20 May 2021 by Tax & Exchange Control Alert

Milnerton Estates revisited: Accruals and suspensive conditions

We had previously reported on the Supreme Court of Appeal’s (SCA) judgment in the case of Milnerton Estates Ltd v Commissioner for South African Revenue Service 81 SATC 193 (20 November 2018) in our Tax Alert of 23 November 2018, as well as on the judgment in the court a quo in our Tax Alert of 14 July 2017.

The matter concerned some of the general principles relating to the accrual of amounts, and more specifically, the deemed accrual of amounts in terms of section 24 of the Income Tax Act 58 of 1962 (Act).

The taxpayer had concluded sale agreements for the sale of 25 immovable properties during its 2013 year of assessment. The sale agreements provided that the purchaser would only make payment of the purchase consideration to the taxpayer “against registration of transfer” of the immovable properties. Transfer was given to the purchaser only in the 2014 year of assessment.

The taxpayer accordingly did not account for the accrual of the purchase consideration in its 2013 year of assessment and intended to only account for it in the 2014 year of assessment.

However, the taxpayer was subsequently assessed by the South African Revenue Service (SARS) on the basis that the consideration accrued during the 2013 year of assessment.

SARS’s position was that, on the basic principles, the accrual was not postponed by the requirement that the taxpayer first had to give transfer to the purchaser. In the alternative SARS argued that, in terms of section 24 of the Act, the purchase consideration is in any event deemed to have accrued in the year that the agreement was entered into into in terms of section 24 of the Act.

On general principles, an amount can be said to accrue to a taxpayer where the taxpayer has become unconditionally and un-contingently “entitled” to that amount (see Lategan v CIR 2 SATC 16; Ochberg v CIR 6 SATC 1; CIR v People’s Stores (Walvis Bay) (Pty) Ltd 52 SATC 9).

This would include amounts to which a taxpayer has a legal entitlement or claim, but which have not been actually received.

For purposes of the definition of “gross income” in section 1 of the Act, it also does not matter whether the amount is payable yet or not.

The proviso to the definition specifically provides that if a taxpayer has become entitled to an amount in a particular tax year, but such amount is only payable in a subsequent tax year, such amount is deemed to have accrued to the taxpayer in the year that the taxpayer has become entitled to the amount and not the year in which the amount becomes payable.

The mere deferral of payment to a subsequent tax year does not prevent an accrual in a current tax year where the taxpayer has actually become entitled to the amount in the current tax year.

In this regard it must be appreciated that it is still required for the taxpayer to have become unconditionally and un-contingently entitled to the amount. An accrual can still be suspended by way of an appropriate suspensive condition.

The Tax Court did consider the particular matter on the general principles, and provisionally concluded that the purchase consideration (in respect of all properties, save one) did accrue to the taxpayer during the 2013 year of assessment on the basis that the taxpayer had in fact become entitled to payment in that year. The relevant suspensive conditions were met, and other statutory permissions were obtained, during that year.

However, both the Tax Court and the SCA ultimately decided the matter based on the application of the deeming provision in section 24 of the Act.

Section 24(1) of the Act provides –

“… 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 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.”

This section effectively provides for a deemed accrual in certain circumstances during a particular tax year despite there not having necessarily been an actual accrual in that tax year as per the application of the general principles.

The circumstances in which section 24(1) of the Act applies is where transfer to the purchaser is subject to receipt by the seller of the whole or a certain portion of the purchase price.

The accrual of the full purchase price will then be deemed to have occurred during the tax year that the agreement was entered into, and not only when transfer is passed.

Effectively, section 24(1) removes any argument that there is no accrual to the seller during the tax year that the agreement is concluded on the basis that the obligation to give transfer is delayed until receipt of payment in a subsequent tax year. Stated differently, the seller cannot rely on saying that it is not yet entitled to the purchase price at the time of conclusion of the agreement because it has not yet given transfer and is not obliged to do so until payment is received.

However, section 24(1) of the Act is not limited to cases where payment is required to be made before transfer.

It includes cases where payment is to be made upon transfer – and as such, cases where payment is to be made “against transfer”.

The court in this case found that payment was to be concurrent with transfer of ownership by registration. In the SCA’s words, the agreements provided for the seller to effectively “pass ownership to the purchaser upon or after receipt of the whole of the purchase price in terms of section 24(1)”.

The agreements had all become unconditional in the same tax year that they were concluded, so there could be no question as to the non-application of section 24(1) on the basis that the agreements were still subject to suspensive conditions by the end of that tax year.

However, what is of particular interest here is the argument advanced by the taxpayer in respect of the application of section 24 of the Act to agreements subject to suspensive conditions. The concern was essentially that, so long as an agreement made provision for the passing of ownership on or after receipt of payment, then the accrual will be deemed to occur on the date that the agreement is entered into, irrespective of whether the agreement is subject to suspensive conditions.

Essentially the taxpayer argued that to uphold the application of section 24 in the current circumstances, would “bring all sales of immovable property subject to suspensive conditions within the ambit of section 24(1)” and that “sellers of immovable property might be liable to pay income tax on amounts the recovery of which was uncertain and in circumstances where, if the worst happened and the transaction failed for any reason, they might not be able to recover the tax they had paid”.

However, the SCA referred to the case of Corondimas v Badat 1946 AD 548 for an answer.

The principle upheld in that decision was effectively that “when a contract of sale is subject to a true suspensive condition ‘there exists no contract of sale unless and until the condition is fulfilled’”.

More specifically, the SCA stated that, “If subject to a true suspensive condition then, until the condition is fulfilled, on a proper interpretation of the section there may well be no binding agreement that ownership be passed upon or after receipt of the amount payable to the taxpayer”.

The court therefore at the very least proposed some answer to the potentially hazardous consequences of the deeming provision in section 24(1) of the Act.

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