Capital Gains Tax
1712. The effective date of a disposal
March 2009 – Issue 115

It is common business practice for parties disposing of assets and businesses to stipulate that the transaction would be effective from a date specified in the agreement as the "effective date". Often, this effective date is a date that precedes the date on which the conditions precedent are fulfilled. Taxpayers should be very careful in these situations as the effective date may not necessarily be the date on which the transaction takes effect for tax purposes.

Generally, where taxpayers dispose of capital assets, the time of disposal would be governed by the provisions of paragraph 13 to the Eighth Schedule of the Income Tax Act, No.58 of 1962 (the Act)

Paragraph 13 specifically provides that the time of disposal in the case of:

· an agreement subject to a suspensive condition, is the date on which the condition is satisfied;

· any agreement which is not subject to a suspensive condition, the date on which the agreement is concluded.

It has been held that a suspensive condition is one which suspends the operation or effect of one, or some, or all, of the obligations under a contract until the condition is fulfilled (refer R v Katz (1959) (3) SA 408 (C) at 417; Wacks v Goldman (1965) (4) SA 386 (W) at 388; Design and Planning Service v Kruger (1974) (1) SA 689 (T) at 695). In this regard the law is quite clear that the time of disposal would be regarded as the date on which the suspensive conditions in the agreement have been satisfied. It is therefore apparent that the disposal of assets where the agreement is subject to suspensive conditions would not come into effect until all the suspensive conditions under the agreement have been fulfilled.

It is nevertheless important to point out that one must distinguish between suspensive and resolutive conditions. A suspensive condition is one where the continued operation of the agreement is dependent on the happening of an uncertain future event. In the case of a resolutive condition there is no postponement of the disposal. We can therefore safely say that any disposal which is subject to a resolutive condition will be regarded as a disposal for purposes of paragraph 13 of the Eighth Schedule, on the date the agreement subject to that resolutive condition has been concluded. The presence of a resolutive condition does therefore not suspend the time of disposal for purposes of the Eighth Schedule to the Act.

In addition to the date of disposal of capital assets, the contracting parties should also consider whether the sales proceeds accrue on the effective date or on another date for tax purposes. The accrual of the sales proceeds will only take place on the date which the seller becomes unconditionally entitled thereto (refer Mooi v SIR, 34 SATC 1). In most instances this would be the date when all of the agreement’s suspensive conditions have been fulfilled.

It is therefore apparent that taxpayers disposing of assets in terms of agreements subject to suspensive conditions should not merely assume that the time of disposal of the assets as well as the accrual of the sales proceeds will be the effective date of the agreement.

Edward Nathan Sonnenbergs

IT Act:8th Schedule , par 13