SARS Ruling on Trading Stock

The Supreme Court of Appeal recently dealt with a dispute as to the capital or revenue nature of sales of sand and as to whether the taxpayer in question was entitled to a trading stock deduction in respect of its “opening stock” of sand in each tax year. The judgement, delivered on 26 May 2008, is referred to as Ernst Bester Trust v C:SARS.

The taxpayer owned a farm in the Cape, on which grapes and grain were farmed. It was approached by a business that wished to mine sand deposits on the farm. An agreement was concluded and, over a number of years, sand was periodically mined on the farm. The income from the sales of sand, although irregular, exceeded the rental income earned by the taxpayer in respect of the farm for each of the relevant tax years.

It was initially contended by the taxpayer that the proceeds from its sales of sand were capital in nature. This contention was not, however, pursued with much conviction before the Supreme Court of Appeal, as previous of its judgements established principles to the contrary. The taxpayer made an attempt to distinguish the facts of its case from those of the previous cases, but could not do so in sufficiently material respects. The Supreme Court of Appeal found that the proceeds were revenue in nature, as part of an ongoing scheme of profit-making.

The taxpayer then contended that it was entitled to a deduction in respect of the value of its “trading stock” of sand as at the commencement of each year of assessment. In this regard, it was necessary to determine when the sand became trading stock. It was found that this happened when the sand was separated from the ground. The sand was disposed of immediately following its separation. The Supreme Court of Appeal stated that where trading stock is acquired and wholly disposed of in the same tax year, section 22 of the Income Tax Act, on which the taxpayer had principally relied for a deduction, has no application.

It was then argued by the taxpayer that the un-separated sand already constituted trading stock. This argument had not previously been raised by the taxpayer and, in any event, facts to support such an argument could not be advanced. The argument was then unsuccessful.

The taxpayer also attempted to rely upon an alleged SARS practice in respect of deductions for trading stock acquired for no consideration. No evidence was led in respect of such a practice and the argument therefore could not succeed.