Draft bill clarifies tax treatment of contingent liabilities

The sale and purchase of a business as a going concern is a common commercial occurrence.

Typically, a sale and purchase agreement provides for the delegation of liabilities, including contingent liabilities, of the seller to the purchaser, while in some circumstances these liabilities remain with and fall to be discharged by the seller. In South Africa, when liabilities are delegated to the purchaser, the question arises as to whether the seller or the purchaser is entitled to claim a tax deduction in respect of the discharge of the contingent liability.

No deduction allowed

In A Co. Limited and Another v Commissioner for the South African Revenue Service, the seller argued that it had realized a loss upon the delegation of contingent liabilities to the purchaser which should be deductible in terms of section 11(a) of the Income Tax Act. The loss arose on the basis that the seller would, instead of receiving payment for the full value of all the assets, only be entitled to an amount equal to the value of the assets less an amount equal to the liabilities delegated. The Tax Court held that the seller was not entitled to a deduction in respect of the alleged loss on the basis that the requirements of section 11(a) of the act had not been met.

In an appeal against the decision, in Ackermans Limited v The Commissioner for the South African Revenue Service, the Supreme Court of Appeal again found in favour of the Revenue Service.

Annalie la Grange is a manager in the tax department at Edward Nathan Sonnenbergs

Johannesburg

150 West Street

Sandton

Johannesburg

South Africa

2196

Tel: +27 11 269 7600

Fax: +27 11 269 7899

E-mail: info@ens.co.za

www.ens.co.za