I have no problem with the date of sale: it is back in history (in the relevant case, sometime in tax year 2017). That was when the sale agreement was signed and there were no suspensive conditions. However, the agreement was for an up front payment.
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
We were concerned that section 24M of the Income Tax Act may well not apply. From the facts now provided by you, it is clear that section 24M in fact doesn’t apply. You confirm that “there were no suspensive conditions” and, importantly, that now state that the “four annual payments” must “be determined based on the profits of the company whose shares were sold.” This was what was unclear when we responded. If, determined based on profits, means that the amounts of each these payments were not quantified, but will only be quantified when the profits for (a specific year) is known, you indeed have an accrual of consideration which cannot be quantified. On that basis we agree that section 24M applies to the four instalments.
Whilst not applicable then, the position would have been different if the total consideration was agreed upfront, but the purchaser will only repay to the extent that profits are available in subsequent years (merely payment terms, but not relevant in your scenario).
With respect to the implications of the person ceasing to be a resident of the RSA during the period between the payment of the initial amount and all of the four subsequent amounts when the become quantified, we submit that there may well be a disposal.
The seller has an asset – is entitled to, or have a right to the consideration, that must still be quantified in future. It may be a financial instrument, and whilst it may be extremely difficult to do so, we believe that it would be possible to value this right.
We don’t understand to following comment:
“So my thinking is that as the person is no longer a resident (note: she has not formally emigrated in this case, but then she was actually never a citizen of the RSA in the first place - not that it is relevant, as the issue is one of residence: she was resident in SA and then ceased to be)”, particularly the “never a citizen of the RSA in the first place”. We agree, the country where the person is a citizen, or national, would (in most instances) be irrelevant. What is relevant is whether the person was, or at any time of holding the asset became, a resident of the RSA – exclusively (see the definition of resident in section 1(1) of the Income Tax Act read with the relevant double tax agreement.
Unless the asset disposed of was an interest in immovable property situated in the RSA, you must in the first instance determine if the RSA had a right to tax the capital gain arising from the disposal of the asset. Under paragraph 2(1)(b), the RSA won’t be able to “tax” movable property unless the asset is effectively connected with a permanent establishment of the non-resident in the RSA (a different Article will then apply).
If the person is a resident of a country with which the RSA doesn’t have an agreement, the tax consequences may well be exactly the same.
We agree that, with regard to the disposal transaction itself, no tax consequences will arise, but, as we explained, we submit that the individual is in fact (under section 9H) deemed to dispose of the right to receive the future payments.