The State controlled daily newspaper gloated in reporting a ruling by Supreme Court Judge Karunakaran giving credence to the Commissioner of Taxes claim that the sale of office space in Victoria House under the Condominiums Act, was in fact a scheme designed to make a huge profit which is liable to tax under the Business Tax Act. The headline, “Court rules big profit on property deal is taxable”, tried to give the impression, that the taxpayer was trying to get away without paying taxes on a huge profit, and therefore, was evading taxes, which is an offence. Indeed, words attributed to the Commissioner of Taxes, Steve Jardine, seemed to endorse that view, as if a small profit would not have been subject to tax.
The company, Central Stores Development (CSD) owns a building and property called Victoria House. The original transaction of buying the land and constructing the building dates back to 1972 when the company was formed. Since that time, the company has been deriving income from the rental of office space and shops in the building. In 1998 the company undertook a refurbishment of the building and in 2000 began selling units under the Condominiums Act provisions. Each year, the company would lodge its tax returns declaring the profit realised from the sale of the units, some R 14,525,202 in total. These returns were accepted by the Revenue Authority as authentic and that the profits were capital gains which were not taxable, well until the Commissioner of Taxes had second thoughts.
In 2003 the Commissioner of Taxes decided to re-open its assessment of the tax returns of the company for the years 2000, 2001 and 2003 when the profits from the sales were realised. According to the 39 page ruling of Judge Karunakaran, a taxman by the name of R Herbert was appointed “to investigate the company’s activities”. The choice of words by the judge gives the impression of sinister goings-on inside the company. As it turned out the investigation was nothing more than a single interview (interrogation) by Mr Herbert with the majority shareholder of the company, Mr R Merali – who was at that time bed ridden. Mr Herbert, in his report, describes Mr Merali as someone “under a disability, perhaps Parkinson’s disease” but that “he understood our discussion”. What more Merali spoke only French. The interview took place on 26th June 2003. In his report Mr Herbert claimed that Merali admitted to him that the real purpose of the redecoration and subdivision of Victoria House was a scheme to sell the property at a profit. In a letter to the Revenue Authority dated 2nd July 2003, Merali denied he made such a claim. But was that really important to the issue? Does the Revenue Authority need to adopt subterfuge and hearsay to prove that an income is taxable under the law? This whole “investigation” smacks more of an inquisition reminiscent of the communist era.
The substance of the appeal by the company on the Tax Commissioner’s ruling and tax assessment were as follows:
1) Had the company (CSD) made a full, true and faithful disclosure of all material facts to the Commissioner of Taxes when submitting its Business Tax Returns for 2000, 2001, 2002 which would preclude the Commissioner of Taxes from further revision of the assessment after 3 years had elapsed?
2) Were the profits on the sale of the condominium units assessable income under Section 21 of the Business Tax Act?
3) If not assessable income under section 21, were the profits on the sale of the condominiums units assessable income under section 22 (1) (g) of the Business Tax Act?
4) If the profit is assessable under section 22 (1) (g), was the Commissioner prevented from making such an assessment under section 48 (2) by the information given to him in the original filings?
For Judge Karunakaran, what the directors revealed in the company’s tax returns and audited accounts did not constitute a full and true disclosure of the financial transactions of the company. Instead, he gave credence to the ““information” alleged to have been disclosed to Mr. Herbert by Mr Merali (who, by the way, has since passed away) was the real intent of company to justify the reassessment after the time-bar for reassessment had come into effect. What Mr Herbert claimed being what Mr Merali told him transformed the company from a “passive property owner” into a scheme “to sell the property for profit” and hence the profit on sale of the condominiums were assessable under section 21 of the Business Tax Act, as the transactions were undoubtedly an act of “carrying on or carrying out business”. In other words synonymous with selling soap powder over the counter. No ruling was required, the judge said, in respect of questions 3 & 4 above as they “stand formulated in the alternative to questions 1 & 2.”
The ruling raises a number of questions. One being what constitutes “full and true disclosure of material fact” and how far can the Revenue Authority go in ascertaining the concept or obtaining “information”? Another being, what determines “capital gains” as opposed to “income”? One of the main guides available in the Business Tax Act as to whether the “profit on sale of land and building” is “assessable income” is given under section 22 (1) (g) which reads “any profit arising from the sale of an option on land or the sale of any property acquired for the purpose of profit-making by sale--is assessable income”. It seems clear that the intention to sell must be set at the time the property was acquired. Since the property was acquired in 1972, 29 years is a long time to realise an intention to sell and make a huge profit. Sadly, Judge Karunakaran conveniently ignored this section of the Act.
The ruling has wider implications than the government or the judge may wish to admit. In Seychelles, (or for that matter anywhere in the world) people inherit land, buildings etc., that appreciate in value over time and, therefore, would always be sold at prices way above its inheritance value – which itself is virtually impossible to ascertain 29 years later. The lesson perhaps, is to play mute when the taxman arrives for an interrogation. More seriously though, those foreigners who intend to buy or have bought units on Eden Island or elsewhere in Seychelles would be deemed to be no longer “a passive property owner” should they decide to sell because their circumstances have changed. Remember, Judge Karunakarun did not consider 29 years long enough to remove any doubt that ones original intention was not to acquire a property for sale in order to make a profit.
The Commissioner of Taxes may have reiterated that “there is no capital gains tax in Seychelles”, but the court ruling has made his statement suspect, because what is or is not capital gains now depends on an simple allegation made by a tax investigator of a taxpayers intention even if the facts show the ridiculous nature of such an allegation, albeit refuted.