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.
Prescription
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