A Sale of Immovable Property - When Does the Taxpayer's Liability Arise?
On the 30 May 2017 the Tax Court of South Africa delivered a judgment in the case of M vs. the Commissioner of the South African Revenue Service (14005)  ZATC 1 (30 May 2017). The case dealt with the issue of whether a taxpayer’s liability arises in the year in which the sale of immovable property is concluded or in the year in which payment is received and transfer is made.
In the 2013 tax year, the Taxpayer, a company, (“M”) sold certain stands of immovable property (the “property”) in the course of trade in terms of deeds of alienation (the “agreements”) entered into during the 2013 tax year. Payment in respect of the purchase price for the property was received against transfer of the property to the purchaser in the 2014 tax year. The sale of the properties were in the course of M’s trade and as such the amounts received were income in its hands. The Commissioner assessed M for income tax on the basis that the amounts in respect of the proceeds of the sales accrued in the 2013 tax year as all suspensive conditions contained in the deeds of alienation were fulfilled in that year and M became entitled to the proceeds from the sales in that year.
M appealed against the Commissioner’s assessment, contending that the amounts accrued only when it became entitled to receive payment after the transfer of the property. In reaching its decision to dismiss M’s appeal the Court reiterated the principles laid out in previous case law. The said principles are set out in Lategan v Commissioner for Inland Revenue 1926 CPD 203 (2 SATC 16) and Commissioner for Inland Revenue v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A).
The Court went on to hold that an entitlement to payment can accrue before the payment is payable. A taxpayer’s right to receive payment vests and thus had value in the taxpayer’s hands as soon as a taxpayer was in a position to be able to tender transfer to the purchaser in terms of the agreement.
In the event that there are suspense conditions contained in the agreement, the said entitlement to payment can only vest once the suspensive conditions are fulfilled. Thus, a taxpayer’s entitlement to payment vested at the date of the fulfilment of any suspensive conditions to which the agreement was subject, or the date upon which the taxpayer obtained the statutory permissions necessary to enable it to tender transfer, whichever occurred later.
In other words, the entitlement to payment vested in the taxpayer as soon as the contract became enforceable at the instance of either party.
Accordingly, the Court held that the proceeds of the sale of the properties therefore actually accrued to M as part of its gross income for the 2013 tax year, on the dates which the respective agreements were concluded where the contracts were not subject to suspensive conditions, and upon fulfilment of the suspensive conditions in those matters in which the agreements were subject to such conditions.
It should be noted that an alternative argument raised by the Commissioner was that the proceeds are, in any event, deemed, in terms of s 24(1) of the Income Tax Act 58 of 1962 (the “”Act), which headed Credit agreements and debtor’s allowances, to have accrued to the taxpayer during the 2013 tax year. M contended that section 24(1) was of no application because the transactions in issue had not involved ‘credit agreements’. To this argument the courts agreed with the finding of the court in Secretary for Inland Revenue v Silverglen Investments (Pty) Ltd 1969 (1) SA 365 (A) that one needs to apply the wording of the provision according to its ordinary tenor unaffected by the heading and thus applied section 24(1) to a cash sale, in which transfer of the property occurred against payment of the purchase price, as in the current matter and thus dismissed the appeal.
Having regard to the above, we see that the findings of the Court are in line with the proviso to the definition of ‘gross income’ in the Act, which reads as follows:
“Provided that where in any year of assessment a person has become entitled to any amount which is payable on a date or dates falling after the last day of such year, that amount shall be deemed to have accrued to the person during such year....”
What can be taken away from this case is that, in the case of a sale of immovable property, once a taxpayer becomes unconditionally entitled to payment of an amount, i.e. when all conditions attaching to a transaction have been fulfilled, only then should an amount be deemed to be accrued to the taxpayer’s and hence taxable, this is irrespective of the date in which actual payment is received or transfer of the property is affected. The case also highlights that in interpreting the Act, Courts tend to follow the wording of the provisions of the Act and apply little importance to the headings of the provisions.