THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case No: 310/2016
In the matter between:
NEW ADVENTURE SHELF 122 (PTY) LTD                          APPELLANT
and
THE COMMISSIONER OF THE SOUTH AFRICAN
REVENUE SERVICES                                                             RESPONDENT

Neutral citation: New Adventure Shelf 122 v Commissioner : SARS (310/2016)
[2017] ZASCA 29 (28 March 2017)

Coram:
Shongwe, Leach, Wallis, Mocumie JJA and Nicholls AJA
Heard:
19 February 2017
Delivered: 28 March 2017

Summary:    Revenue: capital gains tax arising from the sale of immovable
property: sale cancelled more than three years after assessment of capital gains
tax but before purchase price paid in full: seller not entitled to have assessment
reconsidered in the light of the subsequent cancellation: regard to be had to the
cancellation in assessing a capital gain or capital loss in year of cancellation.

________________________________________________________________
ORDER
________________________________________________________________

On appeal from: The Western Cape Division of the High Court, Cape Town
(Binns-Ward J sitting as court of first instance), judgment reported as sub nom
New Adventure Shelf 122 (Pty) Ltd v Commissioner for South African Revenue
Service Case No: 7007/2015; 17 February 2016; (2016) 78 SATC 190:

The appeal is dismissed with costs, such costs to include the costs of two
counsel.

________________________________________________________________
JUDGMENT
________________________________________________________________

Leach JA (Shongwe, Wallis and Mocumie JJA and Nicholls AJA
concurring)

[1] The issue in this appeal relates to the consequences in regard to capital
gains tax where the sale of an asset is cancelled before the seller has been paid
in full, with the unpaid balance of the proceeds of the sale being forfeited and
the asset being returned to the seller. During the 2007 tax year, the appellant
company sold a piece of immovable property near Stilbaai at a price which
resulted in it receiving a substantial capital gain as envisaged in the Eighth
Schedule of the Income Tax Act 58 of 1962 (the Act). This capital gain was
taken into account in the assessment of the appellant‟s liability for tax in respect
of that year. Unfortunately, the purchaser thereafter paid only a portion of what

it had agreed to pay, which led to the sale being cancelled by agreement several
years later. In terms of the cancellation agreement, the property was returned to
the appellant who retained what payments had been made by the purchaser as
predetermined damages for breach of contract.

[2] In these circumstances, as it had in fact received much less than the
agreed price at which it had sold the property, the appellant attempted to
persuade the respondent, the Commissioner of the South African Revenue
Services (SARS) to withdraw its tax assessment for the 2007 tax year and to
reduce its tax liability for that year. This, SARS was not prepared to do. When
its attempts failed, the appellant applied to the Western Cape Division of the
High Court, Cape Town seeking an order reviewing SARS‟s decision and
directing it to do so. The matter came before Binns-Ward J who dismissed the
application. The appeal to this court is with leave of the court a quo.

[3] The background facts are common cause. In 1999 the appellant, a
company with its registered address in Riversdal, Western Cape, purchased the
property at a price of R185 000. Subsequently, on 20 September 2006, a date
which fell within the appellant‟s 2007 tax year of assessment, the appellant
concluded a written deed of sale in terms of which it sold the property to
Kalipso Twintig (Pty) Ltd (Kalipso) at an agreed price of  R17 720 000. The
deed of sale required Kalipso to pay the purchase price by way of a deposit of
R1 200 000 (which had already been paid on 13 November 2005), with a further
sum of R1 million to be paid on the date of registration of transfer. It provided
for Kalipso to register a bond over the property on transfer in order to secure
payment of the balance R15 520 000. This was to be paid by way of three equal
annual instalments of R500 000 commencing on 31 October 2007, with a final

payment of R14 020 000 to be made on 31 October 2010. Pursuant to this
agreement, the property was duly transferred to Kalipso and the envisaged bond
was registered over it.

[4] In the light of these events, in respect of the 2007 tax year the appellant
declared a taxable capital gain of R9 746 875  as envisaged in Schedule Eight to
the Act derived from the agreed sale price (I shall return to statutory provisions
relating to the taxation of capital gains in more detail in due course.) In an
assessment issued on 1 August 2008, SARS accepted this as being correct and
assessed the appellant as being liable to pay tax of R1 587 277.54 for the 2007
tax year. Of this, R1 413 006.73 related to „normal tax‟ – being the amount
levied on the capital gain less R 1 000 in respect of a loss – with the balance, an
amount of R174 270.81, being interest imposed under s 89 quat of the Act.

[5] The appellant accepts that these amounts were correctly calculated.
Importantly, it raised no objection to the assessment which therefore became
final and conclusive under s 81(5) of the Act. For completeness I should
mention that the appellant failed to pay the tax so assessed and had still not
done so when the application which is the subject of this appeal was heard in
the court a quo in February 2016. Presumably this is due at least in part to its
only asset having been the property which it had sold to Kalipso and for which
it was not paid as had been agreed.

[6] Kalipso had purchased the property for purposes of effecting a residential
development. For various reasons, including a failure to have the property re-
zoned, these plans went awry. More importantly for present purposes, it did not
honour its obligations in regard to payment.  Despite an extension having been

granted, by November 2011 Kalipso had paid the appellant only R4 549 082
rather than the full purchase price of R17 720 000. This breach led to the
appellant negotiating a written agreement with Kalipso on 18 November 2011,
in terms of which the sale was cancelled, with Kaliso undertaking to restore
registered title of the property to the appellant (this was done on 19 April 2012).
Further provision was made for the appellant to retain the payments Kalipso had
made as agreed damages and for no further amount to bowing due to the
cancellation.

[7] As a result of this saga, the appellant in fact received only R4 549 082
from the sale and not the R17 720 000 Kalipso had agreed to pay. Its problem
was that it had been taxed on a capital gain that it had not received and that all it
could obtain as a result of the cancellation of the sale was an assessed capital
loss, with no corresponding gain to set off against the loss. This led to the
appellant seeking to have its unpaid tax liability for the 2007 year revised and
reduced. On 12 March 2012 the appellant, by way of what purported to be an
objection to the 2007 assessment, essentially applied to SARS to withdraw that
assessment under s 98(1)(d) of the Tax Administration Act 28 of 2011 – which
at the time provided for an assessment being withdrawn should SARS be
satisfied, inter alia, that it imposed „an unintended tax debt in respect of an
amount that the taxpayer should not have been taxed on‟ or that the recovery of
the debt under the assessment „would produce an anomalous or inequitable
result‟.1 This attempt was unsuccessful as SARS took the view that the 2007
assessment had to be regarded as final and could not be re-opened.

1 This section has since been amended.

[8] The appellant then took various further steps to obtain relief. These
included asking the Legal Delivery Unit of SARS to reconsider the matter, an
approach to the Tax Omsbud, and having a tax consultant making
representations on its behalf. It is unnecessary for present purposes to detail the
negotiations that ensued and the various submissions made on behalf of the
appellant, although it must be mentioned that both sides placed considerable
reliance upon the Tax Administration Act of 2011. However, they now accept
that the relevant events occurred before that Act came into effect on 1 October
2012 and that its provisions do not apply to their current dispute.

[9] In any event, the negotiations came to nought and, eventually, on
14 April 2015, the appellant gave notice under s 11(4) of the Tax
Administration Act of its intention to institute proceedings in the High Court.
And in due course, on 21 April 2015, it instituted review proceedings in the
court a quo, seeking an order setting aside the assessment for the 2007 tax year
and certain ancillary relief. The refusal of such relief led to this appeal.

[10] In the light of this background, I turn to consider the appellant‟s
contention that on the facts described above its 2007 tax assessment ought to
have been re-opened, revised and reduced. So called „capital gains tax‟ was
introduced into this country with effect from 1 October 2001 by way of the
Eighth Schedule to the Act. Simply put, the essential factor to which regard is
had is the difference between the amount at which a person acquires a capital
asset and the amount of the proceeds received on its subsequent disposal.
Should such proceeds exceed the amount at which it was acquired, there is a
capital gain; conversely, should they be less, there will be a capital loss. The
aggregate of capital gains and capital losses are then taken into account to

calculate a net capital gain (this being the difference between the aggregate
capital gain of a year and the aggregate capital loss of the previous year)2 and a
percentage then applied to the net capital gain to calculate the taxable capital
gain for the year of assessment.3 In terms of s 26A of the Act, that taxable
capital gain then falls to be included in the taxable income of the person
concerned.

[11] The learned authors of Silke on South African Income Tax comment as
follows upon the provisions of this scheme:
„Although one refers colloquially to the terms “capital gains tax” or the “capital gains tax
provisions”, in truth, it is not a separate tax. Taxable capital gains do not constitute “gross
income” or “income”, but are added directly to a taxpayer‟s other taxable income and
subjected to normal (income) tax. This result is achieved by the charging provision, s 26A,
which includes in a person‟s taxable income for any year of assessment a percentage of his
taxable capital gains, as determined in accordance with the provisions of the Eighth Schedule.
The effective consequence is that the taxable capital gains are aggregated with other taxable
income and taxed according to the normal (income) tax rates.‟

[12] The essential starting point of the scheme is the so called „base cost‟ of an
asset. Although paragraph 20 of the Eighth Schedule provides in considerable
detail for the determination of base cost in particular circumstances, it is in
simple terms set out in paragraph 20(1)(a) as being „the expenditure actually
incurred in respect of the cost of acquisition or creation of that asset‟. However,
capital gains fall only to be assessed from 1 October 2001, the so called
„valuation date‟ when capital gains tax was introduced. Accordingly, in respect
of assets acquired before that date – referred to as „pre-valuation date assets‟ –
and in order to levy capital gains tax only on increments in value occurring after

2 Paragraph 8(a) of the Eighth Schedule.
3 Paragraph 10 of the Eighth Schedule.

the valuation date, the legislature devised a scheme in paragraph 25 of the
Eighth Schedule to exclude any increment in value of an asset that may have
taken place before the valuation date.

[13] For purposes of this judgment it is unnecessary to have regard to the
considerably detailed provisions prescribed in Schedule Eight in order to
achieve this end.4 Suffice it to say that the parties are agreed that although the
appellant bought the property for R185 000 in 1999 (it was therefore a pre-
valuation date asset), its base cost for purposes of determining its taxable capital
gain when sold to Kalipso in the 2007 tax year5 was a sum in excess of R7m.
And although certain of the instalments due in respect of the purchase price
were to be paid after the conclusion of the 2007 tax year, by reason of
paragraph 35(4) of the Eighth Schedule, these fell to be „treated as having
accrued to [the appellant] during that year‟. This led to the calculation of the
appellant‟s capital gains tax liability for the 2007 year as already set out above.6

[14] In the light of the appellant‟s failure to object to its 2007 assessment for
more than three years, the initial obstacle the appellant has to overcome is to be
found in s 81 of the Act. Under s 81(1) a taxpayer aggrieved by an assessment
may object „in the manner and under the terms and within the period prescribed
by this Act‟. Section 81(2)(b) goes on to provide that the prescribed period for
objections may not be extended „where more than three years have lapsed from
the date of the assessment‟ whilst, as already mentioned, s 81(5) provides that
should no objections be made to an assessment, it „shall be final and
conclusive‟. Consequently, the now disputed assessment seemingly had become

4 For those who might be interested see De Koker and Urquart Income Tax in South Africa par 5A.4.4.
5 Arrived at by applying the time-apportionment method of calculating base cost set out in paragraph 30 of the
Eighth Schedule and having regard to certain expenses.
6 See para 4.

final and conclusive under s 81, and if that is so it is fatal to the relief the
appellant seeks. This was SARS‟s simple answer to the appellant‟s claims.

[15] The appellant‟s argument as I understood it, however, was that this did
not apply in respect of tax levied on a capital gain. This argument was founded
in the main upon paragraph 35 of the Eighth Schedule which, inter alia,
provided:
„35(1) Subject to subparagraphs (2), (3) and (4), the proceeds from the disposal of an asset
by a person are equal to the amount received by or accrued to, or which is treated as having
been received by, or accrued to or in favour of, that person in respect of that disposal . . .
(2)
. . .

(3)
The proceeds from the disposal of an asset by a person, as contemplated in
subparagraph (1) must be reduced by –
(a)
any amount of the proceeds that must be or was included in the gross income of that
person or that must be or was taken into account when determining the taxable income of that
person before the inclusion of any taxable capital gain;
(b)
any amount of the proceeds that has been repaid or has become repayable to the
person to whom that asset was disposed of; or
(c)
any reduction, as the result of the cancellation, termination or variation of an
agreement or due to the prescription or waiver of a claim or release from an obligation or any
other event of an accrued amount forming part of the proceeds of that disposal.‟

[16] In the light of these provisions, the appellant argued as follows: Under
paragraph 3 of the Schedule, a person‟s capital gain is calculated with reference
to the proceeds received or accrued from a disposal of an asset. The capital gain
received or accrued is calculated in terms of paragraph 35(1) of the Eighth
Schedule. That paragraph includes sub-paragraph 35(3), which says that the

gain is to be reduced by certain amounts. One of these is that contained in
paragraph 35(3)(c), namely, any reduction in those proceeds as the result of the
cancellation, termination or variation of an agreement. This is what occurred
here. In almost all instances falling within this sub-paragraph, the reduction of
proceeds by virtue of cancellation or the like will occur in a later year of
assessment. Paragraph 25(2) requires the taxpayer, in those circumstances, to
re-determine the base cost of the asset and the capital gain in the light of the
change in circumstances. That can only relate to the original assessment.
Accordingly, so the argument went, it is the original assessment that must be re-
opened and revised in the light of the redetermination of the base cost and the
amount of the capital gain.

[17] The appellant sought to buttress its argument that there should be such a
redetermination of the capital gain by arguing that unlike „normal‟ income tax
(in respect of which s 81 would clearly apply) the assessment of capital gains
tax was not necessarily an annual event. It argued that the only way that there
can be a matching of capital gains arising in one tax year and capital losses
arising out of the same transaction in a later tax year, is to allow such a
redetermination, the mechanism of which lies in paragraph 25 of the Eighth
Schedule. Sub-paragraph 25(1) provides a scheme to exclude any increment in
value of a pre-valuation date asset that may have taken place prior to the
valuation date. Sub-paragraphs 25(2) and (3) go on to provide:
„(2) If a person has determined the base cost as contemplated in subparagraph (1) of a pre-
valuation date asset which was disposed of during any prior year of assessment and in the
current year of assessment─
(a)  any amount of proceeds is received or accrued in respect of that disposal which has not

been taken into account in any prior year in determining the capital gain or capital loss in

respect of that disposal;

(b)  any amount of proceeds which was taken into account in determining the capital gain or

capital loss in respect of that disposal has become irrecoverable, or has become repayable

or that person is no longer entitled to those proceeds as a result of the cancellation,

termination or variation of any agreement or due to the prescription or waiver of a claim

or a release from an obligation or any other event during the current year;
(c)  any amount of expenditure is incurred which forms part of the base cost of that asset

which has not been taken into account in any prior year in determining the capital gain or

loss in respect of that disposal; or
(d)  any amount of base cost of that asset that has been taken into account in any prior year in

determining the capital gain or capital loss in respect of that disposal, has been recovered

or recouped,
that person must redetermine the base cost of that asset in terms of  subparagraph (1) and the
capital gain or capital loss from the disposal of that asset,  having regard to the full amount
of the proceeds and base cost so redetermined.
(3) The amount of capital gain or capital loss redetermined in the current year of assessment
in terms of subparagraph (2), must be taken into account in determining any capital gain or
capital loss from that disposal in that current year, as contemplated in paragraph 3 (1)(b)(iii)
or 4 (1)(b)(iii).‟

[18] There are a number of difficulties confronting this argument. Bearing in
mind the provisions of the basic scheme under which capital gains tax is levied,
the assessment of capital gains tax is, an annual event in the sense that, if any
occurrences during a tax year render the provisions of Schedule Eight
applicable to an accrual of a taxable capital gain, the amount thereof is to be
included in the taxpayer‟s taxable income for that year.  This is in line with the
general principle that income tax is an annual fiscal event so that, as was stated
by Botha JA in Caltex Oil (SA) Ltd v Secretary for Inland Revenue 1975 (1) SA
665 (A) at 677H-678A:

„. . . events which may have an effect upon a taxpayer's liability to normal tax are relevant
only in determining his tax liability in respect of the fiscal year in which they occur, and
cannot be relied upon to re-determine such liability in respect of a fiscal year in the past.‟

[19] Consequently, the fact that in a particular year there may not be any
events which lead to the accrual of a taxable capital gain is no reason to find
that when they do occur, and when a taxable capital gain is included in a
taxpayer‟s taxable income, provisions relating to an assessment of tax liability
such as those in s 81 should not apply.

[20] In addition, the appellant‟s argument requires paragraph 35 of the Eighth
Schedule to be construed as applying not only to the determination of capital
gains in a particular year, but also to require a redetermination in a later year of
a capital gain already accrued. But that is inconsistent with the overall scheme
of paragraph 35(3). In the first place the sub-paragraph relates to the
determination of the proceeds of a disposal „during a year of assessment‟. It
provides that the proceeds in that year, and that year alone, are to be reduced by
three items.

[21]   The first of these is any amount of the proceeds of the disposal of the
asset that have already been taken into account in the taxpayer‟s gross income.
That can only apply during the year in which the disposal occurs. It is directed
at the situation where the accrual constitutes gross income as would be the case
with a disposal by a person who deals in shares or the disposal by a property
developer of all or part of the development. As that is the income-earning
activity of those taxpayers the proceeds from such disposals constitute gross

income. They must accordingly be excluded from the calculation of capital
gains.

[22] The second item deals with the situation where the taxpayer has to repay
part of the price, or other proceeds of disposal, to the party to whom the
disposal was made. This deals with a number of commonplace situations, such
as the redetermination of the purchase price of a business in the light of a post-
sale determination of the value of stock on hand or book debts. Another would
be a refund of portion of the price to address a complaint that the goods sold
were defective. A third would be the need to meet warranty claims. Again these
are events that will ordinarily come to light in the year in which the disposal
occurs.

[23] The third item, a reduction of the proceeds of the disposal caused by a
cancellation or variation of an agreement, is also likely to occur in the same
year as the disposal. Thus all three situations envisaged by the sub-paragraph
are directed at ensuring that where a disposal occurs in a particular tax year,
events during that year that operate to diminish the proceeds received by the
taxpayer in that year are taken into account to reduce those proceeds and hence
the capital gain arising from the disposal. That is the ordinary and natural
construction to be given to paragraph 35 and I agree with the argument by
SARS that the amendments effected in 2015 with effect from 2016, which
clearly spell that out to be the case, are confirmatory of that construction.7

7 Patel v Minister of the Interior & another 1955 (2) SA 485 (A) at 493A-D and National Education Health and
Allied Workers’ Union v University of Cape Town & others 2003 (3) SA 1 (CC) para 66.

[24] Moreover, the provisions of paragraphs 3, 4 and 25 of the Eighth
Schedule do not support the appellant‟s argument. As set out in
paragraph 25(2), the base cost of a pre-valuation date asset which was disposed
of during any prior year of assessment, as well as the capital gain or capital loss
from the disposal of that asset, is to be redetermined „in the current year of
assessment‟ should certain events occur. Paragraph 25(3) further provides that if
such events take place, the amount of the redetermined capital gain or capital
loss „in the current year of assessment . . . must be taken into account in
determining any capital gain or capital loss from that disposal in that current
year, as contemplated in paragraph 3(b)(iii) or 4(b)(iii).‟ As appears from this,
should there be a redetermination of a capital gain or a capital loss that occurred
in a prior year of assessment, that redetermination is to be taken into account in
the determination of a capital gain or a capital loss, not in the prior year but in
the current year ie in the tax year in which the events giving rise to the
redetermination take place.

[25] This conclusion is reinforced by the provisions of paragraphs 3 and 4 to
which paragraph 25(3) refers. They read:
„3  A person's capital gain for a year of assessment, in respect of the disposal of an asset
(a) . . .
(b)  in a previous year of assessment, is equal to
(i) so much of any amount received by or accrued to that person during the current year of
assessment, as constitutes part of the proceeds of that disposal which has not been taken into
account
(aa) during any year in determining the capital gain or capital loss in respect of that disposal;
(bb) in the redetermination of the capital gain or capital loss in terms of paragraph 25(2); or;

(ii) . . . or
(iii) the sum of
(aa) any capital gain redetermined in terms of paragraph 25(2) in the current year of
assessment in respect of that disposal; and
(bb) any capital loss (if any) determined in respect of that disposal in terms of paragraph 25
for the last year of assessment during which that paragraph applied in respect of that disposal.
4  A person's capital loss for a year of assessment in respect of the disposal of an asset
(a) . . .
(b) in a previous year of assessment, is equal to
(i) so much of the proceeds received or accrued in respect of the disposal of that asset that
have been taken into account during any year in determining the capital gain or capital loss in
respect of that disposal
(aa) as that person is no longer entitled to as a result of the cancellation, termination or
variation of any agreement, or due to the prescription or waiver of a claim or a release from
an obligation or any other event during the current year of assessment;
(bb) as has become irrecoverable during the current year of assessment; or
(cc) as has been repaid or has become repayable during the current year of assessment, and
which have not been taken into account in the redetermination of the capital gain or capital
loss in terms of paragraph 25(2);
(ii) . . . or
(iii) the sum of
(aa) any capital loss redetermined in terms of paragraph 25(2) in the current year of
assessment in respect of that disposal; and
(bb) any capital gain (if any) determined in respect of that disposal in terms of paragraph 25
for the last year of assessment during which that paragraph applied in respect of that
disposal.‟

[26] As clearly appears from their terms, the provisions of paragraphs 3(b) and
4(b) are of application only in a current year of assessment. They establish
convincingly that should any events occur which require the redetermination of
a capital gain or a capital loss which accrued in a previous year, such
redetermined capital gain or capital loss is to be taken into account in
determining the taxpayer‟s capital gain or capital loss in the current year in
which those events occur. That being so, the argument that paragraph 35(3)
entitles the taxpayer to have a confirmed tax assessment of a previous year re-
opened as a result of a cancellation, termination or variation of an agreement
which reduces an accrued amount forming part of the proceeds of an earlier
disposal of an asset, is wholly inconsistent with the provisions of the Eighth
Schedule and is, quite simply, unsustainable.

[27] The court a quo dealt extensively with the manner in which the
cancellation agreement was to be taken into account in respect of the 2010 tax
year for purposes of the assessment of capital gains tax. In doing so it endorsed
a calculation of the appellant‟s capital gains tax liability for that year handed up
in argument by counsel for SARS to the effect that as a result of the cancellation
a capital loss of some R7.7 million had accrued to the appellant. It is
unnecessary for purposes of this judgment either to do the arithmetic, or to
express any opinion either on how it should be performed or the resultant
outcome. Suffice it to say that if there is indeed an accrued capital loss arising
from the cancellation which the appellant can use to set off against any future
aggregate capital gain, this to a large extent militates against the appellant‟s
argument that reducing its tax liability for the 2007 tax year is the only way in
which it could be fairly treated. An assessed capital loss is a valuable asset in
the hands of a taxpayer. Whether it is ever used to off-set a future capital gain is
a matter entirely within the control of the taxpayer.

[28] In any event, even if in certain instances it may seem „unfair‟ for a
taxpayer to pay a tax which is payable under a statutory obligation to do so,
there is nothing unjust about it. 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.

[29] In summary, the cancellation of the sale did not entitle the appellant to
have his tax liability for the 2007 year re-assessed. The cancellation and its
consequences were factors relevant to an assessment of any capital gain or,
more likely, capital loss that accrued during that current tax year and not the
year that the capital gain had initially accrued. Consequently, the court a quo
correctly concluded that the appellant was not entitled to the relief that it sought.
The appeal must therefore fail. There is no reason for costs not to follow the
event.

[30] The appeal is dismissed with costs, such costs to include the costs of two
counsel.

________________
L E Leach
Judge of Appeal

APPEARANCES

For Appellant:
T S Emslie SC

Instructed by:

Shepstone & Wylie Attorneys, Cape Town

Phatshoane Henney, Bloemfontein

For Respondent:
M Janisch SC (with him T S Sidaki)
Instructed by:
The State Attorney, Cape Town
The State Attorney, Bloemfontein
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME
COURT OF APPEAL

From:
The Registrar, Supreme Court of Appeal
Date:
28 March 2017
Status:
Immediate

Please note that the media summary is intended for the benefit of the media
and does not form part of the judgment of the Supreme Court of Appeal.

New Adventure Shelf 122 (Pty) Ltd
v
The Commissioner of the South African Revenue Services

In 1999 the appellant purchased a piece of immovable property near Stilbaai at
a price of R185 000. Subsequently, in the 2007 tax year, the appellant sold the
property to a development company at a price of R17 720 000, with certain
payments due to be made after registration of transfer. Transfer was effected
but the purchaser defaulted on making due payments and, on 18 November
2011, the appellant concluded a written agreement of cancellation with the
purchaser. In terms of this agreement the immovable property was returned to
the appellant who retained the amount of R4 549 082 that had been paid by
then as agreed damages. It was also agreed that no further amounts would be
owing.

The problem facing the appellant was that during the 2007 tax year it had been
taxed on a capital gain arising from the sale of the property that it did not in
fact ultimately receive, and that all it could obtain as a result of the
cancellation was an assessed capital loss with no corresponding gain to set off
against the loss. This led to the appellant seeking to have its tax liability for
the 2007 year revised and reduced. Its negotiations with SARS to re-open its
2007 assessment proved fruitless and, in due course, it instituted proceedings
in the Western Cape High Court, Cape Town seeking an order setting aside its
2007 assessment. This relief was refused. The appellant appealed to the
Supreme Court of Appeal against such refusal.

SARS argued on appeal that under s 81(1) of the Income Tax Act 58 of 1962,
as more than three years had elapsed from the date of the 2007 assessment of
the appellant’s tax, such assessment was final and conclusive and could not be
revisited. The appellant, however, sought to overcome the provisions of that
section by arguing that it did not apply in respect of the tax levied on the
capital gain. This argument was founded in the main upon the provisions of
paragraph 35 of the Eighth Schedule to the Income Tax Act.

The Supreme Court of Appeal analysed the provisions of the Eighth Schedule
and concluded that they did not oblige SARS re-open 2007 tax assessment. It
held that the change in circumstances due to the cancellation was relevant to
the capital loss that would have accrued during the year the cancellation
occurred, and not to the year that the initial capital gain had accrued. SARS’s
argument was upheld and the appeal was dismissed.