Companies that sell unused land will now have to pay tax on the proceeds because the South African Revenue Services regard it as income for the company that has sold the land. The ruling is expected to deter property developers from investing in this sector.
A ruling earlier this month by the Supreme Court of Appeal ruled against chemicals company AECI that had formed Founders Hill to develop and sell its unused land.
Founders Hill sold a large plot of land in Modderfontein and the land was to be used for a new housing development. However, SARS taxed the proceeds of the sale as income. This overturned a long-standing principle of income tax law that the proceeds of a property sale were regarded as capital and not taxed.
Property economist Erwin Rode has warned that the judgment could have long-term consequences for the property sector and could severely retard development of new property schemes.
AECI says that it is now considering and evaluating its options having lost its appeal. The company says that based on legal advice it received it decided to form Founders Hill and then sold the Modderfontein properties to this company with a view to reselling the land for a housing development.
In the Tax Court SARS contended that Founders Hill had changed its intention and started to trade in the land it received from AECI and therefore the profits it made had to be classified as income.
The Tax Court found in favour of Founders Hill and as a result the SARS turned to the Supreme Court of Appeal, which held that a company that acquired land for the purposes of selling it had traded in those assets.
According to Francois Viruly of the University of Cape Town’s department of construction economics and management, the judgment would have an effect on all companies planning to undertake large-scale projects that involved selling of land and property.
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