A REAL TAX TURKEY

In a 2017 case, M learns the same hard lesson about the authorities’ interpretation of ‘accrual’ that Farmer Lategan did in 1920

When it comes to paying tax, everyone is interested, even those who don’t earn a lot of money. So I pounced on M vs Commissioner for the SA Revenue Service, the first case from the tax court that I have seen this year.

This is clearly no James Bond story, but there is a shock for M in the May 30 judgment.

It deals with M’s crucial question. After signing 25 property deals in the 2013 tax year, M wanted to know if the commissioner was correct to say that all the proceeds were taxable that year, rather than in 2014, when the properties were paid for.

Most people would think you are liable for tax on money you earn in the same year as you are paid it. In M’s case the intuitive answer would be that if the money is paid to you in the 2014 tax year, then that is the year in which you must pay the tax due. But it turns out that you would be wrong.

It all hinges on when the money on which you must pay tax actually “accrued” to you. According to M, the amounts “accrued” only when M became entitled to receive payment after transfer of the properties to the purchaser. And, counsel for M said, since in each case transfer took place during the

2014 tax year, that should be the year in which the money “accrued”.

The definition of

“accrued” as established by the courts in tax matters is different, however, and dates back almost 100 years, to when a farmer called Lategan was involved in a dispute with the tax authorities over a similar principle. In May 1920 he sold wine made during the tax year ended June 1920. Roughly half the price he was due for the wine was payable during the same assessment year and the balance was due during the following year.

Moral of the story

The tax authorities included the whole amount in the earlier year. Though the SA courts were initially divided on this outcome, the then highest court confirmed it as the correct approach: the “accrued amount” for the purposes of a taxpayer’s gross income is the “present value of the future payment to which (the taxpayer) is entitled”.

Section 24 (1) of the Income Tax Act, headed “Credit agreements and debtors allowance”, says that when a taxpayer receives the whole or “a certain portion” of the amount payable on movable or immovable property, then “the whole of that amount shall . . . be deemed to have accrued to the taxpayer on the day on which the agreement” was finalised.

M claimed that as the deals in this case were not “credit agreements” this section did not apply — but the tax court held that a 1969 appeal court decision to the contrary was binding. Ironically, this decision related to a terrible section of the equally terrible Group Areas Act, but that does not make the legal interpretation of the phrase involved invalid.

Some years ago, and speaking about a different tax-related matter in a bulletin for clients, PWC wrote: “The moral of the story is — it may look like a duck, it may quack like a duck, it may swim like a duck, but if the Income Tax Act says it’s a turkey, then it’s a turkey.”

And if, as a result of a badly timed sale, the taxman says you have to pay tax this year on money you will only be paid next year, you’d better believe it.

Quack quack.

Most people would think you are liable for tax on money you earn in the same year as you are paid it