Page 773 - SAIT Compendium 2016 Volume1

CASE DIGEST 2013–2014
‘The circumstances surrounding the loss of the said ethanol ... are in my view nothing more than a conjecture and hearsay information.’
It was therefore concluded that the Commissioner had not wrongly exercised his discretion in nding that the loss had not occurred under exceptional circumstances.
Regarding the issue of whether IVS was entitled to the refund in terms of s 76 (2) (d), the following was held by Chili AJ at para 19:
‘My problem in so far as the applicability of section 76(2) (d) supra is concerned is that the section deals with goods that have been “irrecoverably lost” and goods that are meant for “home consumption”. Regard being had to the applicant’s own version that the ethanol that disappeared from its warehouse was subsequently recorded from a warehouse in Pinetown, I am unable to say that the said ethanol was irrecoverably lost. Furthermore, it is the applicant’s own version that the said ethanol was not meant for home consumption. For the above reasons I am of the view that section 76 (2) (d) does not nd application.’
The appeal was dismissed with costs.
18. Kluh Investments (Pty) Ltd v CSARS WCHC A48/2014 (9 September 2014)
Introduction
This is an appeal to a full bench of the Western Cape High Court from the tax court (ITC 13002; 19 Aug 13) in respect of the taxpayer’s 2004 year of assessment whereby SARS assessed the sale of the taxpayer’s plantation as gross income.
Facts
The taxpayer, a resident company, is used as a special purpose vehicle by its Swiss holding company, Fihag Finanz und Handels AG (‘Fihag’). Steinhoff Southern Cape (Pty) Ltd (‘Steinhoff’) wanted to gain access to a particular plantation in Knysna owned by the Thesen group but from a policy perspective did not want to buy the land leading to the initial transaction on 2 May 2001 being blocked due to this policy. Steinhoff approached a third party, Fihag who was a strategic business partner, whereupon it was agreed that the taxpayer would purchase the land, plantation and some residual assets from Thesen for R29,5m and Steinhoff would purchase the saw mill assets. Based on an oral agreement the taxpayer would allow Steinhoff to operate, manage and exploit the plantation for its own pro t and loss without payment of a fee on condition that on notice in future it makes available a similar quantity and quality plantation to the taxpayer.
Steinhoff accordingly cancelled the original agreements it had entered into on 2 May 2001 with Thesen and the taxpayer (on 29 June 2001) and orally agreed to purchase the assets on the same terms as was previously agreed with Steinhoff, with a partial advance payment and occupation occurring on this date as well. However, the agreement was only reduced to writing on 5 October but with an effective date of 29 June 2001, which allocated the R11.95m of the purchase price to the plantation. During 2003 Steinhoff reconsidered it position and agreed with the taxpayer to purchase the land for R15m and the plantation for R144.7m. However, due to various disputes between the parties, including on the VAT treatment of the sale, the sale agreement was only nalised on 1 June 2004 once settlement of the disputes had been reached. As part of the settlement terms the taxpayer would pay Steinhoff a R12m bonus management fee for the exemplary manner in which it managed the plantation. The sale of the land and plantation was treated as a sale of capital assets subject to capital gains tax with the base cost determined as the market value on the basis that the asset was a pre-valuation date asset.
During August 2010 SARS issued an additional assessment to the taxpayer on the basis that the sale of the plantation was a revenue in nature in terms of s 26 of the Income Tax Act, read with para 14 of the First Schedule, and therefore the difference between the sale price of R144.7m and the initial cost of R11.95m should be included in gross income. The taxpayer lodged an appeal to the Income Tax court on the basis that it was not conducting farming operations. The appeal was dismissed by the tax court on the basis that there was a suf cient connection between the amount received by the taxpayer and the farming operations carried on by Steinhoff in an agency capacity.
Paragraph 14 applies independently
SARS’ rst argument was that it was not necessary to apply s 26 separately as a precondition before the deeming provision in para 14 applied and due to the closeness of the proceeds to the farming operations, once para 14 applied by mere disposal of a plantation, the amount was to be included in gross income. This SARS submitted, applied irrespective of whether farming operations as per s 26 were conducted by the taxpayer.
Steinhoff as contract farmer
SARS’ alternative argument was that the taxpayer’s commercial interest in the condition and value of the plantation coupled with the performance of operations by Steinhoff, as independent contractor for its own pro t but in accordance with agreed standards, with an obligation to restore the equivalent plantation at the end gives rise to the application of s 26 and para 14.
Assessment of evidence
Before the High Court there were various disputes regarding how to assess the evidence, the court held that the necessary evidence before the court was in fact common cause between the parties and it merely had to conclude on those facts in relation to the speci c law. The court recognised that the onus was on the taxpayer to prove that the amounts were not gross income but felt it convenient to rather address the legal questions on the two alternative bases raised by SARS as to why s 26 and para 14 did apply to the proceeds. The court furthermore rejected the tax court’s conclusion that the facts presented in the resolutions, invoices and nancials as to what was sold were relevant in resolving the dispute at hand and concluded that such evidence was only useful as to the credibility of the witnesses, as the matter at hand was a legal question.
Paragraph 14 applies independently
SAIT CompendIum oF TAx LegISLATIon VoLume 1 765
CASE DIGEST 2013-2014