Crossing the Rubicon: Is the Use of a Realisation Company Still a Viable Tax Planning Tool?

Abstract

In this article the principles established in the Natal Estates, Berea West and Founders Hill cases read together with the relevant legislation and other related cases are analysed. The aim is to determine whether the interposition of a realisation entity when selling immovable property with the view to protecting the capital nature of receipts in respect of the property, is a viable tax planning tool for the 21st century. The Supreme Court of Appeal in all three cases applied the so-called “crossing the Rubicon” metaphor to determine the point when the realisation of a capital asset transforms into a scheme of profit-making and thus becomes taxable. The decisions in these three cases, if closely analysed, confirm that the courts have provided complimentary rather than conflicting viewpoints on how the “crossing the Rubicon” metaphor is applied in practice. It is concluded from the analysis that a realisation entity should be used only to realise an asset when there are compelling reasons, other than for pure tax planning purposes, for its use. This conclusion is reached because current legislation ensures that the appreciation in the value of the asset up to the point of the change in use, from capital to revenue, remains capital in nature and will thus be taxed as a capital gain under the Eighth Schedule of the Income Tax Act. In practice therefore, the use of a realisation entity should be considered only in circumstances where the protection of the capital nature of an asset for purely tax reasons is not the main reason for the interposition of a realisation company or any other intermediary entity, but is set up, for example, to administer a deceased or insolvent estate, or to comply with legislation. Any tax advantage gained in these circumstances can be regarded as an inadvertent consequence and thus there is a possibility that the tax advantages gained will not be regarded as income of a revenue nature.

Keywords: Crossing the Rubicon, Realisation Company, Scheme of Profit-making, Intention, Capital Versus Revenue, Best Advantage, Disposal of Property