Is the sale of land capital or is it income?
This is a question property developers will be faced with when vacant land is sold for development.
In a Supreme Court of Appeal, a ruling was made in favour of the South African Revenue Services that the sale of land held by a company could be construed as income. This ruling stands until the case is brought before the Court of Appeals. The ruling incidentally was a landmark ruling and could have far reaching consequences if the ruling is upheld by the Appellate Court.
This judgement overturns a practice that land which is sold was traditionally regarded as capital.
Large companies sitting with excess disposable land generally form “realization companies” to dispose of the excess land and in the past this was viewed as capital.
Prof Viruly said that this will greatly affect the companies who want to embark in large scale projects where the selling of property and land is the main focus.
This could have a long term dampening effect on the development of land specifically due to the scarcity of funding costs, said Property Economist Erwin Rode.
This could pewter down to smaller developers sitting with land which, due to a lack of funding, need to sell the land to generate extra capital because of the shortage of development capital.
Smaller developers would then be forced to carefully consider the purchase of land for development and hold onto it until there is enough capital to develop the land. In the event where the capital is not generated, they will sit with a burden which cannot be turned into capital for smaller projects due to severe tax burdens imposed by this ruling.
The court case between AECI Limited and SARS, in which the judgement and ruling handed down by the Tax Court was opposed by AECI Limited and its realization company Founders Hill, has set this precedent.