LML4804 - Tax Law Assignment 1 Semester 2 2021.

LML4804 - Tax Law Assignment 1 Semester 2 2021. GROSS INCOME There is no definition for “accrued to” and we would therefore have to consider case law to determine what the courts held to determine the meaning of the phrase. IN ategan v CIR (1926 CPD) It was held that the meaning of ‘accrued to’ was ‘entitled to’. An amount of gross income accrues to a taxpayer in the year of assessment in which he became entitled to an amount, irrespective of the fact that the amount may only be due and payable in a later year of assessment. IN CIR v People’s Stores (Walvis Bay) (Pty) Ltd (1990 A) the court held that the amount that “accrued to” a taxpayer is the amount to which a taxpayer “had become entitled to”. If there is a condition imposed in the contract, accrual is deferred until the condition is fulfilled. In Mooi v CIR (1972 AD) The meaning of ‘accrued to’ became ‘unconditionally entitled to’. An amount does not accrue to you, and will therefore not be included in your gross income, if you have to meet a condition to actually receive the amount. The amount will then only be included if the condition is first met. from the cases of WH Lategan v CIR 2 SATC 16 and CIR v People’s Stores (Walvis Bay) (Pty) Ltd 52 SATC 9 that an entitlement to payment constitutes something that can “accrue”, even though actual payment is only due in future. What can be taken away from all of these cases is that, in the case of a sale of immovable property, once a taxpayer becomes unconditionally entitled to payment of an amount, i.e. when all conditions attaching to a transaction have been fulfilled, only then should an amount be deemed to be accrued to the taxpayer’s and hence taxable, this is irrespective of the date in which actual payment is received or transfer of the property is affected. Given that in Maponso’s case although the deeds of alienation were entered into there there were outstanding requirements to be met before they were entitled to the receipt of proceeds from the sale of properties. Requirement iv) This study source was downloaded by from CourseH on :32:36 GMT -05:00 This study resource was shared via CourseH “Transfer could not be effected until the local authority had given rates clearance in terms of section 118 of the Local Government: Municipal Systems Act 32 of 2000.” had not been met in the financial year the commissioner intents to tax Maponso. The commissioner’s opinion is incorrect. Furthermore the proviso to the definition of “gross income” in s1 of the Income Tax Act provides that where a person becomes entitled to any amount payable in the future, the amount is deemed to accrue during the year that the person becomes so entitled to the amount, as opposed to the future date for payment. This means the commissioner’s action is contestable by the taxpayer in question. In light of the above the chances of success if the taxpayer appeals the commissioner’s decision will likely favour the taxpayer. In M vs. the Commissioner of the South African Revenue Service (14005) [2017] ZATC 1 (30 May 2017).M appealed against the Commissioner’s assessment, contending that the amounts accrued only when it became entitled to receive payment after the transfer of the property. In reaching its decision to dismiss M’s appeal the Court reiterated the principles laid out in previous case law. The said principles are set out in Lategan v Commissioner for Inland Revenue 1926 CPD 203 (2 SATC 16) and Commissioner for Inland Revenue v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A). The Court went on to hold that an entitlement to payment can accrue before the payment is payable. A taxpayer’s right to receive payment vests and thus had value in the taxpayer’s hands as soon as a taxpayer was in a position to be able to tender transfer to the purchaser in terms of the agreement. In the event that there are suspense conditions contained in the agreement, the said entitlement to payment can only vest once the suspensive conditions are fulfilled. Thus, a taxpayer’s entitlement to payment vested at the date of the fulfilment of any suspensive conditions to which the agreement was subject, or the date upon which the taxpayer obtained the statutory permissions necessary to enable it to tender transfer, whichever occurred later. In this case Maponso had not met all the requirements, requirement (iv) was clearly This study source was downloaded by from CourseH on :32:36 GMT -05:00 This study resource was shared via CourseH indicate that no transfer can be effected. The court considering these facts will most likely rule in favour of the taxpayer. Question 2 For purposes of determining the taxable income derived by any person from carrying on a trade, s11(c) of the Income Tax Act, No. 58 of 1962 (Act) provides for the deduction of legal expenses which arise in the course of or by reason of a taxpayer’s ordinary trading operations. More specifically, any legal expenses actually incurred by a taxpayer in respect of “any claim, dispute or action at law arising in the course of or by reason of the ordinary operations undertaken by the [taxpayer] in the carrying on of [its] trade” will be deductible. .In order for a Maponso to be able to deduct legal expenses (which include the services of legal practitioners, expenses incurred in procuring evidence or expert advice, court expenses, witness expenses, taxing expenses, expenses of sheriffs or messengers of the court and other expenses of litigation which are of an essentially similar nature to any of the said expenses), such expenses must: i. be in relation to any claim, dispute or action at law; ii. arise in the course of or by reason of the ordinary operations undertaken by the taxpayer in the carrying on of its trade; and iii. not be of a capital nature. Claim, dispute or action at law The phrase “claim, dispute or action at law” is not defined in the Act. However, the meaning of this phrase was considered in ITC 1419 (1986) 49 SATC 45, where the taxpayer incurred expenditure on securing legal representation before a commission of enquiry appointed under s417 of the Companies Act, No. 61 of 1973. The Commissioner for the South African Revenue Service This study source was downloaded by from CourseH on :32:36 GMT -05:00 This study resource was shared via CourseH (SARS) argued that the word “dispute” referred to a defined and readily identifiable dispute between the parties. The court did not find it necessary to decide the issue as commissions appointed under the said s417 are appointed by a court of law. However, the view was expressed that the word “dispute” covers “any disagreement as a result of which parties require legal assistance”. In the same position Mr Sloath’s wife instituted a legal claim against Maponso for the loss of a breadwinner. She argues that Mr Sloath had to work shifts of15 hours without comfort breaks.As a result, Maponso’s payment of R1million for the loss of a breadwinner does not make good their negligence. The case was settled out of court. This will constitute claim and thus deductible. In ITC 1837 71 SACT 177, the taxpayer, a premier of a province, had made remarks at a press conference that resulted in him being successfully sued and ordered to pay damages for defamation. It was held that the claim for damages arose in the course and scope of his employment as premier and was sufficiently closely related to his ordinary trading operations to establish the requisite causal connection between such expenditure and those trading operations. The legal expenses incurred in defending the claim were accordingly deductible in terms of s11(c) of the Act.