A taxpayer with just enough passing acquaintance with tax legislation to be dangerous had a bright idea in relation to the primary residence exclusion in the Eighth Schedule to the Income Tax Act. Having read five years ago that the first R2 million of a gain on disposal of your primary residence is excluded from the CGT provisions, she set about applying this exclusion to her advantage. In the opinion of her new tax consultant, however, she was headed for trouble.
She would buy a residential property and live in it while she refurbished it and put it back on the market a few months later. Having sold it at a gain, she would buy another property and repeat the process. This went on to the point where she had bought, refurbished and sold five properties in four years, in each case using the primary residence exclusion to avoid paying tax on her gains. In each instance both the purchase price and selling price were below R2 million.
Her new tax consultant was concerned when she saw the taxpayer’s property dealing history and warned her that SARS could decline to allow her the primary residence exclusion on the grounds that her conduct amounted to a trade. The taxpayer was adamant that so long as she ticked the primary residence box on her annual tax return, which she was entitled to do because she at any particular time owned only one property, in which she resided, it was axiomatic that the exclusion applied. Therefore whenever she sold a property it was her primary residence and she was entitled to the exclusion.
The tax consultant said she would decline to tick the primary residence box on the taxpayer’s tax return, because she was concerned that this was an offence under the Tax Administration Act (TAA). It was possibly fraud, certainly misrepresentation, and non-disclosure of material facts. She was concerned about being seen to collude with the taxpayer in committing a tax offence. Not only would she be exposed to sanctions by SARS, but her Recognised Controlling Body (RCB) would be likely to take a dim view of her action. She warned the taxpayer that, should SARS at any time challenge her claim for the primary residence exclusion, SARS could reopen previous assessments for as far back as the taxpayer been conducting this activity. The three year prescription period for assessments does not apply where there has been fraud, misrepresentation, or non-disclosure of material facts.
The taxpayer poured scorn on the tax consultant’s opinion, which she described as off the wall, misguided and ill-informed. In her view, SARS was the tax expert, not the tax consultant, and if SARS accepted her claim for the exclusion it was no business of the tax consultant to second guess SARS. Needless to say, the taxpayer and the tax consultant parted ways.
Who is correct in this situation? Has the tax consultant acted correctly in terms of the tax legislation?
Gross income is defined in section 1 of the Income Tax Act as the total amount, in cash or otherwise, received by or accrued to or in favour of a person, excluding receipts or accruals of a capital nature. When we consider whether a receipt or accrual is capital in nature, and then potentially subject to the provisions of the Eighth Schedule, it is necessary to consider case law, and in particular the question of the intention of the taxpayer. For example, in CSARS v Capstone 556 (Pty) Ltd [2016] 78 SATC 231 ZASCA the Supreme Court of Appeal held that in order for a profit to be revenue in nature “the gain must be acquired by an operation of business in carrying out a scheme for profit-making”. In so finding, the court drew on a long line of decisions. A good example relevant to the taxpayer is Natal Estates Ltd v SIR [1975] 37 SATC 193, where the court found that in determining whether any particular case is one of realising a capital asset or carrying on a business of selling land for profit, the totality of the facts of the case must be considered in their relation to the ordinary commercial concept of carrying on a business or embarking upon a scheme for profit. Considerations will include, inter alia, the intention of the taxpayer both when acquiring and selling the land; the owner’s activities in relation to the land prior to decision to sell, and the light that these considerations throw on the owner’s statements of intention.
In the present matter the taxpayer set about using the primary residence to her advantage and proceeded to acquire, refurbish and sell her primary residences five times in four years. She argued, correctly, that at any particular time she owned one residence and used it as her primary residence. However, paragraph 45 of the Eighth Schedule, after providing in subparagraph (1)(b) that the gain on disposal of a primary residence is excluded from CGT if the proceeds do not exceed R2 million, then provides in subparagraph (4)(b) that subparagraph (1)(b) does not apply to the disposal of a primary residence where the taxpayer “used that residence or a part thereof for the purposes of carrying on a trade”. It is submitted that the tax consultant was correct to conclude that the taxpayer was conducting a trade in acquiring, refurbishing and selling residential properties. It did not avail the taxpayer that at each material time whichever property she then owned was her primary residence. Subparagraph (1)(b) prohibited the exclusion. And the tax consultant was wise to decline the appointment. SARS could report the tax consultant to her RCB under section 241(2) of the TAA, which provides that a senior SARS official may lodge a complaint with an RCB “if a registered tax practitioner has, in the opinion of the official-
- Without exercising due diligence prepared or assisted in the preparation, approval or submission of any return, affidavit or other document relating to matters affecting the application of a tax Act;
- Unreasonably delayed the finalisation of any matter before SARS;
- Given an opinion contrary to clear law, recklessly or through gross incompetence, with regard to any matter relating to a tax Act;
- Been grossly negligent with regard to any work performed by a registered tax practitioner;
- Knowingly given false or misleading information in connection with matters affecting the application of a tax Act or participated in such activity; or
- Directly or indirectly attempted to influence a SARS official with regard to any matter relating to a tax Act by the use of threats, false accusations, duress or coercion, or by offering gratification as defined in the Prevention and Combating of Corrupt Activities Act 2004 (Act 12 of 2004)”
The tax consultant would be vulnerable under all but the last of these if she permitted the taxpayer to claim the primary residence exclusion, on the facts before her. She has therefore acted correctly in declining to act for the taxpayer.
