Sars loses trade mark tax case

Johannesburg - The tax court has upheld a taxpayer's claim to deduct a payment of R50m for a radio station's trade mark and name for income tax purposes.

Nina Keyser, partner at Webber Wentzel who acted for the taxpayer, says the South African Revenue Service (Sars) has been known to aggressively dispute the prices allocated to trade marks in business purchases and they have not yet indicated whether they will appeal the outcome in this case.

She clarified that the Income Tax Act has been amended in the interim so that taxpayers can no longer claim a deduction in respect of trademarks.

The case arose when the SABC sold off its regional radio stations in 1996 in a public bidding process. The taxpayer was the successful bidder and purchased a radio station from the SABC for R65m. R50m of the purchase price was allocated to the trade mark and the name of the station.

At that time taxpayers could write off trade marks for tax purposes. Sars was of the view that the trade marks and the name of the radio station was not worth R50m and that the bulk of the purchase price should have been allocated to goodwill. Sars consequently disallowed the taxpayer's claim.

The Income Tax Act provided for a deduction for trade marks based on the cost actually incurred by the taxpayer. Sars argued that the taxpayer did not perform a formal valuation of the trademark and that the price allocation was a sham.

The court found that the Income Tax Act does not require that taxpayers perform a formal valuation of trademarks to obtain a tax deduction.

In this particular case there was also no evidence that the contract between the SABC and the taxpayer was a sham because in the taxpayer's honest opinion, the bulk of the value lay in the trademark and the name. The taxpayers would not have purchased the radio station without the trademark and the name.

They testified that they would rather have applied to regulatory body Icasa for a licence to operate a new radio station if they could not get the name and the trademarks which identifies the station. The other bidders for the radio stations sold by the SABC at the time also allocated the bulk of their bid prices to the trademarks.

Sars also tried to argue that the value of the radio stations lay in the licences to be obtained from Icasa, but the court dismissed this argument on the basis that the purchase was conditional on the taxpayer obtaining a licence from Icasa. No portion of the R65m purchase price was paid to Icasa for the licence to operate the radio station, and the SABC could not sell its own right to broadcast to the taxpayer.

- I-Net Bridge