A tax court judgment concerning a wealthy businessman who had repatriated to South Africa and failed to disclose that he had made a capital gain in his 2009 tax return was handed down electronically on April 23.
The taxpayer accumulated considerable wealth from businesses outside of South Africa. By 2003 his personal net worth exceeded R119 million. It is to be noted that he earned income and accumulated this wealth while he was not resident in South Africa.
In 2003 he applied for amnesty under the Exchange Control Amnesty and Amendment of Taxation Laws Act, and began the process of repatriating his wealth and assets to South Africa.
The taxpayer disclosed to the South African Revenue Service (Sars) that he held an 82% shareholding in a company by the name of BCD Corporation, an offshore company registered and incorporated in the British Virgin Islands.
The South African Reserve Bank accepted a valuation of $11 937 258 for BCD Corporation, which translated to R95 389 436 at the prevailing exchange rate.
Additional assessment raised by Sars
The taxpayer had also owned 53.1% in a South African company BCD SA, and sold all 1 000 BCD SA shares to the Sail Group on January 29, 2009. The taxpayer did not disclose this in his 2009 tax return.
In terms of the sale agreement, the aggregate purchase price “due and payable to” the taxpayer for the sale of his shares was R66 364 587.
This was payable as follows:
- R27 944 485 in cash on the implementation date, January 8, 2009.
- R15 264 000, when the taxpayer is allotted Sail shares to the value of R16 591 304.
- R23 156 102 payable in January 2012, subject to certain warranty clauses and breach provisions in the sale agreement.
Sars found that during the 2009 tax year the taxpayer had disposed of his shares in BCD SA, and raised an additional tax assessment for the capital gain, including penalties and interest.
The taxpayer argued that the so-called ‘warranty claims’ had reduced the share price. However, the court further concluded that all the suspensive conditions had been fulfilled when the taxpayer had been paid the first amount, and that there was no evidence before the court to show that the sales price had been reduced.
The court found that the amount of R66 364 587 had “accrued” to the taxpayer, that is, the “amount to which he was entitled”. This is based on the Lategan principle.
The court found “beyond doubt” that the taxpayer had failed to disclose to the commissioner the full circumstances regarding the sale, which he was “undoubtedly under a legal obligation to do so”.
The taxpayer had disclosed the loss on the sale of the BCD Corporation shares, and argued that this could be set off against the capital gain on the BCD SA shares.
The court agreed that “all of the shares held by the taxpayer in the group of companies should, for purposes of the assessment of CGT [capital gains tax], be treated as one ‘asset’ as defined in the Eighth Schedule” and reasoned that the “only question which remains is what is the base cost of those shares disposed of”.
The court reasoned that the taxpayer had disposed of his 28.9% shareholding to other shareholders between 2003 and 2009, reducing his shareholding to 53.1%.
“This disposal was however not disclosed to the Commissioner.” At the time of the sale in January 2009 “there were two companies left in the Group, namely BCD SA and BCD Corporation – and the taxpayer was a 53.1% shareholder in the Group”.
Capital gain tax calculation
The court’s calculation of the capital gain and the amount liable for capital gains tax
|Proceeds of sale of BCD SA shares||R66 364 578|
|Proceeds of sale of BCD Corporation shares||R9 980 300|
|R76 344 878|
|Less base cost||R61 763 520|
|R14 581 358|
|Less annual exclusion||R16 000|
|Capital gain||R14 565 358|
|Inclusion rate of 25%||R3 641 340|
Capital gains tax is only payable on the ‘included amount’, which is calculated at 25% (applicable for 2009 tax year) of the capital gain.
The taxpayer is therefore liable for capital gains tax on the amount of R3 641 340.
The court ordered that the assessment is amended instead of referring the matter back to Sars, taking into account the time period of nine years which has elapsed since the revised assessment.
The court was of the view that the taxpayer should be charged additional tax (equivalent to a penalty under the current act) mainly “from his failure to disclose the disposal of his shares during the 2009 tax year”.
The taxpayer attempted to lay the blame for his omission on his professional advisors, and the court had “difficulty in understanding how the taxpayer, given his vast experience and exposure in the business world, could have been under the impression that the once-off amnesty exonerated and relieved him from acting in the future as a responsible taxpayer”.
The court reduced the 200% additional tax imposed by Sars to 25%, but did not reduce the interest imposed by Sars, except to the extent of the reduction in the penalty.
The court remitted the penalty charged by Sars for the omission to submit Vat returns, on the basis that this would be double jeopardy.
- Dismissed the taxpayer’s appeal against the revised assessment for the 2009 year.
- Sars is to include the capital gain of R3 641 339.58 in the taxpayer’s income.
- The 200% additional tax is to be reduced to 25%.
- The interest is only to be adjusted in regard to the reduced penalty.
- The penalty charged in regard to the failure to submit provisional tax returns is remitted.
- There was no order as to costs.
Listen to Nompu Siziba’s interview with tax specialist Hugo van Zyl: