A v Commissioner of Revenue Services

• Jurisdiction: http://justis.com/jurisdiction/166,South Africa
• Judge: Adams J
• Judgment Date: 21 February 2023
• Citation: 2023 JDR 0493 (TAX)
• Docket Number: 46206
• Hearing Date: 13 February 2023
• Court: Tax Court

Adams J (Accountant Member et Commercial Member concurring):

[1]

We have before us an appeal by the appellant ('the taxpayer') in terms of section 107 of the Tax Administration Act ('the TAA') [1] , against the additional assessment of the taxpayer by the respondent ('the Commissioner') pertaining to

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Adams J (Accountant Member et Commercial Member concurring)

her income tax for the 2018 tax year of assessment, during which year the taxpayer emigrated (for purposes of both exchange control and tax) to the United Kingdom with effect from 3 September 2017. During that year, the taxpayer 'recouped' an amount of R67 995 991 arising from a foreign trade and the said amount was included in her gross income for that year. The taxpayer contends that she was entitled to set off, against that foreign trade income, a brought forward assessed loss of R62 296 925 arising from that self-same foreign trade in prior years.

[2]

In essence, the effect of the additional assessment was that the taxpayer's taxable income for the 2018 tax year of assessment did not take into account the deduction of R62 296 925, being an assessed loss brought forward from the 2017 tax year. The taxpayer was accordingly taxed on an income substantially more than what she believed the total amount of her income for that year to have been. The South African Revenue Services ('SARS'), so the taxpayer contends, wrongly disallowed the set-off claimed, thus subjecting her to income tax on the full amount of the recoupment, being R67 995 991, rather than on only R5 699 066 thereof, being the net amount after set-off of the assessed loss.

[3]

The fundamental issue in dispute in this appeal is whether the taxpayer may in terms of section 20(1) of the Income Tax Act ('the ITA') [2] , set off (deduct) the balance of the foreign assessed loss from an aircraft partnership trade, as carried forward to the 2018 tax period, against the income received by or accrued to her in the form of recoupments arising from the deemed disposal, under section 9H of the ITA, of partnership assets used in the conduct of a foreign trade. The dispute turns on the source (for purposes of proviso (b) to s 20(1)) of the recoupment income included in the taxpayer's 2018 year of assessment arising from the deemed disposal of the aircraft.

[4]

The adjudication of the aforesaid dispute between the parties requires a proper interpretation of s 20(1) of the ITA, as well as the erstwhile sub-paragraph (n)(ii) of the definition of 'gross income' in s 1 of the ITA. This sub-paragraph was in the ITA as and at the date of the appellant's emigration during September 2017,

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Adams J (Accountant Member et Commercial Member concurring)

although it was subsequently repealed. The appellant and the Commissioner, in applying these provisions to the facts in this matter, place different interpretations on these provisions and it may be apposite at this juncture to cite the relevant portions of these provisions, which form the basis of the cases of the parties.

[5]

Section 20(1)(b) provides, in the relevant parts, as follows: -

'20

Set-off of assessed losses

(1)

For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall, subject to section 20A, be set off against the income so derived by such person –

(a)

any balance of assessed loss incurred by that person in any previous year which has been carried forward from the preceding year of assessment: .........

(b)

any assessed loss incurred by a person during the same year of assessment in carrying on any other trade either alone or in partnership with others, otherwise than as a member of a company the capital whereof is divided into shares:

Provided that there shall not be set off against any amount –

(a)

.........

(b)

derived by any person from a source within the Republic, any –

(i)

assessed loss incurred by such person during such year; or

(ii)

any balance of assessed loss incurred in any previous year of assessment,

in carrying on any trade outside the Republic; or

(c)

.........'. (Emphasis added).

(2)

For the purposes of this section 'assessed loss' means any amount by which the deductions admissible under section 11 exceeded the income in respect of which they are so admissible.'

[6]

As regards, paragraph (n) of the definitions section 1 of the ITA, which was applicable at the relevant time, it provided for the specific inclusion in a taxpayer's 'gross income' of:

'(n)

any amount which in terms of any provision of this Act is specifically required to be included in the taxpayer's income and that amount must –

(i)

for the purposes of this paragraph be deemed to have been received by or to have accrued to the taxpayer; and

(ii)

in the case of any amount required to be included in the taxpayer's income in terms of section 8(4), be deemed to have been received or accrued from a source within the Republic notwithstanding that such amounts may have been recovered or recouped outside the Republic.'

[7]

In disallowing the deduction of the accumulated assessed loss of R62 995 991, the Commissioner relied almost exclusively on the aforesaid

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paragraph (n)(ii) on the basis that the income earned by the taxpayer during 2018, in the form of a 'recoupment', as explained later on in this judgment, is deemed to have been received or accrued 'from a source within the Republic', which means that proviso b(ii) of s 20(1) of the ITA finds application. Therefore, so the argument on behalf of the Commissioner is concluded, the accumulated assessed loss cannot and should not be deducted from the 2018 income.

[8]

The taxpayer disagrees, hence this appeal presently before us against the additional assessment pertaining to the 2018 tax year of assessment. The dispute between the taxpayer and the Commissioner is to be decided against the factual backdrop of the matter. The material and relevant facts, as set out in the paragraphs which follow, are common cause, same having been agreed upon as per inter alia a signed statement of agreed facts, which refers to and incorporates the material correspondence between the parties pertaining to the assessment. Importantly, as will be elaborated upon later on in the judgment, in the final pre-trial conference between the parties, the Commissioner accepted that the trade of the partnership, in which the taxpayer was a one third partner, had a 'permanent establishment' in the UK, as defined in section 1 of the ITA, to which the aircraft was effectively connected. The significance of this undisputed permanent establishment is addressed later on in the judgment.

[9]

Given the above agreements, it was not necessary for oral evidence to be led or for witnesses to be cross-examined and the parties closed their respective cases without leading evidence. Thereafter, the hearing of the matter proceeded directly to closing arguments based on the agreed common cause facts.

[10]

To the extent that this appeal involves matters of law, this judgment and the order is my own. To the extent that issues of fact were considered and decided, the learned accountant member and commercial member concur with my findings.

[11]

That brings me back to the facts in the matter.

[12]

Up to and until 3 September 2017, the taxpayer was a 'resident' of South Africa for tax purposes. Prior to that date, she and her father were members (holding one-third and two-third undivided shares respectively) of a partnership

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that owned and operated a passenger aircraft for charter purposes. The partnership, which traded under the name and style of 'Tri-Air Aviation Partnership' was formed under and in terms of South African law. It ran a charter business using a passenger aircraft and charter business or trade operated in and from the UK. The aircraft was not registered to operate in South Africa, and did not do so. It was registered and based in the UK, where the business' offices were also situated.

[13]

For South African income tax purposes, the partnership was governed by section 24H of the ITA. These provisions render a South African partnership 'tax transparent', which, in effect, means that the partnership was thus not assessed as a taxpayer in its own right. The taxpayer, as a partner, earned her proportionate share of the partnership gross income and was also entitled to claim a proportionate share of the partnership deductions and allowances. She was taxable directly on her proportionate share of the taxable income.

[14]

It is important to note that the taxpayer was not subject to income tax on the air charter business in the UK because, by virtue of Article 8(1) of the double tax treaty between South Africa and the UK, the profits of an enterprise of a Contracting State from operation of ships or aircraft in international traffic are taxable only in that State. Since the aircraft was an enterprise of the taxpayer and thus an enterprise of South Africa, and flew only inter-continentally, the UK had no taxing rights over the air charter trade. Only South Africa had the right to tax the profits, a right which was exercised since the inception of the partnership.

[15]

The taxpayer had accordingly claimed, as deductions in prior years, a proportionate share of capital allowances, namely depreciation, permitted in relation to the aircraft under section 12C of the ITA. These deductions on an annual basis was in fact a claim annually of 20% on the cost of the aircraft. She had also deducted a proportionate share of other expenses of the air charter trade. The said deductions resulted in the partnership trade suffering losses for South African tax...