Beware of unintended tax consequences when disposing of immovable property
The timing of income tax when disposing of immovable property
In order for either normal income tax or capital gains tax to arise on the sale of immovable property, an amount must accrue or be received.
SARS and some tax practitioners have held differing views as to when income tax arises on the disposal of immovable property. One popular view is that as the ownership of immovable property only passes when the property is transferred in the deeds office, an amount in respect of the disposal cannot accrue or be received before transfer occurs. The alternative view is that an amount accrues when an unconditional agreement for the purchase and sale of the property is concluded.
It is a well-known fact that payment of income tax is an annual event, which requires a taxpayer to determine the amounts that are to be included in taxable income by the end of a tax year. Determining this timing is crucially important for rendering an accurate annual tax return and paying sufficient provisional tax.
These differing views are therefore material to a taxpayer when immovable property is transferred after a tax year-end and where the contract was concluded before the year-end.
In case number 14005, the Tax Court decided on this timing debate. The taxpayer provided evidence from the conveyancing attorneys to support the view that payment followed the registration of the property and therefore that the taxpayer only became entitled to payment from the sale of immovable property after transfer had been given. In disagreeing with the taxpayer, the Court decided that the order in which payment is made and transfer undertaken is irrelevant. Applying the entitlement principle set out in another Court decision of Lategan v CIR, it was the Court’s view that an amount accrued to the seller when the contract of sale became enforceable upon either party. In this case, it was found that the contract became enforceable when all of the suspensive conditions were met and all of the required statutory permissions had been received.
While the decision of the Tax Court does not create binding precedence, it does provide a strong basis for the SARS view in its Comprehensive Guide to Capital Gains Tax that an amount will accrue when a contract of sale is legally enforceable between the parties.
Beware of deferred payments arising from selling immovable property
Immovable property (and other property too) may be disposed of, for an amount that is payable over a period of time. The income tax risk arising from a deferred payment arrangement was considered in the Supreme Court of Appeal decision of New Adventure Shelf 122 (Pty) Ltd v CSARS.
In this case the taxpayer disposed of immovable property for an amount that was to be payable over a period of time. The agreed price exceeded the base cost of the property and therefore the taxpayer derived a capital gain, on which income tax was payable in the year that the property was sold. In a subsequent tax year, the parties agreed to cancel the sale as the purchaser was unable to settle the outstanding purchase price.
If a taxpayer is no longer entitled to the proceeds from a disposal of an asset in a previous tax year, due to a variety of reasons including the cancellation of an agreement, the Capital Gains Tax provisions of the Income Tax Act, only provide a taxpayer with a capital loss equal to the amount to which the taxpayer is no longer entitled. The income tax difficulty that arises is that the capital loss relief is given in the tax year that the payment is no longer due, whereas the capital gain that arose in an earlier year still gives rise to an income tax liability in that same year. Therefore, a taxpayer in this position is liable for income tax, on an amount which has not yet been received and to which the taxpayer has no claim. The taxpayer merely enjoys the benefit of a capital loss that can only be utilised when another capital gain is derived.
This result may be considered unfair. However in the words of the Court:
“Payment of tax is what the law prescribes, and tax laws are not always regarded as ‘fair’. The tax statute must be applied even if in certain circumstances a taxpayer may feel aggrieved at the outcome.”
Avoiding unplanned and unintended tax consequences when disposing of immovable property
These recent Court judgements highlight just two of the income tax risks faced when disposing of immovable property. There are further unintended or unplanned direct and indirect tax consequences that may arise.
It is therefore recommended that organisations consult with one of our Grant Thornton tax adviser in order to assist your business to navigate or plan for these tax pitfalls.
For further information and for assistance in understanding the matters pertaining to immovable property or any other tax enquiries, please contact