CSARS v Capstone 556 (Pty) Ltd (20844/2014) [2016] ZASCA 2; [2016] 2 All SA 21 (SCA); 2016 (4) SA 341 (SCA); 78 SATC 231 (9 February 2016)

CSARS v Capstone 556 (Pty) Ltd (20844/2014) [2016] ZASCA 2; [2016] 2 All SA 21 (SCA); 2016 (4) SA 341 (SCA); 78 SATC 231 (9 February 2016)

The Supreme Court of Appeal found that the dominant purpose of Capstone’s acquisition of JD Group shares was a long-term capital investment aimed at rescuing Profurn, a distressed business, rather than a scheme for profit-making. The intention to resell at a profit was only one of several possibilities and not the primary aim at the time of acquisition. The subsequent sale of shares was unsolicited and fortuitous, resulting from an external book building opportunity rather than a premeditated scheme. The proceeds from the sale were therefore of a capital nature and not taxable as income. Regarding the cross-appeal, the court held that the indemnity payment of R55 million to Daun et Cie...

Citation
[2016] ZASCA 2
Parties
Appellant: THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE; Respondent: CAPSTONE 556 (PTY) LTD
Court
Supreme Court of Appeal
Jurisdiction
South Africa
Judgment Date
9 February 2016
Case Number
20844/2014
Procedural Posture
Civil Appeal / Appeal From the Western Cape Division of the High Court, Cape Town
Outcome
Appeal dismissed with costs; cross-appeal upheld with costs.
Judges
Ponnan, Bosielo, Wallis, Mbha, Van der Merwe
Legal Topics
Capital Gains Tax, Income Vs Capital Nature, Base Cost Calculation, Indemnity Payments, Burden of Proof, Dominant Purpose Test
Tax Law Commercial and Corporate Capital Gains Tax Income Vs Capital Nature Base Cost Calculation Indemnity Payments Burden of Proof Dominant Purpose Test

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Parties

THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE

Appellant

CAPSTONE 556 (PTY) LTD

Respondent

Procedural Posture

Civil Appeal / Appeal From the Western Cape Division of the High Court, Cape Town

Legal Issues

  1. 1 Whether the proceeds from the sale of shares by Capstone 556 (Pty) Ltd constituted income or a receipt of a capital nature for tax purposes.
  2. 2 Whether the indemnity payment of R55 million formed part of the base cost for capital gains tax purposes.

Ratio Decidendi

The Supreme Court of Appeal found that the dominant purpose of Capstone’s acquisition of JD Group shares was a long-term capital investment aimed at rescuing Profurn, a distressed business, rather than a scheme for profit-making. The intention to resell at a profit was only one of several possibilities and not the primary aim at the time of acquisition. The subsequent sale of shares was unsolicited and fortuitous, resulting from an external book building opportunity rather than a premeditated scheme. The proceeds from the sale were therefore of a capital nature and not taxable as income. Regarding the cross-appeal, the court held that the indemnity payment of R55 million to Daun et Cie...

Court Disposition

Appeal dismissed with costs; cross-appeal upheld with costs.

Orders

  • The appeal is dismissed with costs, including the costs of two counsel.
  • The cross-appeal is upheld with costs, including the costs of two counsel.