On 28 March 2017, a judgment was handed down by the Supreme Court of Appeal (SCA) regarding capital gains tax owed by a taxpayer on the proceeds of a sale agreement from 2007 that was cancelled more than three years later. The court found that the seller was not entitled to have the assessment reconsidered, but in the light of the subsequent cancellation, regard was to be had to this in assessing the capital loss in the year of cancellation.
This is an important decision made by the SCA, as it highlights that firstly, an assessment that is made final and conclusive cannot be reopened and revised more than three years after the relevant year of assessment, and that should a capital gain/loss be redetermined, that redetermination is to be taken into account not in relation to the prior year of assessment, but in the current year of assessment.
In 2007, property belonging to the taxpayer was sold and a substantial capital gain was received by the taxpayer on this sale. This capital gain was taken into account in the taxpayer's tax liability for the 2007 year of assessment according to the full purchase price, however only a portion of the purchase price was actually paid over to the taxpayer at the time of the sale. In 2011, the sale was cancelled and the seller kept the payment already received, not as proceeds for the sale, but as damages for breach of contract. The payment the taxpayer received was only ZAR4 549 082 as opposed to the ZAR17 720 000 that was agreed upon in the contract.
Therefore the taxpayer's tax liability in respect of the 2007 tax year was substantially higher and the taxpayer was aggrieved by this. The taxpayer did not pay his tax liability for the 2007 year of assessment, and requested that the assessment be revised and reduced via an objection to SARS.
In the judgment of the SCA, the court found that as the taxpayer did not object to the 2007 assessment by SARS for more than three years as prescribed in terms of the relevant legislative provisions, the assessment was final and conclusive.
The taxpayer, however, argued that paragraph 35 of the Eighth Schedule to the Income Tax Act resulted in this not applying to tax levied on a capital gain, as it states that the proceeds from the disposal of any asset by a person must be reduced by any reduction in those proceeds as the result of the cancellation, termination or variation of an agreement. He contested that paragraph 35 applies not only to the determination of capital gains in a particular year, but also to require a redetermination of a capital gain already accrued in a previous year. Therefore the original assessment should be re-opened and revised in light of the redetermination. He also argued that the implementation of tax legislation that requires the taxpayer to pay a tax liability which did not in actual fact accrue in that year of assessment is unfair.
The court's response was that the assessment of capital gains tax is an annual event, in the sense that, if any occurrences during a tax year result in the accrual of taxable capital gain, the amount thereof must be included in the taxpayer's taxable income for that particular year.
The court found that paragraph 35 of the Eighth Schedule related to the determination of the proceeds of a disposal "during a year of assessment" such that the proceeds in that year of disposal alone are to be reduced. The assessed capital loss that accrued to the taxpayer in 2011 was held to be a substantial and valuable asset that is set off against the capital gain that occurred in a previous year.
In response to the taxpayer's assertion that the payment of the tax liability for the 2007 year is unfair, the court held that "…even if in certain instances it may seem 'unfair' for a taxpayer to pay a tax which is payable under a statutory obligation…, there is nothing unjust about it. Payment of tax is what the law prescribes, and tax laws are not always regarded as 'fair'. The tax statute must be applied even if in certain circumstances a taxpayer may feel aggrieved at the outcome". This illustrates that fairness is not considered a determining factor when decisions are made regarding the application of statute.
Therefore, the cancellation of the sale in 2011 did not entitle the taxpayer to have his tax liability for the 2007 year re-assessed. The cancellation and its consequences were factors relevant to the assessment of capital loss accruing during 2011 tax year. Consequently, the appeal failed in the SCA.
By Margeaux Malherbe, Candidate Attorney