General

A reply to Tax and cancellations

To recap, the following scenario was outlined:
You purchase a property from a property developer (who is registered for VAT) for R456 000 (that is, R400 000 plus 14 percent VAT of R56 000).

However, before taking transfer, you find another purchaser who is willing to pay R570 000 (R500 000 plus VAT). The purchaser approaches the developer to cancel the sale to you and to sell the property to him/her instead.

In terms of the arrangement, the developer agrees to give you R100 000 as a cancellation fee. This scenario raises the following questions:

  • Is this legal?
  • Would the cancellation fee you receive be subject to income tax or capital gains tax (CGT)?
In answer to question 1, the ED Grobbelaar replies:
  • Did the contract have a binding clause that can be cancelled, then yes, it is legal.
  • If the conditions of sale are not met - then yes you can cancel.
  • Each contract must be analyzed on its own merits and have its own clauses in the Deed of sale. From the above information, a person cannot answer "yes" or "no" as to whether or not it is legal.
Regarding question 2, the correspondent answers that if one cancels the contract and receives a cancellation fee, then the income tax becomes payable in the hands of the recipient as the recipient did not dispose of an asset. Here one must look at the definitions of gross income in the Income Tax Act - section 1.

It reads as follows:

gross income,

in relation to any year or period of assessment, means,

i) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident, or

ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within or deemed to be within the Republic, during such year or period of assessment, excluding receipts or accruals of a capital nature, but including, without in any way limiting the scope of this definition, such amounts (whether of a capital nature or not) so received or accrued as are described hereunder, namely--

a) any amount received or accrued by way of annuity, including any amount contemplated in the definition of "annuity amount" in section 10A(1);

b) any amount payable to the taxpayer by his spouse or former spouse, under any judicial order or written agreement of separation or under any order of divorce, by way of alimony or allowance or maintenance of the taxpayer or any children;

c) any amount, including any voluntary award, received or accrued in respect of services rendered or to be rendered or any amount (other than an amount referred to in section 8(1)) received or accrued in respect of or by virtue of any employment or the holding of any office: Provided that--

i) the provisions of this paragraph shall not apply in respect of any benefit or advantage in respect of which the provisions of paragraph (i) apply:

ii) any amount received by or accrued to or for the benefit of any person in respect of services rendered or to be rendered by any other person shall for the purposes of this definition be deemed to have bean received by or to have accrued to the said other person;

[sub-paragraphs (iii), (iv), (v) and (vi) deleted by the Taxation Laws Amendment Act, 2002]

cA) any amount received by or accrued to any person who--

i) is a natural person;

ii) is or was a labour broker as defined in the Fourth Schedule (other than a labour broker in respect of which a certificate of exemption has been issued in terms of that Schedule);

iii) is or was a personal service company as defined in the Fourth Schedule; or

iv) is or was a personal service trust as defined in the Fourth Schedule,

as compensation for any restraint of trade imposed on such person.

d) any amount, including any voluntary award, received or accrued in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of any office or employment or of any appointment (or right or claim to be appointed) to any office or employment: Provided that--

i) the provisions of this paragraph shall not apply to any lump sum award from any pension fund, provident fund or retirement annuity fund;

ii) any such amount which becomes payable in consequence of or following upon the death of any person shall be deemed to be an amount which accrued to such person immediately prior to his death;

e) any amount determined in accordance with the provisions of the Second Schedule (other than any amount included under paragraph (eA)) in respect of lump sum benefits received by or accrued to such person from or in consequence of his membership or past membership of--

i) any fund which has in respect of the current or any previous year of assessment been approved by the Commissioner, whether under this Act or any previous Income Tax Act, as a pension fund, provident fund or retirement annuity fund, or

ii) a fund referred to in paragraph (a) or (b) of the definition of 'pension fund',

if such person was a member or past member of such fund during any such year: Provided that the provisions of paragraph (g) of sub-section (1) of section nine shall mutatis mutandis apply in the case of any amount determined as aforesaid;

eA) where, in relation to a member who effectively remains in the employment of the same employer, or the dependants or nominees of a deceased member--

i) any amount in a fund contemplated in paragraph (a) or (b) of the definition of 'pension fund', the rules of which provide that on retirement of such member a portion of his benefit has to be taken in the form of an annuity, has been transferred to a fund, the rules of which entitle such member, or the dependants or nominees of a deceased member, to a benefit on retirement in the form of a lump sum exceeding one-third of the capitalised value of all benefits (including lump sum payments and annuities); or

ii) a fund contemplated in paragraph (a) or (b) of the definition of 'pension fund', the rules of which provide that on retirement of such member a portion of his benefit has to be taken in the form of an annuity, is wholly or partially converted by way of an amendment to its rules or otherwise, to entitle such member, or the dependants or nominees of a deceased member, to a benefit on retirement in the form of a lump sum exceeding one-third of the capitalised value of all benefits (including lump sum payments and annuities); or

iii) any amount in a fund contemplated in paragraph (a) or (b) of the definition of 'pension fund' has become payable to the member or is being utilised to redeem a debt,

an amount equal to two-thirds--

aa) of the amount so transferred; or

bb) in the case of a conversion, of the amount representing the amount converted for the benefit or ultimate benefit of the member or the dependants or nominees of the deceased member, and such amount shall be deemed to have been received by or accrued to or in favour of such member, dependants or nominees, as the case may be: Provided that where a court granting a decree of divorce in respect of such member has made an order that any part of such amount shall be paid to the former spouse of such member, as provided for in section 7(8) of the Divorce Act, 1979 (Act No. 70 of 1979), such part shall for the purposes of this paragraph be deemed to be an amount converted for the benefit or ultimate benefit of such member; or

cc) in the case of an amount becoming payable to a member or being utilised to redeem a debt, of the amount so payable or is utilised:

Provided that the Commissioner may, on application by a fund, in particular circumstances, increase the proportion of one-third contemplated in subparagraph (i) up to a maximum of one-half on the following conditions:

a) that on 12 March 1997 the proportion of the benefit on retirement in such fund that could be taken in the form of a lump sum was greater than one-third, but not greater than one-half, of the total capitalized value of all benefits;

b) that the rules of such fund are amended so that the maximum proportion of such member's benefit on retirement that can be taken in the form of a lump sum is one-third of the total capitalized value of all benefits; and

c) such further conditions as the Commissioner may determine from time to time;

eB) any amount received by or accrued to any person by way of any distribution by any pension fund or provident fund to such person (other than any amount recoverable in terms of the provisions of section 37D of the Pension Funds Act, 1956 (Act No. 24 of 1956)), where such person or any other person from whom such person received the right to participate in such fund or distribution has during such year or any previous year of assessment as an employer contributed any sum to such fund for the benefits of its employees or former employees;

f) any amount received or accrued in commutation of amounts due under any contract of employment or service;

g) any amount received or accrued from another person, as premium or like consideration--

i) for the use or occupation or the right of use or occupation of land or buildings; or

ii) for the use or the right of use of plant or machinery; or

ii)bis for the use or the right of use of any motion picture film or any film or video tape or disc for use in connection with television or any sound recording or advertising matter connected with such motion picture film, film or video tape or disc; or

iii) for the use or right of use of any patent as defined in the Patents Act, 1978 (Act No. 57 of 1978), or any design as defined in the Designs Act, 1993 (Act No. 195 of 1993), or any trade mark as defined in the Trade Marks Act, 1993 (Act No. 194 of 1993), or any copyright as defined in the Copyright Act, 1978 (Act No. 98 of 1978), or any model, pattern, plan, formula or process or any other property or right of a similar nature;

gA) any amount received or accrued from another person as consideration (or payment of like nature) for the imparting of or the undertaking to impart any scientific, technical, industrial or commercial knowledge or information, or for the rendering of or the undertaking to render any assistance or service in connection with the application or utilization of such knowledge or information;

h) in the case of any person to whom, in terms of any agreement relating to the grant to any other person of the right of use or occupation of land or buildings, or by virtue of the cession of any rights under any such agreement, there has accrued in any such year or period the right to have improvements effected on the land or to the buildings by any other person--

i) the amount stipulated in the agreement as the value of the improvements or as the amount to be expended on the improvements; or

ii) if no amount is so stipulated, an amount representing the fair and reasonable value of the improvements;

i) the cash equivalent, as determined under the provisions of the Seventh Schedule, of the value during the year of assessment of any benefit or advantage granted in respect of employment or to the holder of any office, being a taxable benefit as defined in the said Schedule, and any amount required to be included in the taxpayer's income under section 8A;

j) so much of the sum of any amounts received or accrued during any year of assessment in respect of disposals of assets the cost of which has in whole or in part been included in capital expenditure taken into account (whether under this Act or any previous Income Tax Act) for the purposes of any deduction in respect of any mine under section 15(a) of this Act or the corresponding provisions of any previous Income Tax Act, as exceeds the sum of so much of any capital expenditure as in the case of such mine is unredeemed at the commencement of the said year of assessment and the capital expenditure that is incurred during that year in respect of such mine, as determined before applying the definition of "capital expenditure incurred" in section 36(11);

jA) any amount received by or accrued to any person during the year of assessment from the disposal of any asset manufactured, produced, constructed or assembled by that person, which is similar to any other asset manufactured, produced, constructed or assembled by that person for purposes of manufacture, sale or exchange by that person or on that person's behalf;

k) any amount received or accrued by way of a dividend: Provided that where any foreign dividend declared by a foreign company-

i) is received by or accrues to a portfolio of a collective investment scheme referred to in paragraph (e)(i) of the definition of 'company'; and

ii) is distributed by that portfolio by way of a dividend, or a portion of a dividend, to any person who is entitled to that dividend by virtue of being a holder of any participatory interest in that portfolio,

that foreign dividend shall, to the extent that it is declared to that person as contemplated in subparagraph (ii), be deemed to have been declared by that foreign company directly to that person and to be a foreign dividend which is received by or accrued to that person;

l) any amount received or accrued by way of grant or subsidy in respect of any soil erosion works referred to in section 17A(1) or any of the matters mentioned in items (a) to (i), inclusive, of paragraph 12(1) of the First Schedule;

lA) Deleted by section 2 of Act 141 of 1992;

lB) any amount received by or accrued to or in favour of any person from the State by way of a subsidy or reimbursement under any scheme designed to encourage the establishment, expansion or carrying on of industrial or commercial undertakings in an economic development area;

m) any amount received or accrued under or upon the surrender or disposal of, or by way of any loan or advance granted on or after 1 July 1982 by the insurer concerned under or upon the security of, any policy of insurance upon the life of any person who, at any time while the policy was in force, was an employee of the taxpayer or, where the taxpayer is a company, was a director or employee of that company, if any premium paid in respect of such policy is or was deductible from the taxpayer's income, whether in the current or any previous year of assessment, under the provisions of section 11: Provided that where any amount received or accrued under or upon the surrender or disposal of any such policy falls to be included in the taxpayer's gross income, the amount so to be included in his gross income shall be reduced by the amount of any loan or advance under or upon security of that policy which has been included in his gross income, whether in the current or any previous year of assessment: Provided further that where any such policy has been terminated by the insurer and a paid-up policy has been issued the terminated policy and the paid-up policy shall for the purposes of this paragraph be deemed to be one and the same policy;

n) any amount which in terms of any other provision of this Act is specifically required to be included in the taxpayer's income, and for the purposes of this paragraph all amounts which in terms of subsection (4) of section eight are required to be included in the taxpayer's income shall be deemed to have been received by or to have accrued to the taxpayer from a source within the Republic notwithstanding that such amounts may have been recovered or recouped outside the Republic:

Provided that where during any year of assessment the taxpayer has become entitled to any amount which is payable on a date or dates falling after the last day of such year, there shall be deemed to have accrued to him during such year--

a) if the taxpayer has on or before 23 May 1990 submitted a return of income drawn on the basis that the present value of such amount has accrued to him during such year, the present value of such amount; or

b) in any other case, such amount:

Provided further that where the provisions of paragraph (a) of the first proviso are applicable, there shall be deemed to have accrued to the taxpayer during any subsequent year of assessment in which he receives such amount or any portion thereof, a sum equal to the difference between such amount or portion thereof and the present value of such amount or portion thereof so deemed to have accrued to him during the first-mentioned year of assessment;

Reader Comments:

John Christie 14/04/2005:

There is some confusion about these articles and in particular the reply to the query. While I do not have the time right now to reply in detail, your correspondents have lost sight of the fact that ANY agreement can legally be cancelled by the parties thereto at ANY TIME..., if they wish. There is no legal impediment to cancellation of any agreement for any reason.

The tax implications of such a cancellation will be determined by the agreement of cancellation and the legal principles which apply. The published articles seem to suggest that an agreement can only be cancelled in certain cases which is not correct. The unilateral cancellation of agreements is of course an entirely different problem

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