“For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”. Winston Churchill
In an effort to render the Mauritius tax system better understood by the taxpayer, we endeavour to present select case studies where rulings have been passed, thus providing our interpretation of such sections of the relevant taxation law of the land.
Under section 159 of the Income Tax Act, any person who derives or may derive any income, may apply to the Director General for a ruling as to the application of the Act to that income.
Case Study 19: Common Expenses to Capital Gains
Facts:
In 2016, the Supreme Court of Mauritius has held in the case of “TT”(The Taxpayer) v the Assessment Review Committee (“ARC”) and the Director General of the Mauritius Revenue Authority (“MRA”), that in accordance with Sections 18 and 26 of the Income tax Act 1995 (“ITA”), common expenses attributable to capital gains should be disallowed, based on the following formula:
Capital gains.
Income + Capital gains X Allowable Expenses
Points at Issue:
- The MRA raised an assessment for previous years and part of the expenses claimed by the Taxpayer were disallowed as per the apportionment formula mentioned above.
- The Taxpayer made a representation before the ARC, which upheld the decisions of the MRA to disallow common expenses attributable to the capital gain.
- The Taxpayer appealed against the ARC’s ruling before the Supreme Court. Taxpayer’s contentions
- The ITA does not provide for such a formula to apportion expenses relating to both taxable income and capital gains.
- Section 26 of the ITA was not applicable to determine the assessment.
- Different principles should be used for disallowing expenses depending on the nature of such expenses.
- Expenses incurred to produce both income and capital gains are allowable under section 18 of the ITA.
- The best judgment assessment should not have been used for apportionment of expenses in respect of capital gains. Income Capital gains + Capital gains X Allowable Expenses Facts of the case
- The Taxpayer holds a Global Business Licence (“GBL”) and is an investment holding company.
- The Taxpayer derived investment income in the form of dividend and interest. It also derived gain on disposal of investment.
- The Taxpayer treated all its common expenses, i.e. expenses relating to taxable as well as capital gains, as allowable expenses.
Supreme Court Judgement:
- Sections 18 and 26 of the ITA are not mutually exclusive and therefore, both sections should be read together regarding the deductibility of expenses.
- The MRA could use the best of judgment assessment to deal with the apportionment of expenses attributable to gross income.
- Tax ruling 50 which stipulates that expenses directly attributable to the sale of shares are not allowable is correct.
- Capital gains and exempt income are both excluded from the definition of gross income. Therefore, both expenses considered to be capital in nature and attributable to exempt income should be disallowed under sections 18 and 26.
- The expenses incurred produced two types of income; one is revenue income which arises in the trading activities and second is capital gains which is when the company decides of the right time for disposal. Thus, the expenses cannot be said to have been “exclusively” or solely incurred for the production of gross income.
- A company cannot benefit from non-taxable capital gains and at the same time benefit from deductions of the expenses which have produced such capital gains, i.e. a “double benefit”.
For further info, please contact Zeeshan Rajubally on [email protected], or Aditi Boolell on [email protected]
