Contesting a pulpable loss

A court recently found that grapes were ‘held’ by a farmer even after being pulped into grape juice and mingled with grape juice from other producers.

Peter O’Halloran - Tax advice

Are a farmer’s pulped grapes, when mingled with pulped grapes from other farmers and turned into grape juice and then wine, a separate, taxable item? This was the issue in the Supreme Court of Appeal Judgement Avenant v CSARS (367/2015) [2016] ZASCA 90 (1 June 2016).

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The appellant delivered grapes to a co-op for making into wine, marketing and sale. The Commissioner of SARS (the respondent) added back a certain value to the farmer’s tax return and assessed him on the grapes pulped by the co-op. The farmer contended that the grapes, mingled with pulp from other farms, were no longer ‘produce on hand’ and could thus not be taxed.

The Court of Appeal deliberated on whether the grapes were still ‘held’ by the farmer at year-end. The farmer based his stance on several legal precedents.

But the court found that, although close in principle, the cases cited dealt with different types of processing that caused the ingredients to lose their identity. In the case of pulp turned into grape juice and then wine, the end-product is still identifiable as ‘fruit of the vine’.

Consequently, the court found that the grapes were still ‘held’ by the appellant even after delivery and pulping. It reasoned that the word ‘held’ did not necessarily refer to ownership and the pulp was still ‘held’ by the appellant because it had not been sold to the co-op. Instead, it was to be made into wine and then sold, with a share of the proceeds going to each contributing farmer. This disposed of the main argument of the appellant.

The value of the pulp was then looked at closely by the court. After the appellant had submitted that the pulp was of low value, the court held that there were industry norms for valuing the pulp and that even if market values were not used by SARS, the respondent had to make use of reasonable and fair values.

The court decided that the value placed upon the pulp by SARS was too high and the assessment had to be re-evaluated to arrive at a reasonable figure, as previously ordered by the Tax Court.

Finally, there was the question of costs, with the appellant contending that, because the Tax Court’s finding regarding the value placed upon the pulp had been upheld, he had succeeded in that respect and was entitled to costs on that score.

Unfortunately, the question of costs arose fairly late in the proceedings and the court held that the appellant could not make those submissions at the late stage where it had not canvassed the point prior to commencement of the appeal.

This article was originally published on 29 April 2016 in Farmer’s Weekly.