I have a client who is selling a property on an installment sale. My question is two fold. 1. When does the capital gain get recognised on signature of the instalment sale agreement or on the last instalment when the transfer takes place. 2. Are the insta
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
We don’t agree with your view, but need to make a comment before we provide the guidance required.
We accept that the taxpayer, your client, held the property not as trading stock. If it was the case, section 24 of the Income Tax Act would apply - see also Milnerton Estates Ltd v CSARS.
The interest that accrue in terms of the agreement are dealt with in terms of section 24J(3) and you’ll notice, not applicable in this instance, that it is included in gross income whether or not the amount constitutes a receipt or accrual of a capital nature).
The law relevant to the time of disposal, of an asset not held as trading stock, is found in paragraph 13(1) of the Eighth Schedule to the Income Tax Act. It reads as follows:
“The time of disposal of an asset by means of—
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a change of ownership affected or to be affected from one person to another because of an event, act, forbearance or by the operation of law is, in the case of—
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an agreement subject to a suspensive condition, the date on which the condition is satisfied;
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any agreement which is not subject to a suspensive condition, the date on which the agreement is concluded;”
It is unlikely that payment terms relating to the transfer of the disposal of the property will constitute a suspensive condition. Judge Wallis, in the recent CSARS v Bosch, said:
“A suspensive condition is one that suspends the exigible content of a contract, either in whole or in part, pending the occurrence of an uncertain future event.”