Trust Taxpayer v Commissioner for the South African Revenue Service (IT 45673) [2024] ZATC 15 (17 July 2024)

Tax Type

Key Facts

Issues

• The dispute centered on whether the R29,773,041 paid by the Trust to RMB in 2016 for the usufruct could be included in the base cost calculation for capital gains tax upon the property's disposal to Investec.
• The court examined the applicability of section 89quat(2) interest, which is levied when normal tax payable exceeds the credit amount, and whether the Trust's circumstances justified its imposition.
• The court evaluated if the non-declaration of taxable income by the Trust constituted a 'substantial understatement' under the Tax Administration Act, warranting a 10% penalty as a standard case.
• The court addressed whether the Trust, as the alleged bare dominium holder, is liable for income tax on rental income that accrued to ZMS or FRB under the usufructuary rights.

Tax Years

• 2016
• 2012
• 2011
• 2010
• 2008
• 2013
• 2009
• 2014
• 2007
• 2015

Holdings

• Understatement penalties of 10% were upheld as a standard case, with the court rejecting the Appellant's claim of a 'bona fide inadvertent error' due to evidence of intentional tax evasion and control over the Trust's finances.
• Section 89quat(2) interest assessments were upheld, as the Trust failed to prove circumstances beyond its control for non-declaration of taxable income, and the discretion to remit interest was not applicable.
• The R29 773 041 payment to RMB was ruled not to relate to the acquisition of a usufruct, disallowing its inclusion in the base cost calculation for capital gains tax on the 2016 property disposal.
• The court determined that the Trust did not cede a usufruct to ZMS or RMB, and as the registered landlord, it was entitled to rental income, which must be included in its gross income for tax purposes.
• The court dismissed the taxpayer's appeal and upheld the additional assessments, including understatement penalties and interest, finding no valid usufruct ceded and affirming the Trust's liability for rental income and tax obligations.

Remedies

• The appellant is ordered to pay the cost of the appeal on the scale of attorney and client, including payment to two counsels.
• The appeal by the taxpayer is dismissed.
• Additional assessments, including understatement penalties and interest assessments, are upheld by the court.

Tax Issue Category

• Capital Vs. Revenue
• Other

Legal Principles

• The court evaluated the taxpayer's good faith in claiming the understatement. The Appellant's argument was dismissed as a planned scheme rather than an innocent mistake, indicating a lack of good faith.
• The court emphasized that the taxpayer must prove, on a balance of probabilities, that the Commissioner's assessments were wrong. The Appellant failed to meet this burden by not providing evidence to support their claims regarding usufruct and lease agreements.
• The court applied the substance over form principle, determining that the trust's actual role as landlord and receipt of rental income, despite claims of usufruct, dictated the tax treatment. The legal form of the agreements did not override the economic reality.
• The court applied costs principles by awarding costs to the Respondent as the Appellant's appeal was deemed unreasonable and without merit. The judgment notes that the appeal was frivolous, leading to the costs being imposed on the Appellant.
• The court applied the standard of proof at a balance of probabilities, requiring the taxpayer to show it's more likely than not that their position is correct. The Appellant's evidence did not meet this threshold.

Disputed Tax Amount

Precedent Name

• ITI 13772
• ITC 1890

Cited Statute

• Tax Administration Act 28 of 2011
• Income Tax Act 58 of 1962
• Deeds Registries Act, 47 of 1937

Judge Name

• ND Kekana
• Sebueng Mthembu
• Eric Mphumbude

Passage Text

• While I agree with the authority referred to by the Appellant, I'm however, of the view that the use of this authority by the Appellant to advance its argument is a misnomer, and completely misplaced. It is an ironic paradox and contradiction in terms for the Appellant to believe that while there existed evidence that proved that there was no usufruct ceded by the Trust, with evidence of lease agreements entered into between the Trust and multiple tenants which showed that the trust was the landlord receiving the rental income, with evidence of rental income declared in the annual financial statements of the Trust throughout the affected years of assessment, and with the Trust taking up insurance to mitigate against the risk of the loss of the said rental income, which evidence has and remains unchallenged, the Appellant still believes that the non-declaration of the income by the Trust was an innocent, unintentional mistake.
• I'm convinced that there was no usufruct ceded to any other entity not ZMS and certainly not FRB/RMB. The trust always had all rights and enjoyed the use of the asset. The Trust entered into lease agreements in its capacity as the landlord and received the rental income as declared in its annual financial statements. The Appellant's version cannot succeed as it failed to adduce evidence to support the cessation of a usufruct or because it is a personal servitude, the registration thereof with the Deeds Registry as required by the law. The Trust failed to discharge the onus resting on it of proving on a preponderance of probability that the additional assessments raised by SARS, were wrong. As such I'm fully convinced that the Commissioner was correct in raising the additional assessment.
• That appeal by the taxpayer is dismissed. 2. The additional assessments, including the understatement penalties and interest assessments, is upheld.