Page 742 - SAIT Compendium 2016 Volume1

CASE DIGEST 2012–2013
2003 Tax Year: Capital gains tax in respect of the alleged disposal of the C Mining Dump
The appellant, being the taxpayer, argued that it did not dispose of the C Mining Dump, nor of the rights thereto, within the meaning of the word ‘disposal’ as envisaged in para 11 of the Eighth Schedule to the Act, and also that it did not own the C Mining Dump but had only acquired the rights to certain platinum-bearing materials thereon; consequently, the provisions of the Eighth Schedule to the Act were not applicable to the transaction concerned, neither were the penalties imposed in terms of the provisions of s 76 of the Act.
SARS, being the respondent, argued that the disposal of the taxpayer’s 50% ownership of the chrome tailing rights to D Company as contemplated in para 11(1) of the Eighth Schedule to the Act for a consideration paid by D Company to the taxpayer, in the sum of R3.5 million, fell within the purview of para 11(1) of the Eighth Schedule to the Act.
2004 Tax Year: Fair value adjustment
The appellant asserted that the fair value adjustment amount in question constituted an allowable deduction in terms of s 11(a) of the Act and was made up of of ce expenditure and salaries incurred by the taxpayer when it took over the staff and premises of E Mining (Pty) Ltd for its own purposes, to raise capital from the public during a reverse take-over bid aimed at rescuing the latter in order to secure its listing on the Johannesburg Stock Exchange.
The appellant further argued that the assessment was factually incorrect in that E Mining (Pty) Ltd never issued shares to the taxpayer in lieu of any loans that it advanced to it. While arguing that the deduction of fair value adjustment was fully justi ed, the taxpayer noted that it had been mistakenly claimed by way of an adjustment and/or a write-off of a loan converted into shares and stated that the reason for the mistake was fully set out in correspondence with SARS.
The respondent argued that the amount in issue was not deductible in terms of s 11(a) of the Act, the reason being that the taxpayer had tendered two different versions to SARS, regarding the circumstances which led to the accrual of expenditure/loan advance as the ‘Fair Value Adjustment’.
2005 Tax Year: Capital Gains Tax – alleged ‘disposal’ of chrome tailings right
The appellant contended that the assessment in question was based on the incorrect assumption that it had acquired certain mineral rights from F Company and G Company for no consideration and thereafter had disposed of these rights between itself, the L Consortium, D Company and NO company for a deemed consideration of R8 million. The appellant further argued that the aforesaid assumption was factually incorrect as no disposal of mineral rights per se had occurred within the meaning of para 11 of the Eighth Schedule to the Act.
The respondent argued that the mineral rights acquired from G Company and F Company, had been acquired for no consideration, as the appellant had not laid out capital when the mineral rights were acquired and further that the appellant by depriving itself of an asset in favour of the L Consortium, had been involved in the transfer of an asset (mineral rights and intellectual property) and thus ‘there was a disposal of a right’.
2005 Tax Year: Capital gains tax and donations tax – disposal of an income share
The appellant argued that SARS’ application of para 38 of the Eighth Schedule to the Act to the transaction concerned, as being a disposal of an asset to a connected person in relation to itself, for a consideration which did not re ect an arm’s length price, was factually and legally incorrect. The appellant stated that on the conclusion of the transaction in issue, the parties were totally unrelated and the transaction was primarily aimed at severing their relationship with the least cost implications to each other, with each party retaining all existing rights and bene ts. Furthermore, the appellant argued that the transaction constituted a bona de agreement concluded between parties acting at arm’s length and consequently the provisions of para 38 of the Eighth Schedule were inapplicable.
The respondent argued that capital gains tax was levied in terms of para 38 of the Eighth Schedule on the ‘disposal’ of an ‘asset’ and where such disposal was for no consideration, para 38 required the proceeds to be determined at the ‘market value’ of such asset and in terms of s 58 of the Act, SARS may deem a ‘disposal’ of ‘property’ as a donation when it has been disposed of for an ‘inadequate consideration’. Consequently, the taxpayer was liable for donations tax in terms of s 54 of the Act in respect of the said transaction as there had been a disposal of the taxpayer’s 38% participation shares to L Co for no consideration. Furthermore, the taxpayer’s 38% participation right in the L Consortium was an unconditional personal right which constituted an incorporeal asset, part of which was disposed of for no consideration, thus bringing the transaction within the scope of para 38 as being an ‘asset disposed of’ for ‘a consideration not measurable in money’.
Donations Tax – Deemed donation
The taxpayer contended that SARS’ application of s 58 of the Act to the transaction was awed in that no gratuitous ‘disposal’ of ‘property’ had taken place within the meaning of s 58 of the Act.
2006 Tax Year: Accrual of management fees
The appellant, in terms of the L Consortium Agreement, became entitled to a management fee of 3.5% of the consortium’s net operating pro t before tax and such fee could only be determined once payment had been received by the L Consortium in respect of the sale of the ‘consortium concentrate’ in terms of certain off-take agreements which provided for payment on the tenth day of the fourth month following the delivery of the concentrate.
The appellant argued that it was quite evident that the accrual of the management fees had only occurred once the L Consortium’s net income had been determined, a gure on which such fees could be calculated. Moreover, the management fees income had been duly disclosed in the taxpayer’s nancial statements for the 2007 nancial year and could not be taxed twice.
The appellant argued that SARS’ inclusion of the said amounts in the 2006 year of assessment was contrary to the ‘accrual’ principle because the taxpayer had not acquired an unconditional legal right to claim payment of a determinable amount.
734 SAIT CompendIum oF TAx LegISLATIon VoLume 1