Page 723 - SAIT Compendium 2016 Volume1

CASE DIGEST 2010–2011
Decision
The court held that an assessment is de ned in s 1 of the Act as ‘the determination by the Commissioner, by way of a notice of assessment (including a notice of assessment in electronic form) served in a manner contemplated in section 106 (2) ... of an amount upon which any tax leviable under this Act is chargeable’. The court referred to case authority which states that a purposeful act is required, whereby the document embodying the mental act is intended to be an assessment. Referring to the May 2007 letter, the court found that it did indeed constitute a determination by the appellant. The letter was titled a revised assessment, and the body of the letter ran along similar lines. It therefore recorded a determination. There was thus no merit in the point that the original assessment for the 2002 year of assessment had become nal in terms of s 79A(2) of the Act, and the rst point was decided in SACS’ favour.
The second issue was essentially whether the construction of the prison was a permissible deduction from SACS’s income in terms of s 11 (a) of the Act for the reasons referred to above. Section 11 (a) provides that, for ‘the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived ... expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature’. The issue turned on s 22, and particularly s 22 (2A) of the Act. Section 22 concerns itself with amounts to be taken into account in respect of values of trading stocks. It had to be decided whether SACS’s activities fell within the terms of s 22 (2A). The latter section provides that where a person carries on construction in the course of which improvements are effected by such person to xed property owned by any other person, such improvements and any materials delivered by him to the relevant property which are no longer owned by him shall, until the contract under which such improvements are effected has been completed, be deemed for the purposes of the section to be trading stock held and not disposed of by him. The question to be answered was whether SACS ever held trading stock in the form of materials and equipment that were built into the prison or, put differently, did it ever effect improvements to the xed property of the State by delivering materials and equipment to that property which it then built into the prison, thus losing ownership of the materials and equipment. As SACS had subcontracted the building of the prison to another party, it never provided the materials or the equipment that were built into the prison, and never owned them at any stage. Therefore, SACS was not entitled to the deduction contended for by it in terms of s 22 (2A), read with s 11 (a). The appeal was upheld in respect of this point.
Turning to the nal issue of the deductibility of fees and interest paid by SACS, the court held that both were deductible in terms of s 11 (bA) of the Act. SACS thus succeeded on this issue.
4. The interrelationship between the Income Tax Act and South Africa’s international double tax agreements
[Commissioner SARS v Van Kets 74 SATC 9 (2011) (Judgment delivered by the Cape High Court, case No 13446/2011, 22 November 2011)]
Introduction
In March 2009, SARS received a request from the Australian Tax Of ce (‘ATO’) for information of a person residing in South Africa in terms of the double tax agreement (‘DTA’) between South Africa and Australia.
Facts
SARS acted in terms of the obligations of the DTA and attempted to furnish the information in terms of ss 74A and 74B of the Income Tax Act.
SARS sought an order in the Western Cape High Court declaring that ss 74A and 74B of the Act may be invoked by it for the purpose of obtaining information from a taxpayer and any other person in the Republic of South Africa in respect of an Australian taxpayer in order to comply with its obligations under a double taxation agreement or treaty which had been concluded between South Africa and Australia and which contained a provision for the exchange of information.
Issue
The taxpayer refused the request for information on the basis that it was con dential. It appeared to be common cause that the taxpayer possessed the information which ATO had requested from SARS and that, because of his refusal, it was impossible to obtain such information.
The issue to be determined by the court was whether the words ‘any taxpayer’, used in s 74A and s 74B of the Act, can be interpreted to include a person who is not a ‘taxpayer’ as de ned in s 1 of the Act, but who, in terms of a DTA, has been identi ed as someone who can provide the information pursuant to the request made by the ATO.
Accordingly, SARS sought an order declaring that ss 74A and 74B of the Income Tax Act 58 of 1962 may be invoked by it for the purpose of obtaining information from Mr Van Kets in order to comply with its obligations under the DTA, which contained a provision for the exchange of information.
Decision
The court held that the provisions contained in a DTA become part of South African domestic income tax laws. Section 231 of the Constitution has the effect that the provisions of a DTA become law in South Africa once it has been gazetted. Davis, J made the point that the provisions of a DTA and the Act should, where possible, be reconciled and read as one coherent whole.
The court pointed out that the purpose of the exchange of information clause contained in the DTA is to ensure that a resident of Australia does not escape Australian tax, which may be imposed in respect of income accruing to that resident from a source located in South Africa. If the DTA did not provide for an exchange of information, the ATO would be unable to obtain information about such income, and subject that to tax in Australia.
SAIT CompendIum oF TAx LegISLATIon VoLume 1 715
CASE DIGEST 2010-2011