Page 756 - SAIT Compendium 2016 Volume1

CASE DIGEST 2013–2014
costs and audit fee expense were a cost relating to the trading stock and should also be proportionally disallowed for deduction as well a speci c royalty expense.
SARS disallowed the taxpayer’s objection and this is an appeal to the Gauteng Tax Court in respect of the matters assessed. The main issue in dispute was whether s 23F (2) applied in the current matter. The second matter was whether the drying expense should be disallowed and lastly whether SARS was correct in imposing additional tax of 50 per cent. SARS during argument conceded that the administrative and audit fees should be allowed and the taxpayer conceded that the royalty expense should be disallowed. SARS also conceded on a liability of R160 million raised due to an arithmetical error but the taxpayer still requested a cost order in this respect from the court.
Section 23F(2)
The taxpayer submitted that s 23F (2) does not apply as the mineral-bearing ore mined by it does not meet the requirements of ‘trading stock’ and ‘acquisition’ as required in that section. The taxpayer contended that the ore won from the soil was acquired for mining purposes from its mining operations and was not kept in stock piles nor could it be sold. It further submitted that only the concentrate was a saleable commodity that constituted trading stock. SARS attempted to argue that manufacture includes the process of winning of the ore and bringing it to the surface but the court dismissed this argument as constituting a new ground of assessment. The court then still had to determine whether the costs of extraction of the concentrate were a cost of acquisition thereof. The taxpayer contended that ‘acquisition’ can only mean acquisition of ownership and on this basis it did not acquire ownership during the extracting phase as it had acquired ownership of the ore on severing it from the land. It thus merely took possession of the concentrate at a later stage. It submitted that s 23F (2) required more than mere possession. SARS contended that s 23F (2) is there to balance s 24M, meaning that if the taxpayer had the bene t of the one it was also necessary for SARS to bene t from the other. SARS submitted that the word should be interpreted in context, namely that the term ‘acquisition of the trading stock’ is used opposite to the term ‘disposal of the trading stock’.
Held
Section 23F
The court agreed with the submission of the taxpayer that the ore did not constitute trading stock as rstly it was acquired for the purposes of mining and secondly it was not saleable and therefore it did not meet the second requirement of trading stock. It also agreed that the concentrate was trading stock as de ned and that the process of winning the concentrate was similar to the procedures employed in the Foskor case. However, the court held that the procedure of winning the concentrate from the ore does not create something materially different from what it originally was – the ore is merely more re ned. The court held that this process also did not constitute a process of manufacture but was a process of mining.
The court however rejected the taxpayer’s submission that it rst took possession of the ore and then took possession of the concentrate and held that it acquired ownership of the concentrate when it severed the ore from the land. The court therefore held that the limitation imposed by s 23F (2) only applied to the second phase of extracting the concentrate, notwithstanding that it was extracted from a process of mining and not manufacturing. It also held that any redetermination of tax should be on the basis of the mining formula for tax purposes.
The taxpayer’s appeal was therefore partially upheld on this ground.
Drying costs and administrative costs
The court stated that s 23F (2) was there to limit deductible expenditure and therefore the contra scum rule found application. In this regard, there must be a causal link between the expenditure claimed and the acquisition of the trading stock. The court held that no such causal relationship existed between the trading stock concentrate and the drying and administrative expenses as the latter was incurred after acquisition of the trading stock and were not incurred to acquire such trading stock concentrate.
The taxpayers appeal was accordingly upheld on this ground.
Royalty fee
Though the matter was conceded by the taxpayer during argument, the court held that the licensing expense was based on the sales value of the concentrate but that it arose from licensing charges and therefore was capital in nature. The court held that the amount should, however, be limited to the sales that took place in the relevant year irrespective of the number of months as the expense could only be determined once the concentrate had been extracted.
The taxpayer’s appeal was therefore dismissed on this ground.
Costs
The taxpayer had requested the court for a cost order in respect of SARS’ failure to concede and for the arithmetical errors in the assessment until the date of the pre-trial. The court held that the error of R160 million was substantial and re ected negatively on the taxpayer’s nancial pro le. SARS’ action had forced the taxpayer to raise this in their grounds of appeal and SARS even failed to address the matter in its statement of appeal. The court therefore awarded the taxpayer 50 per cent of its costs against SARS.
5. ABC Ltd v CSARS ITC 12984 (5 September 2014)
Introduction
This is an appeal to the Gauteng Income Tax Court by the taxpayer, ABC Ltd, against the assessment to employees’ tax by SARS as well as the levying of penalties and interest on the assessed amount. SARS raised additional assessments for employees’ tax in respect of the company car scheme, the travel allowances and the company cell phones for the March 2003 to February 2008 periods against which the taxpayer objected. The objection was disallowed, whereupon
748 SAIT CompendIum oF TAx LegISLATIon VoLume 1