Page 719 - SAIT Compendium 2016 Volume1

CASE DIGEST 2009–2010
In terms of s. 24H (2) of the Income Tax Act 58 of 1962, each partner in a partnership is deemed to be carrying on the business of the partnership. Consequently, the appellant was deemed to be carrying on the business of Webber Newdigate, and the portion of the pro ts in issue was deemed in terms of s. 24 H (2) to be generated by the appellant.
It was held that article 22 of the Double Tax Agreement eliminated double taxation in the present case since it provides that, in South Africa, taxes paid by South African residents in respect of income that is taxable in Lesotho is deductible from taxes due under South Africa’s tax laws.
10. The requirements for deductibility of expenditure in terms of s. 11 (gA) [ITC 1838 2010 (72) SATC 6]
The taxpayer company had been granted a private sound broadcasting licence. It thereafter acquired a commercial radio station from the South African Broadcasting Authority, and the written agreement in this regard allocated the purchase price in a manner that included certain trademarks and the trade name of the radio station.
The taxpayer claimed deductions in terms of s. 11 (gA) of the Income Tax Act in the relevant tax years for the expenditure that had been incurred in acquiring the trademarks.
The issue before the court was whether the requirements of s. 11 (gA) had been ful lled, and in particular, whether such expenditure had been ‘actually incurred’ in acquiring the trademarks and associated intellectual property, or whether the allocation of the purchase price to the trademarks was a sham.
It was held that the allowance provided for in s. 11 (gA) (iii) of the Act was not based on market value but on ‘expenditure actually incurred’. Consequently, such amounts as had been shown to constitute expenditure actually incurred by the taxpayer in acquiring the trademarks and name in issue were deductible in terms of s. 11 (gA) of the Act, but that any amounts expended on the acquisition of unregistered trademarks were not.
It was held that the taxpayer had discharged the onus of showing that the amount of the purchase price allocated in terms of the agreement to the trademarks and the name constituted an expense ‘actually incurred’ in their acquisition. It was further held that the Commissioner for SARS had failed to demonstrate the existence of any common intention between the parties other than was re ected in the purchase agreement, and that it had not been shown that the allocation of the purchase price to the trademarks and the trade name was a sham. The taxpayer had thus discharged the onus of showing that it had acquired the trademarks in issue by way of assignment, and that the trademarks in issue were not only used in the production of income but that income had in fact been derived from them. The Commissioner had, however, not taken any decision with regard to what would constitute an appropriate write-off period in terms of s. 11 (gA) of Act 58 of 1962, and there was thus no decision in this regard that was susceptible of revision on appeal.
It was held that the taxpayer was entitled to the allowances in terms of s. 11 (gA) of the Act, but that this was not an appropriate case to award costs against the Commissioner for SARS in terms of s. 83 (17) (a) of the Act.
11. Whether, on the sale of a business, contingent liabilities became expenditure that had been ‘incurred’ and thereby quali ed for deduction
[ITC 1839 (2010) 72 SATC 61]
The taxpayer had sold a retail business as a going concern, and thereafter claimed to be entitled to deduct, in terms of
s. 11 (a) of the Income Tax Act, the amounts of three underlying contingent liabilities that had been taken over by the purchaser and were to be discharged by the latter in terms of the agreement of sale. The taxpayer contended that the terms of the agreement were such that the contingent liabilities in question had become expenditure that had been ‘incurred’, thereby satisfying the requirements for deductibility in terms of (a).
The Commissioner contended that the amounts in question had not been ‘incurred’ and therefore did not qualify for deduction, and that they were barred from deduction by s. 23 (e), s. 23 (f) and s. 23 (g) of the Act. The Commissioner also contended that the amounts in question failed to satisfy the requirements for deductibility in that they had not been incurred in the production of income, that they were of a capital nature, and that they had not been incurred for the purposes of trade.
It was held that the transactions in question had not caused any diminution of the taxpayer’s patrimony; furthermore, the taxpayer had suffered no loss, as it had been relieved of the risk that the contingent liabilities in issue would materialise. Furthermore, that such contingent liabilities, until such time as they became unconditional, did not constitute ‘incurred’ expenditure and, since there was no obligation on the taxpayer to effect payment, no expenditure relating thereto could possibly have been incurred It was held that the notional expenditure, in terms of the agreement, had not been incurred in the production of income prior to the sale of the business, and that the notional expenditure that was incurred in relation to the sale of the business was closely connected to the taxpayer’s income earning operations and was therefore of a capital nature. Moreover, such expenditure was not laid out or expended for the purposes of the taxpayer’s trade.
It was consequently held that the contingent liabilities assumed by the purchaser in terms of the agreement for the sale of the business were not deductible by the seller in terms of the Income Tax Act.
12. Liability for donations tax on distributions by a trust to non-bene ciaries
[ITC 1840 (2010) 72 SATC 79]
The issue in this case was whether a liability for donations tax in terms of ss. 54, 56 and 56 (1) (l) of the Income Tax
Act had been incurred in consequence of a series of donations made by the taxpayer, which was a trust that had been established for the bene t of the founder’s children.
The trust had sold certain of its assets to six other trusts, whose bene ciaries were those same children. A portion of the purchase price was left outstanding on interest-free loan account. The trust thereafter awarded certain amounts to the aforementioned six trusts and applied a set-off between those awards and the balance due in respect of the sale.
It was held that, in these circumstances, the trust had awarded ‘property’, as contemplated in s. 54 of the Act and in the de nition of ‘donation’ in s. 55 of the Act, that there had been a ‘disposal’ by the taxpayer trust of such property which had been motivated by pure liberality or disinterested benevolence, and that such awards consequently constituted ‘donations’ as contemplated in s. 55 (1).
SAIT CompendIum oF TAx LegISLATIon VoLume 1 711
CASE DIGEST 2009-2010