For 10 years Company X has owned an office block in South Africa. Company X leases offices in the block to commercial tenants. In tax year 1, Company X sells the property to Company Y for a profit. The sale is not subject to any suspensive conditions. The sale agreement says that Company Y must pay the price immediately after registration of transfer of the property in the name of Company Y in the Deeds Office. The transfer is registered in the Deeds Office in tax year 2.

When must Company X account for “capital gains tax” (CGT) in South Africa: when the sale agreement is signed in tax year 1 or when the property is registered in the name of Company Y in the Deeds Office in tax year 2.

The time of disposal of an asset by means of a sale agreement that is not subject to a suspensive condition is the date on which the agreement is concluded: paragraph 13(1)(a)(i) of the Eighth Schedule to the Income Tax Act, No 58 of 1962 (ITA).

The proceeds from the disposal of an asset by a person are equal to the amount received by or accrued to that person in respect of that disposal.

The term “accrued to” is not defined in the Eighth Schedule to the ITA (or in the body ITA).

However, the Courts have on a number of occasions been called upon to interpret the phrase.

Suffice to say that the Courts have held that an amount accrues to a taxpayer when the taxpayer becomes entitled to the amount. The following is stated in Haupt, P and Haupt, E Notes on South African Income Tax 2026 at paragraph 2.4.3:

An amount “accrues” to a taxpayer once he becomes unconditionally entitled to receive it. In other words, all the legal steps necessary for the amount to be unconditionally vested in the taxpayer must have been completed.

In the case of Milnerton Estates Ltd v CSARS (1159/2017) [2018] ZASCA 155 (20 November 2018) a property developer had sold certain immovable properties in a tax year. The developer held the properties on revenue account (that is, not on capital account as in the case of Company X). The transfer of the properties occurred in a subsequent tax year. The question arose as to whether section 24(1) of the ITA applied to the sales.

 Section 24(1) of the ITA reads as follows to the extent that it is relevant:

…if any taxpayer has entered into any agreement with any other person in respect of any property the effect of which is that,…in the case of immovable property, transfer shall be passed from the taxpayer to [another] person, upon or after the receipt by the taxpayer of the whole or a certain portion of the amount payable to the taxpayer under the agreement, the whole of that amount shall for the purposes of [the ITA] be deemed to have accrued to the taxpayer on the day on which the agreement was entered into.

The Court held that section 24(1) of the ITA did apply and that the taxpayer should have accounted for income tax in the tax year during which the properties were sold and not during the subsequent tax year in which the properties were registered in the names of the purchasers in the Deeds Office.

In his arguments, counsel for the taxpayer argued that the application of the provision would cause anomalies if it were to be applied where a taxpayer realises a capital gain determined in accordance with the Eighth Schedule to the ITA.

In this regard, the Court stated the following at paragraph 22:

As regards the other concern with capital gains, the determination of the amount of any capital gain falling to be included in the taxpayer’s taxable income is a matter dealt with in the Eighth Schedule to the Act. It is not apparent to me that the provisions of s 24(1) apply in determining when an accrual occurs for the purpose of para 3 of the Eighth Schedule. There is no reference back to s 24(1) and on its face the Schedule seems to provide a self-contained method for determining whether a capital gain or loss has arisen. Again I refrain from any definitive decision on the point, but it may be an answer to the concern expressed by counsel…

Those statements were obiter (that is, they were said in passing) but are still persuasive.

In Thistle Trust v CSARS 87 SATC 103 the Constitutional Court held that section 25B in the body of the ITA (a provision that deals with income accruals in the case of trusts) did not apply in the determination of the liability for CGT; paragraph 80 of the Eighth Schedule to the ITA (a provision that deals with capital accruals in the case of trusts) overrode section 25B of the ITA.

Accordingly, section 24(1) of the ITA does not apply to quantify the capital gain that arises on the disposal of immovable property held on capital account in terms of the Eighth Schedule to the ITA.

Accordingly, one must revert to ordinary principles.

In by far the majority of agreements for the sale of immovable property the price is only payable on, against, or after registration of transfer of the immovable in the name of the purchaser in the Deeds Office.

Accordingly, the price only accrues to the seller once transfer has taken place because that is the final legal step that must be completed for the amount to be unconditionally vested in the seller.

The current law on how statutes must be interpreted is set out in Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] 2 All SA 262 (SCA). Among other things, the Court stated the following at paragraph 18:

A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results…

It is often said that there is no equity in tax.

However, when determining whether or not an amount has accrued to a taxpayer who has disposed of immovable property in one tax year, it would be totally insensible and unbusinesslike to require a taxpayer to pay CGT during that year if registration of transfer only takes place, and the taxpayer only receives, the proceeds in the subsequent tax year.

The Legislature could clearly never have intended such a state of affairs.

No doubt, in most cases, immovable properties constitute the most valuable assets of taxpayers, certainly in the case of taxpayers who are selling their homes. And in by far the majority of cases taxpayers will not have the wherewithal to pay CGT on the disposal of their immovable properties until such time as they receive the proceeds, that is, on registration of transfer.

Many years ago, one of the taxation maxims proposed by the great economist Adam Smith in his renowned book An Inquiry into the Nature and Causes of the Wealth of Nations is the following:

Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. 

It would be unconscionable to expect a taxpayer to pay CGT in a sale of immovable property before she has even received the proceeds of the sale – this is inconvenience in its extreme form.

To sum up: A taxpayer who sells immovable property held on capital account must account for CGT on the sale during the tax year in which the property is registered in the Deeds Office which is the time when the proceeds unconditionally accrue to the taxpayer. (Naturally, if the parties agree that the price accrues to the seller in whole or in part before registration of transfer, the date of accrual will precede the date of transfer in the Deeds Office.)

So, Company X must account for CGT after the property is registered in the name of Company Y in the Deeds Office, and not when the sale agreement is signed.

Ben Strauss

Director

This article is published for information purposes only and does not constitute legal advice.