19 Nov 2007
The facts of the judgment SARS v Brummeria Renaissance (Pty) Ltd were that these interest-free loans, which were repayable on the death of the retiree, were used in consideration for a right of the lenders to occupy the retirement dwellings for life. The South African Revenue Services (SARS) claimed that the value of the use of the interest-free loans was a taxable benefit for the developer.
The Supreme Court of Appeal agreed with SARS that an interest-free loan was a valuable right, despite the fact that the developer could only use the loans to develop the retirement units and could not use the money for income-earning investment. The Court reasoned that, in the same way, the right to live in a house rent-free could not be rendered tax-free by limiting the right of occupation to the recipient.
The court decided that the right to retain and use borrowed funds without paying interest had a money value, and that the value of such right was taxable. The interest-free loan constituted a continuing donation to the developer, and the benefit consisted in the right to use the loans without having to pay interest on them, whatever the companies did or did not do with the loans.
Commenting on the judgment, Erika Petersen, a partner in the tax department of Shepstone & Wylie attorneys, said the judgment was important in that it once again interpreted the definition of "gross income", this time with negative consequences for the taxpayer. "Over the years, the Courts have tended to interpret this phrase to mean that any benefit which is not money, but which can be turned into money, must be included in the gross income net, but have largely avoided including a benefit which, although having an ascertainable value in monetary terms, cannot readily be turned into money. For example, in the case of Stander v CIR, a 1997 Cape Provincial decision, the Court held that a prize of an overseas trip, which could not be converted into cash and could not be transferred to anyone else, was not part of the recipient's taxable income."
"It is important to note that it was not the entire amount of the interest-free loan that was held to be taxable, but rather the notional amount of interest that would have accrued on the loans that falls into the tax net," Petersen said.
The tax had to be calculated according to the annual interest the developer would have paid for the loan at the average prevailing prime overdraft rate. In fact, the fact that the loan could not be turned into money was irrelevant. "It only mattered that such a benefit had a value that could be determined in monetary terms. That being the case here, the value of the right of the interest-free loan had to be included in the developer's gross income," concluded Petersen.
She added that, although the judgment was a correct interpretation of the law, it would have harsh consequences for many taxpayers.
For more information contact Dirk Boshoff @ dirk@spiralsight.co.za
Article obtained from property24.com