Lance Dickson Construction CC v Commissioner for the South African Revenue Service

Facts

Lance Dickson Construction CC (“the Taxpayer”) owned immovable property over which certain development rights had been procured. The Taxpayer concluded a written agreement of sale in September 2016 with a related entity for a sum of R25.2 million.  The selling price was calculated on the basis that the property, once sub-divided, would comprise of 72 individual erven, valued at R350,000 each.  Included in the agreement of sale was a provision whereby the purchaser will only pay the Taxpayer the R350,000 when each erf in the development was on-sold to the ultimate purchaser.  The agreement further stated that capital gains tax (“CGT”) on the entire transaction would only be paid by the Taxpayer on an ad hoc basis, as and when each individual erf was so on-sold.  The property in its entirety was transferred to the purchaser in October 2016.  However, no CGT, (as per the agreement), was declared in the 2017 tax return of the taxpayer.  It should be noted that the transaction was declared on the Taxpayer’s relevant VAT201 for the period.  The South African Revenue Service (“SARS”) identified this and raised a query. The Taxpayer relied on paragraph 39A of the Eighth Schedule to the Income Tax Act No 58 of 1962 (“Eighth Schedule”), and argued that the CGT should have been ring-fenced, and the loss carried over to the subsequent tax years. The reason for this, according to the Taxpayer, was that none of the erven transferred, were sold, and that paragraph 6 of the deed of sales clearly states that all the conditions for the transfer must be met before CGT could be realised.  SARS did not accept the position adopted by the Taxpayer and held that the Taxpayer should pay the full CGT to SARS during the 2017 year.  SARS also imposed an understatement penalty of 25% (‘standard case’ of reasonable care not taken in completing a return during a year of assessment), in light of this, in terms of the provisions of section 222 of the Tax Administration Act No 28 of 2011 (“TA Act”).  The Taxpayer lodged an objection, which objection eventually found its way via the Tax Board to the Tax Court.  The Tax Court then upheld the earlier decision by the Tax Board.

Issues

Issue 1 – Whether or not the determination of SARS that the Taxpayer was liable to pay a 25% penalty for the understatement of its liability for CGT, was correct or not; and

Findings

SARS applied the understatement penalty table in section 223 of the TA Act and imposed an understatement penalty of 25% as per item (ii) – ‘standard case’ of reasonable care not taken in completing a return during a year of assessment.  SARS did not deviate from its stance in its Rule 31 statement.  In its Rule 32 statement, the Taxpayer argued that it submitted the tax return correctly based on the tax position it took, and therefore, the understatement cannot relate to the return completion process.  The Taxpayer also contended that if SARS wanted to raise an understatement penalty, it should have done so in terms of section 223 of the TA Act and imposed an understatement penalty of 50% as per item (iii) – ‘standard case’ of no reasonable grounds for tax position taken.  In this regard, the Taxpayer submitted that it did in fact have reasonable grounds for the tax position taken since it was based on a tax opinion given by an independent expert.  However, SARS did not file a Rule 33 statement addressing the issue raised by the Taxpayer i.r.o of the tax position taken, and therefore, the issue that had to be addressed was, whether or not the Taxpayer did not take reasonable care when it completed its tax return for the 2017 year of assessment.  During the proceedings, the witness on behalf of SARS eventually accepted that the wrong behaviour category was selected. The court reminded all that in terms of section 102(2) of the TA Act, the onus to justify the imposition of an understatement penalty under Chapter 16, lies with SARS. In this case, SARS was unable to prove that the Taxpayer did not take reasonable care in completing the 2017 tax return.  SARS also was not able to argue that a higher penalty should have been imposed, because the issue was never raised in its Rule 31 statement, and SARS also did not file a Rule 33 statement.  During the Tax Court proceedings, the parties were invited to make written submissions on the question as to whether or not it was entitled to increase the penalty to 50%.  The Tax Court relied on Purlish Holdings (Pty) Ltd v CSARS 2019 ZASCA 04.  However, the power to increase the penalty is contingent upon SARS having made the allegations in its Rule 31 statement, and secondly, having discharged the burden of proof as is required in terms of section 102(2) of the TA Act.  This is the basis upon which the Supreme Court of Appeal decided Purlish.  Since SARS did not make the allegations in its Rule 31 statement and did not discharge the burden of proof that the taxpayer had no reasonable grounds for the tax position taken, the Court did not have the power to increase the penalty to 50%. SARS was therefore directed to exclude the understatement penalty imposed in the 2017 additional assessment.

The appeal was upheld with costs.

Find a copy of the court case here.