IN A landmark decision, the Supreme Court of Appeal found that a taxpayer who had sold her property was involved in a profitmaking scheme and therefore liable for tax on the proceeds thereof.

The taxpayer held land under a leasehold arrangement with a local municipal council and was responsible for improvements on the property, on which she spent a substantial amount.

The council renewed her lease regularly. Twenty years later the council began selling the land.

The taxpayer, who could not afford to buy the property she occupied, faced losing the value of the improvements she had made if the lease was terminated.

She resolved her dilemma by borrowing money for a short term, buying the property and then selling it.

Revenue contended that the taxpayer had carried out a profitmaking scheme, with profit to be included in her income.
The Cape High Court held that the taxpayer was compelled to sell because in the circumstances that developed (and over which she had no control), she could no longer afford to keep it.

The Supreme Court of Appeal held that the taxpayer had embarked on a scheme of profitmaking. When she purchased the property she had the intention of reselling it within a period of 12 months, with the intention of making a profit.

Two factors that have always been of great importance in deciding whether the proceeds of the sale of property were of a revenue or capital nature were the intention with which the taxpayer acquired the property and the circumstances in which the property was sold.
If a property was acquired for the purpose of reselling it at a profit even if it was a single, isolated transaction it would usually be regarded as a profitmaking scheme, the court said.

The court rejected the taxpayer's arguments that the right to acquire an asset for less than its market value was an accrual and could be compared to a legatee to whom a property was bequeathed in terms of a will.

The appeal court held that the taxpayer was not the owner of the property and that she had no other real rights in respect of the property.

The taxpayer's rights were determined by the terms of the lease agreement she had the right to use the property against payment of the rental; she was not the owner of the property and had no other real rights in the property.

While the discounted offer was attractive, it had no commercial value in itself it was made to the taxpayer and could not be transferred to a third party.

The appeal court rejected the high court's findings that the taxpayer should be put in the same category as someone who by force of circumstance was forced to sell her home.

Temkin is professional services editor.