Disallowance of the utilisation of an assessed loss

Disallowance of the utilisation of an assessed loss

• 19 December 2019
• Corporate Tax
• Gigi Nyanin

Monday, 15 October 2018

Important:

This article is based on tax law for the tax year ending 28 February 2019.

Author: Gigi Nyanin

In the recent case of Commissioner for the South African Revenue Service v Digicall Solutions (Pty) Ltd(927/2017) [2018] ZASCA 137 (28 September 2018), the Supreme Court of Appeal (SCA) was requested to consider whether the Commissioner for the South African Revenue Service (Commissioner) was correct in disallowing the utilisation by Digicall Solutions (Pty) Ltd (Taxpayer) of certain assessed losses, in terms of s103(2) of the Income Tax Act, No 58 of 1962 (Act).

By way of background, in order to determine the taxable income of a taxpayer from its trade, s20(1) of the Act provides that a taxpayer may set off (i) a balance of the assessed loss brought forward from the previous year of assessment, and (ii) any assessed loss incurred in the current year in carrying on any other trade.

The following requirements must be met for a taxpayer to set off an assessed loss against taxable income:

the taxpayer must be carrying on a trade;

the assessed loss may only be set off against income derived from its trading activities; and

the taxpayer can only carry forward its assessed loss from the immediately preceding year of assessment if such taxpayer carried on a trade during the current year of assessment.

Section 103(2) of the Act is an anti-avoidance provision which essentially allows the Commissioner to disallow the setting-off of an assessed loss or balance of an assessed loss against the taxpayer’s income if certain requirements are met. More specifically, s103 deals with transactions, operations or schemes which have been entered into for purposes of avoiding or postponing liability for or reducing amounts of taxes on income and provides that any assessed loss must be disallowed by the Commissioner if he is satisfied that:

• any agreement has been concluded affecting any company, or that a change in the shareholding of a company has taken place;
• as a direct or indirect result thereof, income has been received by or accrued to that company during the year of assessment; and
• that agreement was concluded or the change in the shareholding effected solely or mainly for the purpose of utilising any assessed loss incurred by the company, in order to avoid or reduce any tax liability.

The tax avoidance as opposed to taxation nature of s103 of the Act was explained in Glen Anil Development Corporation Ltd v Secretary for Inland Revenue 1975 (4) SA 715 (A) at 626 where the court held that:

“Section 103 of the Act is clearly directed at defeating tax avoidance schemes. It does not impose a tax, nor does it relate to the tax imposed by the Act or to the liability therefor or to the incidence thereof, but rather to schemes designed for the avoidance of liability therefor. It should, in my view, therefore, not be construed as a taxing measure but rather in such a way that it will advance the remedy provided by the section and suppress the mischief against which the section is directed…The discretionary powers conferred upon the Secretary should, therefore, not be restricted unnecessarily by interpretation.”

Section 103(4) of the Act, which imposes the onus of proof on the taxpayer, provides that when it is proved that an agreement or change in shareholding has resulted in the avoidance or postponement of liability for payment of any tax or in the reduction of the amount thereof, it will be presumed that the agreement or change in shareholding has been entered into or effected solely or mainly for the purpose of utilising any assessed loss, in order to avoid or reduce any tax liability. It follows therefore that the taxpayer bears the onus of rebutting the above-mentioned presumption by proving that an agreement or change in shareholding was entered into or effected for a commercial objective and not solely or mainly for avoiding or reducing any tax liability.

Considering the above background, the relevant facts, arguments made by the respective parties, findings of the lower courts and decision of the SCA are summarised below.

Please click here to read more.

This article first appeared on cliffedekkerhofmeyr.com.

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