23 November 2018 by and Tax & Exchange Control Alert

Cruel accrual? An important judgment for taxpayers in the property development industry

It is an established tax law principle that an amount will form part of a person’s gross income, in the year of assessment in which the amount accrues to that person. However, as illustrated by a recent judgment, where property-related transactions are concluded, the parties must consider whether s24(1) of the Income Tax Act, No 58 of 1962 (Act) applies to their agreement.

On 20 November 2018, the Supreme Court of Appeal (SCA) handed down judgment in the matter of Milnerton Estates Ltd v CSARS (1159/2017) [2018] ZASCA 155 (20 November 2018). The SCA had to consider whether Milnerton Estates Ltd (Taxpayer) had to include the purchase price of immovable properties sold in its 2013 or 2014 tax year of assessment. The Taxpayer was appealing against the Tax Court’s judgment, which court found that the purchase price of the properties accrued to the Taxpayer in its 2013 year of assessment, even though payment was only received in its 2014 year of assessment. We reported on this judgment in our Tax and Exchange Control Alert of 14 July 2017.

Facts

In 2013, the Taxpayer concluded 25 sale agreements of erven in the Parklands Residential Estate. The purchasers were required to pay a nominal deposit of R5,000 and the balance of the purchase price was payable against transfer. Although conditions regarding payment of the purchase price were not the same in all the sale agreements, in all 25 cases the purchase price was fully secured before the end of the 2013 tax year.

In terms of each agreement, the Taxpayer could only give possession of the property to the purchaser once it had obtained the approval of the local authority, to permit the passage of vehicular traffic on the completed roads in the development. In all 25 cases, the local authority’s approval was obtained before the end of the 2013 tax year, although in some cases possession was only given in the subsequent tax year. At the end of the 2013 tax year, the Taxpayer had not yet transferred the 25 stands to the purchasers. Therefore, it omitted the purchase price of each of the stands from its gross income for the 2013 year of assessment. However, SARS contended that in each instance, the purchase price had accrued to the Taxpayer in the 2013 tax year, or alternatively that it was deemed to have accrued to the Taxpayer in terms of s24(1) of the Act. It therefore issued an assessment in terms of which the Taxpayer was taxed on an amount of R6.8 million.

Issue

The SCA stated that two issues were raised in the appeal:

  • Firstly, whether the Taxpayer’s right to receive the purchase price under the 25 sale agreements accrued to it during the 2013 tax year?
  • Secondly, in any event, whether the deeming provision in s24(1) of the Act deemed those amounts to have been received by the Taxpayer during the 2013 tax year?

Judgment

With reference to the issues raised in the appeal, the SCA stated that it was unnecessary to consider the first question, that is, whether there was an accrual in accordance with ordinary principles. It held that the matter should be decided with reference to s24(1) of the Act.

Section 24(1) of the Act states the following:

Subject to the provisions of section 24J, if any taxpayer has entered into any agreement with any other person in respect of any property the effect of which is that, in the case of movable property, the ownership shall pass or, in the case of immovable property, transfer shall be passed from the taxpayer to that other person, upon or after the receipt by the taxpayer of the whole or a certain portion of the amount payable to the taxpayer under the agreement, the whole of that amount shall for the purposes of this Act be deemed to have accrued to the taxpayer on the day on which the agreement was entered into.

SARS contended that the requirements of s24(1) had been met in that:

  • the Taxpayer;
  • had entered into agreements with other persons, being the purchasers of the erven;
  • in respect of immovable property, being the erven;
  • the effect of which agreements was that transfer would be passed from the Taxpayer to the purchasers; and
  • upon or after the Taxpayer receiving the whole of the amount payable to it under the agreements.

In response, the Taxpayer raised various arguments. Firstly, it argued that s24(1) is not concerned with cash sale agreements of this type, but only with agreements for the sale of immovable property on credit. Essentially, the Taxpayer sought to distinguish between cash sales and sales of immovable property, where the purchase price was to be paid in instalments over time, with transfer only being given once the full purchase price had been paid. It argued that this argument was supported by the opening words “subject to the provisions of s24J” in s24(1). The SCA rejected this argument.

Secondly, the Taxpayer referred to s24(2) of the Act and tried to argue that the effect of s24(2) is to remove an agreement from the ambit of s24(1), to which s24(1) would otherwise apply. Although the SCA rejected this argument, it accepted that this is a factor that together with other factors may suggest that s24(1) should be interpreted restrictively when considering the range of agreements to which the section may apply.

Thirdly, the Taxpayer argued that as the heading of s24 refers to credit agreements and debtors allowances, but the agreements concluded by the Taxpayer with the purchasers were not credit agreements, s24(1) did not apply. The SCA found that there was some merit in this argument, but ultimately rejected it. The SCA reasoned that the heading was amended to read “Credit agreements and debtors allowances” after the judgment in Secretary for Inland Revenue v Silverglen Investments (Pty) Limited 1969 (1) SA 365 (A) (Silverglen), which is binding authority on s24(1), without any corresponding amendment to exclude the current case from s24(1)’s ambit.

Fourth, the Taxpayer argued that in interpreting the Act, the court should adopt a practical approach and that the provisions in the Act should be construed having regard to their situation in the statute so that they “take colour from their surroundings”. This argument was also rejected.

The SCA held that even if the four arguments above are taken collectively, it would not justify a restrictive interpretation of s24(1), so that its application is limited to agreements that are specifically called “credit agreements”. The section should be interpreted to apply to all sale agreements where ownership passes to the purchaser “upon or after receipt by the taxpayer of the whole or a certain portion of the purchase price”.

Finally, the Taxpayer tried to argue that the requirement in s24(1) that ownership should only pass “on or after” receipt of the purchase price, had not been met as ownership could only pass after transfer took place in the Deeds Registry, which had not taken place in the 2013 tax year. The SCA rejected this argument in light of the judgment in Silverglen where this argument was previously rejected. Considering the agreements concluded and that the guarantees provided by the purchasers to the Taxpayer constituted payment, which payment is concurrent with transfer of ownership in the Deeds Registry, the agreements provided for ownership to pass to the purchasers upon or after receipt of the whole of the purchase price in terms of s24(1). This meant that s24(1) was applicable and that the entire purchase price in each instance was deemed to be received in the 2013 tax year, when the agreements were concluded and not in the 2014 tax year, when payment was in fact made. This was also the decision in Silverglen, which in the SCA’s view was correctly decided.

Accordingly, the SCA dismissed the Taxpayer’s appeal with costs.

Comment

The judgment confirms that where an agreement for the sale of immovable property contains a suspensive condition whereby transfer of ownership in the Deeds Registry is delayed until payment of any portion of the purchase price, the purchase price is deemed to accrue in the tax year that the agreement was concluded. Property developers should therefore take note of this judgment and s24(1) of the Act and ensure that where a sale agreement falls within the scope of this provision, they declare the income from the sale in the tax year that the agreement was concluded, even if payment of the purchase price and transfer of ownership only takes place in the following tax year.

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