By Pieter van der Zwan
Capital gains tax (CGT) is imposed when a taxpayer disposes of an asset. The taxpayer has to account for the CGT in the year of assessment in which the disposal takes place. The gain on disposal is determined as the difference between the proceeds, which in simple terms is represented by the amount accrued to the taxpayer in respect of the disposal, and the base cost of the asset. The taxpayer in New Adventure Shelf 122 v C:SARS (310/2016)  ZASCA 29 (28 March 2017) got into a position where the gain accounted for upon disposal did not realise and had to be reversed.
Background and judgment in the case
The taxpayer sold a property in Stilbaai, a coastal town in South Africa, for an amount of R17,72 million during 2006. It was sold to a company that intended to effect residential developments on it. The arrangement entailed that the purchaser would pay the taxpayer the selling price in a number of instalments. The purchaser only honoured some of its obligations towards the seller. It only paid approximately R4,5 million of the purchase price. During November 2011 the parties came to an arrangement in terms whereof the purchaser returned the property to the seller. The seller retained the payments received as compensation for its damages.
From a tax perspective, the seller declared a taxable capital gain of R9,74 million on the disposal in its 2007 year of assessment. As the asset was acquired before 1 October 2001, it had used a valuation date value as its base cost. The full amount of R17,72 million constituted proceeds as it the taxpayer was entitled to its payment in future. When the cancellation took place in 2011 and it became apparent that a large portion of the above proceeds would not be received, the taxpayer requested that its 2007 assessment be re-opened to correct the capital gain that still reflected the full proceeds. SARS did not allow this on the grounds that the legislation did not make provision for such a re-opening (rather that a capital loss arose upon cancellation that could be utilised in future) and that the 2007 assessment had become final when the taxpayer did not object to it within 3 years.
The court confirmed the views of SARS. In particular, it held the view that any reference to a reduction in the proceeds as a result of cancellation in the provisions dealing with proceeds (para 35) referred to as reduction in the year during which the disposal took place. The provisions relating to a re-determination of the capital gains (para 25) require such a re-determination to be made in the year in which the change that requires the re-determination took place.
Practical implications to consider
This case confirms that where a disposal that gave rise to a capital gain is cancelled in a subsequent year, the effect of the capital gain will be reversed by a capital loss. This principle has been clarified in the legislation by certain amendments in 2015. The capital loss arises in the year of the cancellation and is not carried back to the year in which the disposal took place. The taxpayer would therefore be in a position where it paid tax on the gain, while the effect of the cancellation (capital loss) can be utilised against future gains by the taxpayer.
The outcome serves as a reminder for taxpayers that like income tax, CGT is payable on an accrual basis. This means that a person can be taxed on a capital gain, whether it has received the proceeds in cash or not. If the taxpayer is entitled to an amount in respect of the disposal, it will be subject to CGT.