| 17/5/2012 |
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| Board of Special Commissioners - Cases |
| Case No. 39/74 |
Decided: 10 March, 1975 |
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In the case of a perpetual sub-emphyteusis, the premiums received, apart from ground rent, are of a capital nature and not taxable - article 5, now 4, Income Tax Act
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Appellant had granted a block of flats through a contract of perpetual sub-emphyteusis in terms of which it was to receive a premium apart from annual ground rent. Revenue decided that once article 5 included "rents, royalties, premiums and any other profits arising from property" as chargeable income, the premium was taxable.
Quoting from a previous decision, the Board pointed out that the income referred to was indeed chargeable to tax but only in so far as it was not capital in nature. Unlike a taxpayer who trades in the sale of immobile property, a person who sells a building which he had inhabited or which came into his possession, say through a bequest as in this case, is not chargeable to tax on the income derived from the sale, in view of the fact that it is capital in nature.
The same applies in the case of a grant of perpetual sub-emphyteusis where, apart from the ground rent, the payment of a sum termed a premium or otherwise is agreed upon. That sum represents the actual price of the building proper whose ownership is being transferred in perpetuity and, as such, is capital in nature since it is not considered to constitute a profit.
As in the case of a contract of sale, the transferor in a contract of perpetual sub-emphyteusis divests himself of the property; all that he retains is the utile dominium which is practically useless, since the property will only revert to him in the remotest possibility of the actual owner failing to pay the ground rent agreed upon. Such a contract, moreover, should not be confused with that of lease since, while the ground rent cannot be changed, rent proper is subject to fluctuation in line with the economic situation at a particular time.
Lord Wrenbury had ruled that "the price paid for sterilising the asset from which otherwise profit might have been realised" is a capital receipt and not chargeable to tax.
An appeal was entered before the Court from this decision. The appeal was subsequently ceded.
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