Page 409 - SAIT Compendium 2016 Volume2

IN 33 (4) Income Tax acT: InTeRPReTaTIon noTes IN 33 (4) • a ‘trade’ requirement; and
• an ‘income’ requirement.
The court rejected the argument that it was suf cient to trade without earning trade income, and rejected the decision in ITC 777.*
The Supreme Court of Appeal considered the ‘income from trade’ requirement in C: SARS v Megs Investments (Pty) Ltd & another.† In that case the respondent companies carried on the business of a central buying organisation on behalf of their members comprising various wholesale and retail supermarket and grocery outlets. Their income was the difference between the discounts they received and the discounts they passed on to their members. The company’s year of assessment ended on 31 December. On 1 January 1996 the appellants sold their entire business as a going concern for R21 million. The proceeds were dealt with as follows:
• R6 million – placed on call with ABSA Bank
• R6 million – distributed as a dividend
• R9 million – lent interest free to three Namibian companies
The appellant’s activities during 1996 consisted of –
• exploring the possibility of starting a similar central buying business in Angola and other countries to the north through
the Namibian companies in which they had invested; and • attempting to exploit certain rearm and liquor licences.
Considerable money, time and effort were expended by the appellants’ directors on these activities, but no contracts were concluded, no organization was established, no active trading was done, and no income was earned. During the year ended 31 December 1996 the companies sought to set off their assessed losses brought forward from 1995 against their interest income. The set-off was disallowed by the Commissioner on the grounds that the company had not traded nor earned any income from trade during 1996.
The court accepted for purposes of the appeal that the companies’ activities constituted trading. However, the court rejected the argument that the interest income was derived from carrying on the trade of an investment company. On the basis that the respondents had conceded that for a set-off to occur there must be some income from trade, the appeal was upheld and the set-off of the assessed losses disallowed. Jones AJA emphasised that his judgment should not be seen as con rming the principle that a company that had traded but failed to earn any trade income was not entitled to set off its assessed loss. He stated that his decision was based on the concession made by the respondents, namely, their acceptance of the ‘income from trade’ requirement. The question therefore remains unresolved and no binding precedent has been established by the Supreme Court of Appeal.
In ITC 1830‡ a company sought to carry forward an assessed loss of R3 338 742 from the 2003 to the 2004 year of assessment. The loss arose from expenditure incurred in developing a computer program for licensing to the security industry. In the 2004 year of assessment a further loss of R424 057 was incurred. The only income derived by the company during the 2004 year of assessment comprised interest and other sundry income of R12 302 which the taxpayer had conceded for the purpose of the appeal was unconnected to trading activities. For the purposes of adjudicating the case the court assumed that the ‘trade’ requirement of section 20(1) had been met. The sole issue for determination was whether, assuming the company had traded during the 2004 year of assessment, it was necessary for it to have derived some income from trade in order to achieve a set-off of the assessed loss carried forward from the 2003 year of assessment. The court con rmed the existence of the ‘income from trade’ requirement and dismissed the taxpayer’s appeal. Some commentators have incorrectly suggested that SARS departed from the view expressed in this Note by taking the matter on appeal. However, at no stage did SARS concede that the taxpayer had carried on a trade, and in these circumstances SARS will invoke the ‘income from trade’ requirement (see 5).
Change of shareholding – section 103(2)
In Conshu (Pty) Ltd v CIR,§ a case dealing with section 103(2), the company had entered into an agreement for the acquisition of a business on the last day of the 1985 year of assessment. A change of shareholding also took place at this time. In the 1986 year of assessment it sought to set off its balance of assessed loss against the income generated from the business it had acquired in the previous year. Harms JA stated the following:¶
‘It follows, in my view, from this analysis that the word ‘income’, as used in the introductory part of s 20(1), is not used in its de ned sense (cf Commissioner for Inland Revenue v Simpson 1949 (4) SA 678 (a) at 692) but rather as the income taxable but for the set-off. This all simply means that a set-off in terms of s 20 can only arise if there would otherwise have been taxable income, ie pre-tax pro t. I nd it impossible to perceive how, in an assessment to tax, set-off of an assessed loss can operate in relation to, say, an individual item of income such as the recoupment on the sale of an asset.’
SARS accepts that in the context of section 103(2) it is the tainted ‘pre-tax pro t’ that is ring-fenced, and not an individual item of tainted ‘income’ as de ned. But SARS does not accept as a general principle that a set-off of a balance of assessed loss can only take place against a ‘pre-tax pro t’. To do so would lead to unintended and draconian results.** For example, a company that incurs a loss from trading in year two – even having derived some income from trade in
* (1953) 19 SATC 320 (t).
† 2005 (4) SA 328 (SCA), 66 SATC 175.
‡ (2007) 70 SATC 123 (g).
§ 1994 (4) SA 603 (a), 57 SATC 1.
¶ At SATC 10.
** See SARS’s statement following the case, as cited by H Coetzee in ‘Assessed Losses – The Final Blow?’ (October
1998) Accountancy SA 19 at 33.
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