Page 735 - SAIT Compendium 2016 Volume1

CASE DIGEST 2012–2013
The court further held that the intention of the taxpayer, on acquisition of the shares, did not show that there was always an intention to realise the shares for a signi cant pro t and the question was not if, but when, a sale would occur and hence a pro t-making intention was always a dominant purpose within the mind of those who controlled the taxpayer. When both the purpose at the time of acquisition and sale of the shares are considered, it could not be concluded, on the probabilities, that a long-term investment had been realised to best advantage. On the contrary, the mixed intention had converted into a clear purpose of selling to ‘cash in’ on the pro t; accordingly the gain from the disposal of the shares in issue stood to be classi ed as a revenue gain in the hands of the taxpayer.
Held in regard to the ‘equity kicker’, that it was expenditure incurred in order to implement the transaction which was of a revenue nature and this obligation fell ultimately to be discharged by the taxpayer and hence was to be allowed as a deduction from its taxable income. Further, with regard to the indemni cation agreement, the evidence indicated that the taxpayer had assumed an unconditional liability and the court was entitled to conclude that the amount in issue was expenditure, actually incurred, during the relevant year of assessment, because in that year of assessment an unconditional liability to pay that amount had been created. In regard to the interest levied by the Commissioner, the interest levied was to be remitted in terms of s 89quat(3) of the Income Tax Act 58 of 1962. Consequently, the 2005 assessment against the appellant was revised and set aside.
[Link: http://c.ymcdn.com/sites/www.thesait.org.za/resource/resmgr/2014_case_law/tc_-_it_13003_wc.pdf]
2. Whether or not the proceeds on the disposal by a bare dominium holder of a plantation were subject to the provisions of s 26(1) of the Income Tax Act?
[ABC (Proprietary) Limited v CSARS (Case No 13002: Tax Court Cape Town – 19 August 2013)]
Introduction
In this matter, it had to be established whether or not the proceeds on the disposal of a plantation (owned by the appellant) were subject to the provisions of s 26(1) of the Income Tax Act (the Act). In terms of s 26(1), the provisions of the First Schedule to the Act must be applied in the calculation of taxable income derived from carrying on pastoral, agricultural or other farming operations.
If the First Schedule applies, the receipt or accrual in respect of the disposal of the plantation is deemed, in terms of para 14, to be of a non-capital nature and therefore it will form part of the farmer’s gross income. This represents the manner in which SARS (the respondent) treated the transaction in the additional assessment that was issued.
The appellant objected to this assessment, stating that the provisions of s 26(1) could not apply to the sale of the plantation as it was acquired for investment purposes and not to carry on a trade. Therefore, according to the appellant, only the capital gain arising from the disposal of the plantation should be included in taxable income.
Consequently, the tax court had to determine whether the appellant carried on ‘pastoral, agricultural or other farming operations’ during the relevant years of assessment and if it did, whether the proceeds on disposal of the plantation were ‘derived from such operations’.
Facts
The appellant submitted that the plantation had been acquired for investment purposes and that it had contracted with a third party (‘E’) to carry on farming operations on E’s own behalf and for E’s own bene t. According to the appellant, the plantation never formed part of its business operations as it did not farm. After the land had been acquired, it granted the usufruct to E and retained the bare dominium. The appellant neither earned any income nor incurred any expenses relating to the operations that were exclusively undertaken by E. In return, E only had the obligation to safeguard the appellant’s investment by maintaining the plantation and with the termination of the agreement E was obliged to return the same quantity and timber to the appellant.
In terms of the agreement the passive ownership of the land and plantation was separated from the farming operations which had been carried out by E since E only had the use of the land and of the plantation as well as the right to yield income from the plantation for the duration of the agreement.
The respondent claimed that the key issue in this matter was to determine whether a close and direct connection existed between the owner of the property (the appellant) and the income generated from the farming activities conducted thereon. Since the appellant retained a direct interest in the failure or success of the farming operations, it was argued that the appellant conducted farming operations.
In support of this statement, the respondent held that the appellant had control over the management and standard of the farming activities and bene tted directly from the fruits of this management. It was submitted that s 26(1) could still apply, although the appellant contracted with E to manage the plantation. The respondent claimed that the appellant retained a direct, real and commercial interest and involvement in its plantation business for the whole period under review and therefore taxable income was derived directly from the farming operations.
Another objection to the appellant’s case was based on the sales agreement concluded between the appellant and the entity from which the plantation business was acquired (‘D’). In terms of the purchase agreement, the appellant agreed to acquire the business ‘as a going concern’. This means that the appellant acquired the exclusive right to deal with the plantation as its own business, including the right and freedom to carry on farming activities and to derive proceeds therefrom.
Held
The evidence presented to the court needed to be evaluated in order to determine whether the appellant retained a direct interest in the plantation and farming business and, if so, whether such interest was of such a nature and to such an extent that it can be regarded that the appellant itself was conducting farming operations. The court was provided with testimonies from the appellant’s witnesses who insisted that the appellant made an investment and never engaged in
SAIT CompendIum oF TAx LegISLATIon VoLume 1 727
CASE DIGEST 2012-2013