File picture: Philimon Bulawayo

Pretoria - A recent tax case demonstrated quite clearly how paying tax under a “statutory obligation” might seem “unfair”, but that there was nothing “unjust” about it.

In this case the taxpayer – a company – sold a property for a huge gain, was taxed on the capital gain, but was not paid the total amount. However, the company remained liable for the original capital gains tax assessment.

The case – heard by the Supreme Court of Appeal – relates to a property in Stilbaai, which was bought for R185 000 in 1999 and sold for a whopping R17.7 million in 2006.

In 2007 the South African Revenue Service (SARS) assessed that the company had a capital gains liability of R1.6 million.

The company accepted the assessment at the time, but the sale did not go as planned. It only received R4.4 million of the full purchase price of R17.7 million.

“Its problem was that it had been taxed on a capital gain that it had not received and that all it could obtain as a result of the cancellation of the sale was an assessed capital loss, with no corresponding gain to set off the against the loss,” the Supreme Court said.

Des Kruger, a member of the tax legal technical work group at the South African Institute of Tax Professionals, says capital gains tax, like income tax and Value Added Tax (VAT) is essentially determined on the amount accrued or “received.”

It does not matter whether the taxpayer has in fact already received it.

“The VAT Act makes provision for smaller vendors to account on a cash basis, but otherwise all taxpayers would need to account for tax on amounts due, but not paid, as was the case here. It is nothing new in our tax law.”

Kruger, also a tax specialist at law firm Webber Wentzel, explains that if the taxpayer sold trading stock, he would have had to account for income tax in 2007 and if he was not paid by 2011, would have had to claim a bad debt deduction in 2011.

In the case before the Supreme Court the company was obviously not satisfied with having to pay tax on an amount it had not received. On top of that, this was its only asset for which it was not paid as had been agreed.

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It asked SARS for relief, did not get any, and then approached the Western Cape High Court, which dismissed its application for a review of SARS’ decision, and then approached the Supreme Court, to appeal the high court decision.

The taxpayer asked SARS to reopen the 2007 assessment and to reassess the capital gain based on the amount it actually received.


Kruger points out that, once the three-year prescription limit is reached, neither the taxpayer nor SARS can reopen an assessment. It remains final and conclusive. SARS can only go back more than three years if there has been material nondisclosure by the taxpayer.

“The fact that tax is determined in relation to income tax and capital gains tax on an annual basis and the three year limitation provides for certainty in the tax system. This is an approach followed in most other tax jurisdictions,” he says.

The Supreme Court referred to three instances where the proceeds in a specific year can be reduced.  One is the cancellation or variation of an agreement in the year of assessment.

In this case, the high court took account of the cancellation of the sale agreement, but not for the 2007 year, when the sale took place, but in 2010 when the sale was cancelled.

It endorsed a calculation of the capital gains tax liability, which amounted to a capital loss of R7.7 million.

The Supreme Court pointed out that an “accrued capital loss” could be set off against any future capital gain. This, the court found, militates against the company’s argument that reducing the 2007 tax liability was the only way in which it could be fairly treated.

“An assessed loss is a valuable asset in the hands of a taxpayer. Whether it is ever used to off-set a future capital gain is a matter entirely within the control of the taxpayer,” the Supreme Court found.

“Payment of tax is what the law prescribes, and tax laws are not always regarded as fair,” the court said.

Kruger says the taxpayer may never get to utilise the capital loss, either because it closes shop, or because it may not derive any future capital gains.

“In this instance, as the asset was the taxpayer's only asset which I am sure it would now try and dispose of again, there is a good chance that the taxpayer would get to use the assessed loss. But, that is no solace for the taxpayer,” says Kruger.

The Supreme Court dismissed the appeal.

Kruger says this is the manner in which a tax system, which operates on an “accrual basis”, works.

Relief in terms of capital gains tax, income tax and VAT is only granted when the amount is effectively “irrecoverable”, he says.