Page 727 - SAIT Compendium 2016 Volume1

CASE DIGEST 2011–2012
Background
The taxpayer is a wholesaler that imported and distributed Bells whiskey in South Africa. It concluded a 10-year agreement relating to this distribution which was prematurely cancelled more than three years before the earliest date on which the distribution agreement could be terminated.
As a result, the taxpayer received the sum of R67 million from United Distillers, a United Kingdom (UK) based company with which the taxpayer had concluded the distribution agreement. The Commissioner for SARS included the receipt of this payment as part of the taxpayer’s gross income in the assessment for tax. This was upheld by the tax court.
Issue
On appeal, the issue before the SCA was the taxpayer’s contention that the payment was of a capital nature which attracted no tax liability. The Commissioner’s cross appeal related to the tax court’s decision not to allow interest on the unpaid provisional tax while the appeal in the second case related to whether VAT was payable on the payment received because the payment allegedly related to services supplied by the taxpayer to a non-resident of South Africa but directly connected to movable property situate in South Africa.
Decision
The SCA held that the tax court misinterpreted the evidence where it reasoned that the payment received arose out of a calculation by the taxpayer of its future loss of pro ts, and therefore the payment was part of gross income. Evaluating the evidence in the case, the SCA found that the taxpayer did not carry on the business of the purchase and sale of rights to purchase and sell liquor products, did not embark on a scheme of pro t making, and discharged the onus of establishing that the payment was of a capital nature.
The cross-appeal was dismissed since the issue became moot once the SCA found that the provisional tax was not payable.
The appeal with regard to VAT was dismissed on the bases that the services in question, compositely the surrender of rights, were not connected to any movable property, and on the basis that in any event the exclusive distribution right held by the taxpayer was an incorporeal right not situated in South Africa since United Distillers was registered in the UK, which meant VAT was to be charged at zero per cent in terms of s 11(2)(l)(ii) of the Valued-Added Tax Act.
5. Whether a letter from the Commissioner amounted to a determination, and whether the construction of a prison was a permissible deduction?
[Commissioner SARS v South African Custodial Services (Pty) Ltd 2012 (1) SA 522 (SCA)]
Background
During August 2000, the taxpayer and the Minister of Correctional Services concluded a concession contract in terms of which the taxpayer would design, construct and operate a prison. The concession contract granted the taxpayer the right to occupy the land for the duration of the concession, but would have no title to, ownership interest in, liens, leasehold rights or any other rights in the land, and the Government would at all times remain the legal owner of the land.
The taxpayer in turn subcontracted the design, construction and commissioning of the prison, as well as the running thereof to third parties. The concession agreement earned the taxpayer xed and variable income from its running of the prison. The xed fee income in turn was payment for the construction of the prison.
Facts
In response to an assessment issued by SARS (‘the appellant’) for the 2002 year of assessment, the taxpayer requested a reduced assessment in terms of s 79A of the Income Tax Act on the basis that certain expenses that quali ed for deduction had not been claimed as deductions in its tax returns for the relevant period.
SARS sent a letter to the taxpayer on 4 May 2007 which was described as containing revised assessments for the 2002- 2004 tax years. The taxpayer subsequently lodged a notice of objection dated 19 September 2007, in which it described the year of assessment to which it applied as ‘2003-2004; alternatively 2002’. In response, SARS contended that as no objection to the 2002 assessment was received within the three-year period after the date of assessment, that assessment was nal and conclusive. According to SARS, the date of assessment was 1 June 2004, the letter of 4 May 2007 was not a revised assessment, and therefore three years after the date of assessment the 2002 assessment became nal. The taxpayer, on the other hand, argued that the letter of 4 May 2007 was indeed a revised assessment and consequently that the assessment for the 2002 year of assessment had not become nal.
The second issue related to the construction of the prison by the taxpayer. The taxpayer contended that in the construction of the prison, it carried out a trade, hence the materials that were used to construct the prison constituted its trading stock. The materials, when they were built into the prison, acceded to the prison – and hence became the property of Government. As a result, the materials were deemed by the taxpayer to be trading stock held and not disposed of by it in terms of s 22(2A) of the Act. The taxpayer consequently argued, that it being expenditure actually incurred, and hence not being of a capital nature, and the cost of the construction of the prison was therefore a permissible deduction from the income in terms of s 11(a) of the Act.
Due to the fact that the taxpayer incurred a number of fees payable to various parties in order to bid for the tender and to raise the loans that it required to nance the construction of the prison, it claimed to be entitled to a deduction in respect of the various fees and the interest paid on the loans, in terms of s 11(bA) of the Act.
Decision
It was 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 s 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
SAIT CompendIum oF TAx LegISLATIon VoLume 1 719
CASE DIGEST 2011-2012