Abstract:
This article analyses the facts and judgment in CIR v Niko, involving the
transfer of business assets from a sole trader to a company, the shares of
which were substantially owned by the same sole trader. This case changed
the inherently fl awed, but prevailing practice at that stage of regarding a
lump-sum payment from a lock-stock-and-barrel sale of a business as a
receipt of a capital nature, to a receipt that needed to be allocated to the
various assets included in the sale, and therefore potentially the receipt
would be partly of a capital and partly of a revenue nature. Although the
conclusion relating to lock-stock-and-barrel sales in general was sound,
the submission made in this article is that, in the particular circumstances
of the case, the economic reality of the transaction was not considered
– virtually no economic gain was realised by J. Niko, the seller and sole
owner of the business to a company of which he was also the substantial
shareholder. Two subsequent court decisions, which similarly ignored
the economic reality of the transactions in the context of a group of
companies, followed this judgment. In this article, the problematic nature
of the decisions that ignored the economic reality of the transactions
is demonstrated with reference to accepted canons of a good taxation
system. The article also explains the partial legislative relief that has
subsequently been granted for transfers of assets from a person to a
company and for transfers within a group of companies, but concludes
that there is a need for full recognition of a group of companies as an
economic entity for tax purposes.
