Page 761 - SAIT Compendium 2016 Volume1

CASE DIGEST 2013–2014
In determining the intention on sale and whether a change in intention existed, the court held that the tax court did not review the decision to sell by the taxpayer in context and af rmed the legal principle that the sale of an asset for substantial pro t shortly after its acquisition is important, but not conclusive, especially if there was an intervening event. The court held that the consortium partner had presented sound evidence as to why it chose to sell the shares, namely on the fortuitous opportunity presented by Citibank on an unrelated transaction. Furthermore the court concluded that the intention on sale by the appellant was irrelevant as in this case it had no choice to sell, it was in fact compelled to do so once the consortium had decided on this course of action. The court concluded that it was satis ed that the taxpayer simply intended to dispose of the asset and did intend converting a capital asset into trading stock.
The taxpayer’s appeal on this ground was accordingly upheld.
This nding, however, meant that the tax court’s conclusion that the concomitant expenses were also revenue was overturned which meant that the court now had to determine whether the expenses could form part of the base cost of the shares.
Deductibility of ‘equity kicker’
In respect of the question of the incurral of the expenditure, the court found that SARS’ approach to this question was overly formalistic by failing to have regard to the basic commercial reality of the transaction. In this regard the court upheld the tax court nding that the taxpayer did indeed in substance incur an unconditional legal obligation.
As to whether the costs incurred could form part of the base cost in terms of para 20 of the Eighth Schedule, it had to be determined whether the costs constituted ‘borrowing costs’ in terms of para 20 (2) (a), which would then exclude them from the base cost. The court found that the meaning of ‘borrowing costs’, taken in context, would be the overall costs expended by a taxpayer in acquiring an asset with borrowed money. The court held that the facts presented indicated that the kicker was intended to provide the lender with a higher return, the lender regarded it as a return on the investment and was an obligation arising from the loan. It therefore concluded that the ‘equity kicker’ did constitute borrowing costs; however, it also held that the exception in para 20 (1) (g) of the Eighth Schedule applied, which allows a third of the borrowing costs if the nance was used to acquire listed shares as in the current instance and the taxpayer was therefore entitled to such expenditure as part of base cost.
SARS’ cross appeal on this point was therefore partially upheld.
Deductibility of ‘indemnity’ expense
The court accepted the tax court’s ndings pertaining to the facts of the indemnity payment and also accepted the nding that an unconditional liability was created between the consortium partners in respect of the indemnity expense. The court found that it therefore still needed to address whether the expense constituted a cost of acquisition. The court held that the original tax indemnity to FirstRand Ltd on acquisition of the shares had remained contingent and that the renegotiated indemnity with the consortium partner was an intervening event which causally separates the expense from the acquisition. The court held that the indemnity was more properly a cost of disposal and not of acquisition.
SARS’ cross appeal on this matter was therefore upheld and the expense was excluded from base cost.
Costs
The court only made a provisional cost order to allow the parties to present argument in respect thereof if they so choose and provisionally awarded the taxpayer only 80 per cent of the cost of two counsel.
9. Chittenden NO & Another v CSARS & CIPC HC 12795/14 NG (18 February 2014)
Introduction
This case considers an application made by the second applicant (Kestrel Network Solutions (Pty) Ltd) to the North Gauteng High Court which arises from business rescue proceedings in respect of the second applicant and to which the rst applicant (Grant Chittenden NO) was appointed as business rescue practitioner on 30 May 2013. The Commissioner for the South African Revenue Service (CSARS), in his capacity as rst respondent, opposed the business rescue proceedings and also did not issue a tax clearance certi cate (TCC) in terms of s 256 of the Tax Administration Act 28 of 2011 (hereinafter referred to as ‘the TAA’). Consequently, an application, which is still pending, was launched by the rst applicant in terms of s 153 (1) (a) (ii), read with s 153 of the Companies Act 71 of 2008 to have the CSARS’ vote against the business rescue proceedings set aside based on the fact that it was inappropriate as well as an application in terms of s 8 of the Promotion of Administrative Justice Act 3 of 2000 (PAJA) to launch review proceedings against the negative decision in respect of the TCC.
Facts
Kestrel Network Solutions (Pty) Ltd (KNS) commenced with business rescue proceedings on 27 May 2013; this was opposed by the CSARS at a subsequent creditors’ meeting held on 23 August 2013. KNS thereafter submitted an application in terms of s 153 (1) (a) (ii), read with s 153 of the Companies Act 71 of 2008 to have the CSARS’ vote against the business rescue proceedings set aside based on the fact that it was inappropriate. During the above proceedings, KNS received a notice from the Department of Defence that its TCC will expire on 22 February 2014. KNS did not take a pro-active approach to ensure that it receives a TCC as soon as the current one has expired and only applied for a new TCC on 5 February 2014. Two days later, on 7 February, 2014, SARS declined the application for a new TCC. In response to this an application was made to the High Court on 13 February 2014.
Section 256 (3) of the TAA, states the following:
‘(3) A senior SARS of cial may provide a taxpayer with con rmation of the taxpayer’s tax compliance status and may con rm that the taxpayer is tax compliant by issuing a tax clearance certi cate only if satis ed that the taxpayer is registered for tax and does not have any—
SAIT CompendIum oF TAx LegISLATIon VoLume 1 753
CASE DIGEST 2013-2014