New Insights on the Reduction of Proceeds to Determine CGT
06 June 2017
By Esther van Schalkwyk, Consulting Manager, Tax
Recent case law has shed some light on when taxpayers may or may not reduce the proceeds on the disposal of an asset in determining capital gains for CGT purposes. Proceeds on the disposal of an asset for CGT purposes are usually determined as the amount received by or accrued to the seller in respect of the disposal. Proceeds are therefore taken into account on the earlier of receipt or when a person becomes unconditionally entitled to the amount, which may create cash-flow constraints if accrued funds are only received in later years. Proceeds from the disposal of an asset during a year of assessment may be reduced by:
- Amounts that must be or was included in the gross income of that person or that must be or was taken into account in determining the taxable income of that person before the inclusion of any taxable capital gain;
- Amounts that has been repaid or has become repayable to the person to whom that asset was disposed in that year of assessment; or
- A reduction, resulting from the cancellation, termination or variation of an agreement or due to the prescription or waiver of a claim or release from an obligation or any other event during that year, of an accrued amount forming part of the proceeds.
In March 2017 the Supreme Court of Appeal (SCA) delivered judgment in New Adventure Shelf 122 (Pty) Ltd v CSARS. The seller (New Adventure) disposed of immovable property in its 2007 year of assessment at an agreed price of R17.72 million, which was to be settled in different instalments over several years. In 2007 (the year of disposal), New Adventure accounted for a capital gain based on the full sales price of R17.72 million. In the following years the purchaser failed to settle the full outstanding amount and only paid approximately R4.5 million by 2011. The seller cancelled the sale agreement in 2010, title was restored to the seller, and the purchaser forfeited all amounts already paid (as agreed damages). SARS held the view that the 2007 assessment was final and could not be re-opened, while New Adventure argued that it should not have been taxed on a capital gain in 2007 (as this was never received). New Adventure failed to object to its 2007 income tax assessment within three years which rendered the assessment final and conclusive. New Adventure argued that its 2007 assessment should be re-opened and that the proceeds from the disposal be reduced as a result of the cancellation. The SCA confirmed that the assessment of capital gains tax (like income tax) is an annual event and held that all three circumstances (listed above) that can reduce the proceeds for CGT purposes apply to events that occur during the tax year in which the disposal takes place. As a result, New Adventure could not reopen its 2007 tax return, but realised a capital loss on the cancellation in 2010. The SCA remarked that although it seems “unfair” to only realise a capital loss in a subsequent year (which may only be offset against future capital gains), paying taxes is not unjust if there is a statutory obligation to do so.
In December 2016 the Tax Court (Cape Town) also considered whether proceeds should be reduced in M Family Trust v CSARS. The M Trust disposed of shares held in a foreign company. The stockbroker, who acted on behalf of the trust, transferred the proceeds to a Dutch bank account held by a third party pending the outcome of an exchange control application to repatriate the funds to South Africa. It later transpired that the funds were transferred out of the Dutch bank account without the trust’s permission and allegedly embezzled. The M Trust argued that the proceeds on disposal should be reduced by the amount that was allegedly embezzled as constituting “any other event during that year, of an accrued amount forming part of the proceeds of that disposal.” The court held in favour of SARS on two grounds, namely:
- The particular provision only relates to amounts accrued but not received, whereas the proceeds in this case were clearly received for the benefit of the trust albeit in a third party’s foreign bank account.
- Moreover, the words “any other event” in the provision could not be construed so widely as including a subsequent unrelated event caused by a third party who had no obligation to pay for the asset and who acted outside of the agreement to dispose of the asset. The particular provision accordingly requires a sufficient nexus between the accrual and the reduction in proceeds.
The recent case law illustrates that proceeds on disposal can only be reduced in certain instances when calculating CGT. Taxpayers are advised to seek professional tax advice when confronted with such situations.
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