LDC Taxpayer v CSARS (IT 24888)

Background

During the 2017 tax year, LDC concluded a written sale agreement with a purchaser (KMC) in terms of which it sold an immovable property for R25.2 million including VAT. The property consisted of vacant land with development rights for subdivision. The purchase price was payable in tranches of R350 000 on the sale by KMC of each subdivided erf to an end-user purchaser.

LDC did not declare the capital gain on disposal in its 2017 tax return as it was of the view that “accrual” was deferred until sale to the end-users.

SARS included the gain in LDC’s taxable income for 2017 and imposed a 25% understatement penalty. Ultimately, LDC’s appeal was dismissed as there was an omission from their 2017 return which resulted in prejudice to SARS.

Issues

(i) Whether the date of accrual for capital gains tax (CGT) purposes occurred in 2017 or upon sale to the end-users (i.e. 2020).

(ii) Whether there was any prejudice suffered by SARS which would have collected the CGT in 2020.

Finding

The court, in reference to CIR v People’s Stores (Pty) Ltd, quoted the following: “any right (of a non-capital nature) acquired by the taxpayer during the year of assessment and to which a money value can be attached forms part of the “gross income” irrespective of whether it is immediately enforceable or not, but that its value is affected if it is not immediately enforceable.”

The court was of the view that the above principle disposed of LDC’s argument that the accrual did not take place during 2017. [Note: While not stated in the case, it is our assumption that payment of the purchase price by KMC to LDC was not conditional upon KMC selling the units to end-users. Presumably, payment would be due to LDC regardless of whether KMC made the necessary sales.]

Moreover, the court agreed that SARS was prejudiced in that the considerable time and labour spent on this matter could have been spent elsewhere. It is important to note that prejudice need not be financial prejudice. However, SARS did suffer financial prejudice as the monetary value of the capital gain decreased from 2017 to 2020.

Lastly, in each year, SARS is given a target by National Treasury to collect a certain amount of tax. Where taxes are due in a particular year and are not recovered in that year, the delay must logically affect SARS’ ability to collect the revenue as mandated by Treasury, which ultimately affects government’s ability to fulfil its constitutional obligations to its citizens.

Obiter

SARS initially raised a 25% penalty on the ground “reasonable care not taken in completing a return”. Upon relooking at the facts, SARS notes that they lost an opportunity to impose a penalty of 50% as this was more aptly fell into the category of “no reasonable grounds for tax position taken”.

The court agreed that the 50% penalty should have been imposed but ultimately found that it did not have a discretion to increase the penalty to 50% as the issue had not been properly raised for adjudication before the court.

Find a copy of the case here.

19/08/2021