Page 769 - SAIT Compendium 2016 Volume1

CASE DIGEST 2013–2014
the Consortium and another 25 per cent for cash at the cost of the plant. The R3.5 million payment made to GB Mining gave rise to the second item for consideration by the SCA as the CSARS contended that, in exchange for this payment, Aquarius acquired 50 per cent of the mineral rights in the Kroondal dump and that the mineral rights were therefore disposed of (which was also held to be the case by the Tax Court). GB Mining, however, contended that no disposal took place as the mineral rights remained ceded to it, which it only made available to the joint venture as its capital contribution.
Held
The schedule to GB Mining’s tax return for the 2003 tax year stated ‘calculation of capital gain/(loss) GB Dump – sold to Aquarius’ and the note relating to this item stated ‘sold 50 per cent to Aquarius at R1 300 000’. The tax return of GB Mining was signed by the director as being true and correct in every respect. The sale intention was later changed where the director and Mr Gardner referred to subsequent agreements which were not concluded for purposes of selling the Kroondal dump.
Again, GB Mining’s evidence was not reliable and creditable and contained various inconsistencies. The SCA consequently held that the rights in the Kroondal dump constitute an asset as de ned in para 1 of the Eighth Schedule to the Act and that the amount must be subject to capital gains tax with proceeds equal to R3.5 million and a base cost equal to R1780 771. The appeal against this item consequently failed.
Disposal of mineral rights and intellectual property to a joint venture
GB Mining raised further capital from foreign investors, Mr Sher and others, and registered Gardner and Barnard (UK) Limited (hereinafter referred to as ‘GBUK’) as a company in the United Kingdom which became the holding company of GB Mining. Mr Sher and others received 32 per cent of the GBUK shares, whilst Mr Gardner and Barnard held the remaining 68 per cent. Mr Gardner and Barnard shortly thereafter resigned from GB Mining to become shareholders of GBUK.
To secure additional chrome tailings, GB Mining concluded agreements with two other companies in the Kroondal dump area, namely Xstrata SA (Pty) Ltd (hereinafter referred to as ‘Xstrata’) and Bayer (Pty) Ltd (hereinafter referred to as ‘Bayer’), where both of the agreements stated that GB Mining would cede and assign all its rights and obligations in terms of this agreement to a joint venture. From the agreement of the joint venture, the CSARS determined that GB Mining has contributed certain mineral rights and intellectual property to the joint venture and that it has subsequently disposed of an asset with proceeds equal to R8 million and a base cost of R nil. GB Mining, however, contended that it had not disposed of an asset as it acquired the Xstrata and Bayer minerals for and on behalf of the joint venture. Again the Tax Court upheld the CSARS’ determination and the SCA therefore had to decide on this matter.
Held
The accounts of the joint venture contained an entry that GB Mining contributed a capital contribution of R8 million thereto which Mr Gardner could not explain. Furthermore, all the other evidence pointed to GB Mining disposing of the mineral rights and intellectual property to the joint venture. The SCA held that GB Mining’s ipse dixit (own evidence) based on a trial balance was never withdrawn and never properly explained, which proved to be fatal at the end of the day. The appeal on this matter consequently failed.
Deductibility of overseas travel expenditure
The period of overseas travel to raise capital by Mr Gardner and other GB Mining representatives caused GB Mining to incur travel costs which it attempted to deduct in terms of s 11 (a) of the Act. The CSARS disallowed 50 per cent thereof, as according to him, it was expenditure incurred in acquiring a source of pro t and was therefore capital in nature. The Tax Court came to the same conclusion and this matter was also challenged before the SCA.
Held
The SCA referred to New State Areas Ltd v Commissioner for Inland Revenue 1946 AD and Commissioner SARS v BP South Africa (Pty) Ltd 2006 (5) SA 559 (SCA) to determine if the travel expenditure contained a capital element. By referring to CIR v Nemojim (Pty) Ltd 1983 (4) SA 935 (A) at 951C–E, the SCA held that ‘If the purpose of the overseas travel was partially to produce income for GB Mining and partially to improve the income-earning structure of GB Mining, an apportionment of the expenses incurred can be made on the basis of ‘what would be fair and reasonable in all the circumstances of the case’. Again, Mr Gardner was not able to provide suitable evidence as to the purpose of the travel expenses, ie whether it was incurred to enhance the income-earning operations or the income-earning structure (as per the New State Areas case). Consequently, the SCA held that the 50:50 apportionment applied by the CSARS and Tax Court was fair and reasonable and the appeal failed.
Disposal of interest in the joint venture
Mr Barnard died in Oct 2003; this caused Mr Gardner, in terms of the shareholding agreement, to hold 62 per cent of the total shares in GBUK. As at 28 February 2004, GBUK acquired RKR Mining UK Ltd (RKUK) which had a wholly owned subsidiary, RK Mining SA (RKMSA) which carried on a similar process to the one in the joint venture from a different area which related to the processing of feedstock. Mr Gardner also held 62 per cent of the shares in RKUK with the rest of the 38 per cent shareholding therein being held by Mr Sher and others. Early in 2005, the shareholding in GBUK and RKUK was terminated to ensure that each of the companies would become wholly owned by one of the two groups of shareholders (ie Mr Gardner owning the one company and Mr Sher and others owning the other). The pro t share in the two projects however remained unchanged. Mr Gardner consequently acquired the majority interest in GBUK in exchange for his majority interest in RKUK. In order to transfer stakes in the two joint ventures to each of the shareholding groups, it was held that GB Mining (which held the interest in the rst project/venture) would hold 38 per
SAIT CompendIum oF TAx LegISLATIon VoLume 1 761
CASE DIGEST 2013-2014