Page 643 - SAIT Compendium 2016 Volume2

IN 74 Income Tax acT: InTeRPReTaTIon noTes IN 75 (2)
An example will be where a taxpayer purchases replacement parts for a delivery vehicle in need of repair and pays in advance for the goods, but only half of the goods are delivered by year-end. The taxpayer may only deduct so much of the expense relating to the goods actually delivered, the remaining amount will be deducted once the goods are delivered in the next year of assessment.
4.10 Recoupment of cost of repairs
The question whether the cost of repairs deducted under section 11 (d) can be recovered or recouped under section 8 (4) (a) when the property is sold was considered in C: SARS v Pinestone Properties CC.*
During the 1995 and 1996 years of assessment the taxpayer incurred expenditure on repairs of R626 519. On 8 November 1996 the taxpayer sold the property for R2,5 million. SARS included R626 519 in the taxpayer’s income under section 8 (4) (a) on the basis that a portion of the proceeds of R2,5 million represented a recoupment of the cost of the repairs. The court dismissed SARS’s appeal stating the following on the relationship between the sale proceeds and the cost of the repairs:†
‘It is not axiomatic that repairs to a property necessarily improve its value – certainly not repairs which may have been done some time before its sale.’
The court found that it was necessary for SARS to show by facts other than the mere sale at a pro t greater than the cost of repairs that there had been a recoupment. However, the court emphasised that it should not be understood to hold that the cost of repairs can never be recouped under section 8 (4) (a) and provided the following examples of situations in which expenditure on repairs might be recouped:
• Expenditure is incurred in order to repair defective work on a building and is recovered through a claim for damages against the builder.
• Expenditure is incurred in effecting repairs to an insured asset and is recovered through a claim against the insurer.
• An agreement is concluded to sell an income-producing property for a higher selling price on the basis that the seller
conducts speci ed repairs before the sale takes place.
Cases can arise in which major repairs are undertaken shortly before the sale of an asset. When it can be shown that these repairs result in a higher selling price there may well be a recoupment of the cost of the repairs.
5. Conclusion
In order for an asset to be repaired, there must be damage or deterioration to a part of the original asset or structure and the intention of the taxpayer must be to restore the asset or structure to its original condition. Because there are no set criteria as to what constitutes a repair and only principles derived from case law, each case will have to be determined on its merits.
The cost of repairs may be recovered or recouped under section 8(4)(a) provided that there is a causal link between the cost of the repairs and the amount received or accrued.
Legal and Policy Division
SOUTH AFRICAN REVENUE SERVICE
INTERPRETATION NOTE: NO. 75 (ISSUE 2)
DATE: ACT: SECTION: SUBJECT:
Preamble
22 September 2014
INCOME TAX ACT 58 OF 1962
SECTIONS 1 (1) AND 41 (1)
EXCLUSION OF CERTAIN COMPANIES AND SHARES FROM A ‘GROUP OF COMPANIES’ AS DEFINED IN SECTION 41 (1)
In this Note unless the context indicates otherwise –
• ‘section’ means a section of the Act;
• ‘the Act’ means the Income Tax Act 58 of 1962;
• ’the corporate rules’ mean the special rules relating to asset-for-share transactions, substitutive share-for-share
transactions, amalgamation transactions, intra-group transactions, unbundling transactions and distributions on
liquidation, winding-up and deregistration contained in sections 41 to 47 of Part III of Chapter II of the Act; • ‘the de nition’ means the de nition of ‘group of companies’ in the section indicated;
• ‘the proviso’ means the proviso to the de nition in section 41(1); and
• any word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note provides guidance on the application of the proviso to the de nition in section 41(1).
2. Background
Under certain circumstances the corporate rules provide relief from income tax when assets are disposed of between companies forming part of the same ‘group of companies’ as de ned in section 41(1). Generally these relief measures defer the income tax on income and capital gains until the asset is disposed of to a third party or until a degrouping
* 2002 (4) SA 202 (N), 63 SATC 421. † At SATC 427.
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