Proving intention for tax purposes usually requires more than a simple statement or a single witness

The taxability of profits made on the sale of any kind of asset depends, to a considerable extent, on the intention of the taxpayer at the time the property was acquired.

So if the asset was acquired as stock-in-trade for sale in the course of a business or scheme of profit-making, then the proceeds of the sale are subject to income tax. In contrast, if the property was acquired for the purpose of being held as a capital asset then (unless some exclusion applies) the profit on resale is subject to capital gains tax (CGT).

Mark Badenhorst, corporate tax partner at PricewaterhouseCoopers SA, says that as the rate of CGT is lower than income tax rates, most taxpayers would therefore prefer to be liable for CGT. “The onus of proving that property was not stock-in-trade, but a capital asset that attracts CGT rather than income tax, rests with the taxpayer.”

Badenhorst explains that the same rule of intention and proof thereof applies to individual taxpayers, close corporations and companies. “In law, a company or cc is regarded as having the equivalent intention of the persons who control it.”

Badenhorst says that the weakest tax strategy for any taxpayer to adopt is to stake everything on the hope that SARS or the tax court will take his or her word on the issue of intention. “Some taxpayers naively adopt the attitude that, since there is no-one to contradict me, my word as to my intention must prevail.

“But this approach is extremely naïve as the courts have regularly emphasised that just because evidence is uncontradicted, does not mean it is true, or that it must be believed.”

In the recent case of ITC1820, a company involved in a business deal worth millions of rand, only managed to produce a single witness in the tax court to attest to the company’s intention. The Court was able to test the witness’ statement against statements it made in a circular to shareholders giving notice of the acquisition and the surrounding circumstances and found that it was unable to accept the witness’ assertion.

Badenhorst says that in such an instance one would have thought that the taxpayer company would produce minutes of a directors’ board meeting recording the discussion of the pending transaction and the motivation and intention of the company, what profits were being sought, and the purpose for which expenditure was being incurred.

“In the absence of any such documentary evidence, it is hardly surprising that in ITC 1820 the tax court inevitably concluded that the taxpayer company had not discharged the onus of proving its intention for tax purposes.”

A similar rule of intention applies in relation to the tax-deductibility of expenditure. If expenditure was incurred for the purpose of producing income, then it is deductible.