What happens if an agreement for the sale of property is taxed in one year, but the sale is later cancelled and the property is returned, with loss of some of the assessed gain? Is capital gains tax (CGT) paid in the year when the deal was done, or is it recalculated?
This was more or less the thrust of the questions posed before the Western Cape High Court in the matter of New Adventure Shelf 122 (Pty) Ltd v The Commissioner SARS (case number 7007/2015).
A certain valuable property was sold in an agreement that provided for ownership to pass in the 2007 tax year. However, the purchaser, who intended developing the property, was to make payments over the term of the contract. The CGT was paid in 2007 and was, quite correctly, a considerable sum.
In 2012, the buyer realised that the property development could not go ahead and the property was returned to the taxpayer, as allowed for in the agreement’s cancellation provisions. The seller took transfer of the property and kept the payments made up to that date as pre-estimated damages.
Naturally, the question of a re-assessment of the CGT became relevant. SARS held that the 2007 assessment had to stand because the time limit for objecting to the assessment had passed. It maintained that the CGT effect of the cancellation of the agreement in 2012 was to be reckoned in the 2012 tax year.
The taxpayer did not succeed with its objections nor with a request to SARS to re-assess based on Section 98 of the Tax Administration Act, which covers reassessment due to error and other aspects.
A period of 180 days is allowed for a review application after exhausting internal remedies. This time limit had long expired when the taxpayer approached the High Court. Nonetheless, the necessary condonation was granted and the case was heard.
In its ruling, delivered on 17 February 2016, the court held that the 2007 assessment had been proper. It also held that the object of a redetermination is not to amend the determination of a capital gain or loss in a previous year of assessment (2007), but to provide a basis for the result of the redetermination to be taken into account for CGT purposes in the current year (2012).
The court thus ruled in favour of SARS. The case is highly instructive, especially as regards the time limits for making objections and for High Court reviews, as well as the circumstances under which condonation of late applications might be granted.
Advocate Peter O’Halloran is a tax specialist.