a capital intention. At the same
time it is important to remember that the primary question is
whether the taxpayer acquired and disposed of the shares as part of
a scheme of profit-making. The length of time for which shares are
held is only one factor in this enquiry, and the courts will deal
with each matter on a case by case basis and taking into account
all admissible factors.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
In response to information provided by FIRS, NSE has sent letters to publicly listed companies, who were purportedly identified by FIRS as non-compliant.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).