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

In 1999, the appellant company purchased immovable property near Stilbaai for R185,000. On 20 September 2006 (during the 2007 tax year), it sold the property to Kalipso Twintig (Pty) Ltd for R17,720,000. The purchase price was to be paid in installments, with R1.2 million deposit (already paid in 2005), R1 million on transfer, and the balance secured by a bond to be paid in annual installments until 31 October 2010. The property was transferred to Kalipso accordingly. The appellant declared a taxable capital gain of R9,746,875 for the 2007 tax year, which SARS assessed at R1,587,277.54 on 1 August 2008. The appellant did not object to this assessment, which became final under section 81(5) of the Income Tax Act. Kalipso failed to make full payment, having paid only R4,549,082 by November 2011. On 18 November 2011, the sale was cancelled by agreement, the property was restored to the appellant (on 19 April 2012), and the appellant retained the payments made as agreed damages. More than three years after the 2007 assessment, on 12 March 2012, the appellant sought to have SARS withdraw the assessment under section 98(1)(d) of the Tax Administration Act. After various unsuccessful attempts to obtain relief, the appellant instituted review proceedings in the Western Cape High Court, which dismissed the application. The appellant then appealed to the Supreme Court of Appeal.

• Whether a taxpayer is entitled to have a final capital gains tax assessment from a prior year re-opened and revised when the sale giving rise to the capital gain is subsequently cancelled in a later tax year
• The proper interpretation and application of paragraph 35(3) of the Eighth Schedule to the Income Tax Act 58 of 1962 concerning reductions in proceeds due to cancellation of agreements
• Whether paragraph 25(2) of the Eighth Schedule allows or requires redetermination of capital gains from a prior year when events such as cancellation occur in the current year
• The application of section 81 of the Income Tax Act regarding finality of assessments where no objection is lodged within the prescribed period
• The tax year in which a capital loss arising from cancellation of a sale should be assessed - the original year of disposal or the year in which the cancellation occurs

The appeal was dismissed with costs, including costs of two counsel. The High Court decision refusing to review and set aside SARS's refusal to re-open the 2007 tax assessment was upheld.

Where a sale of an asset giving rise to a capital gain is cancelled in a tax year subsequent to the year in which the capital gain was assessed, the taxpayer is not entitled to have the original assessment re-opened and revised. Capital gains tax assessments are annual fiscal events and events affecting tax liability are relevant only for determining liability in the fiscal year in which they occur, not for re-determining liability for past fiscal years. Paragraph 35(3) of the Eighth Schedule to the Income Tax Act applies only to the determination of proceeds in the year of disposal and does not permit redetermination in a later year of a capital gain already accrued. Where redetermination of a capital gain or capital loss is required under paragraph 25(2) of the Eighth Schedule as a result of events such as cancellation occurring in a current year, the redetermined capital gain or loss must be taken into account in the current year (when the events occur) pursuant to paragraphs 3(b)(iii) and 4(b)(iii), not in the prior year when the original disposal occurred. An assessment becomes final and conclusive under section 81(5) of the Income Tax Act if no objection is lodged within the prescribed period and cannot be re-opened more than three years later.

The court observed that an assessed capital loss arising from the cancellation is a valuable asset in the hands of a taxpayer which can be used to offset future capital gains, and whether it is ever so used is a matter entirely within the control of the taxpayer. The court commented that even if in certain instances it may seem "unfair" for a taxpayer to pay tax which is payable under a statutory obligation, there is nothing unjust about it - payment of tax is what the law prescribes, tax laws are not always regarded as "fair", and the tax statute must be applied even if taxpayers feel aggrieved at the outcome. The court noted that amendments effected in 2015 with effect from 2016 which spell out that paragraph 35(3) applies in the year of disposal are confirmatory of the construction adopted by the court (citing Patel v Minister of the Interior and NEHAWU v University of Cape Town on the interpretive value of confirmatory amendments). The court expressly stated it was unnecessary to express any opinion on the arithmetic calculation of the capital loss arising in the 2010 tax year or how that calculation should be performed.

This case provides authoritative guidance on the treatment of capital gains tax when transactions are cancelled in a tax year subsequent to the year in which the capital gain was assessed. It confirms that capital gains tax follows the annual fiscal event principle applicable to income tax generally. The judgment clarifies that paragraph 35(3) of the Eighth Schedule operates within a single tax year and does not permit or require re-opening of prior year assessments when agreements are subsequently cancelled. It establishes that capital losses arising from the cancellation of sales must be assessed in the year the cancellation occurs, not by re-opening the original year's assessment. The decision reinforces the finality of tax assessments under section 81(5) where no objection is timeously lodged. It is an important precedent for understanding the temporal application of the Eighth Schedule provisions dealing with capital gains and losses, and the interaction between different tax years in respect of transactions spanning multiple years. The case demonstrates the courts' strict application of tax statutes even where outcomes may seem commercially unfair to taxpayers.