In our recent Tax and Exchange Control Alert of 13 October 2017, we referred to the number of tax court judgments that were recently published by SARS on its website. One of these cases is the matter of Ms A and Mr B v The Commissioner for the South African Revenue Service (Case No IT13974 & 13993) (as yet unreported), handed down by the Tax Court on 24 March 2017. In this case Ms A and Mr B (Taxpayers) appealed against SARS’s decision regarding the transfer duty payable on a property which they purchased in terms of a written sale agreement.
The Taxpayers are life partners and entered into a written sale agreement on 7 August 2007, in terms of which they purchased a sectional title unit together with two parking bays (Property) from the seller. In terms of the sale agreement, Mr B would acquire the right of “habitatio” and Ms A would acquire the “bare dominium” for a total purchase price of R4.2 million. The agreement also stated that the Taxpayers would acquire “the rights of habitatio and the bare dominium respectively but jointly”. The Taxpayers each filed separate transfer duty declarations (TD2 declaration) with SARS. Ms A indicated in her TD2 declaration form that transfer duty was payable on an amount of R2,869,103.40 and Mr B indicated an amount of R1,330,896.60, which, together, totaled R4.2 million. Based on these declarations, the Taxpayers owed transfer duty in the amount of R225,998.49, but SARS argued that transfer duty must be calculated on the total purchase price of R4.2 million, in which case the transfer duty would be R281,000 and about R55,000 more than the transfer duty calculated by the Taxpayers. The Taxpayers paid the amount of R281,000, but appealed against SARS’s decision.
Arguments raised by the parties
The main basis of the Taxpayers’ appeal was that on a proper reading of the sale agreement, they acquired two separate real rights, namely the right to habitatio and the right to bare dominium, and therefore transfer duty should be payable on two distinct and divisible transactions and not on the full amount of R4.2 million recorded in the sale agreement. Mr B testified that the sole reason for structuring the transaction in the manner which they did was to protect the Property against his potential creditors, who could hold him personally liable as he was a director of a law firm.
On the other hand, SARS argued that the written sale agreement failed to make provision for separate considerations of the two distinct rights and as such deemed the contract indivisible. It argued that more than one “property” was acquired in one transaction with one composite consideration being the amount of R4.2 million. SARS conceded that if the amounts reflected in the TD2 declarations had been apportioned in the agreement, the transfer duty that was payable according to the Taxpayers would have been correct.
The Tax Court first considered the legal scheme of the Transfer Duty Act, No 40 of 1949 (Act). Section 1 of the Act defines “property” as land in South Africa and any fixtures thereon, including any real right in land, but excluding any right under a mortgage bond or a lease of property other than a lease for the right to minerals or to mine minerals. Section 2 of the Act states that transfer duty is levied on the value of any property acquired by any person after the date of commencement of the Act and that the value must be determined with reference to s5, s6 and s7 of the Act. Section 3(1) of the Act states that transfer duty is payable by the purchaser within six months from the date of acquisition. With regard to determining the value of the Property, the Tax Court referred to s5 of the Act, which states that where consideration is payable by the purchaser, the transfer duty is payable on the amount of the consideration.
The Tax Court held that to determine whether a contract, as in the present instance, is divisible or not for the purpose of paying transfer duty, it is necessary to interpret the contract. With reference to previous case law on the issue, the Tax Court held that one must look at whether the contract provides for separate considerations (amounts). Where the parties have not divided the consideration and there is nothing to show what consideration should go to each portion, the contract would normally be regarded as indivisible. The Tax Court relied on the decision in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA), where the Supreme Court of Appeal held, amongst other things, that in interpreting a contract one must look at the language of the provision, read in context and having regard to the purpose of the provision, and the background to the preparation and production of the document. The Tax Court rejected SARS’s argument that the sale of the rights of habitatio and bare dominium in the contract were indivisible and found it to be misguided. It held that when viewed objectively and having regard to the purpose of the provision and the background to the preparation of the document, two different persons acquired two different forms of property distinct from each other. This was despite the agreement referring to one composite amount of R4.2 million. It was not in dispute that the value of the right to habitatio was correctly computed by the parties.
SARS also tried to argue that the agreement was indivisible because the Taxpayers would have to act together if they wanted to cancel the agreement and because they could only sue for the composite purchase price (R4.2 million) and not for two separate considerations. The Tax Court rejected this argument and held that the purchase price can only be regarded as a guideline for the purposes of paying transfer duty. Furthermore, it held that if either of the purchasers wanted to sue the seller to enforce the provisions of the agreement, they could only sue the seller for the rights to which they were entitled in terms of the agreement. If the seller wanted to sue Ms A or Mr B, it could only claim the proportionate amount, which each of them stipulated in their TD2 declarations.
The Tax Court therefore upheld the Taxpayers’ appeal and found that they only had to pay transfer duty as calculated in their TD2 declarations. It also awarded costs in their favour.