There have been regular reports in the news that South Africa is facing a rising threat from cybercrime and is the most targeted country in Africa. It is estimated that cybercrime will cost South Africa R2,2 billion a year. One such crime involves business email compromise (BEC). References to paragraphs in this article are to paragraphs of the Eighth Schedule to the Income Tax Act 58 of 1962 (the Act).
Business email compromise
BEC occurs when a fraudster gains access to the user's email account. We have all probably received those emails purportedly from our Internet Service Provider (ISP), inviting us to click on a link to update one's email details to ensure that one can continue to receive and send email. But a quick check on the sender's email address will usually reveal that it did not come from one's ISP but is simply a way of a fraudster inviting one to part with one's email address and password. Once that happens, the fraudster can monitor your email traffic, delete legitimate correspondence and replace it with fake correspondence, so that payments will be diverted to the fraudster's bank account.
Persons engaging with firms of attorneys are prime targets for this crime as the sums of money involved tend to be substantial, particularly those involving property transactions.
In 2024 the Supreme Court of Appeal (SCA) heard one such case,
Edward Nathan Sonnenberg Inc v Hawarden. In 2019 Ms Hawarden, a pensioner, purchased immovable property for R6 million. She paid R500 000 as a deposit to the estate agents and was warned about cybercrime and told to verify the estate agent's banking details before making payment, which she did, and the payment went through without a problem.
A few days later, she received a fraudulent letter purporting to be from Edward Nathan Sonnenberg Inc (ENS), the conveyancing attorney's acting for the seller. Unbeknown to her, a hacker had gained access to her email account and had intercepted the legitimate email from ENS and substituted it with a fraudulent letter containing the fraudster's banking details. The next day she went to her bank for assistance with transferring the balance of the purchase price of R5,5 million. Neither she nor her bank verified the banking details, and the payment was duly processed. The fraudster intercepted and replaced more emails until it became apparent that ENS had not received the funds and that Ms Hawarden had been duped. She then brought a delictual action against ENS demanding that the firm compensate her for her R5,5 million loss.
Having been held liable by the High Court, ENS appealed to the SCA, which found in its favour. The SCA noted that under the law of delict Ms Hawarden had to establish wrongfulness arising out of an omission causing pure economic loss. In contrast to instances of physical harm, conduct causing pure economic loss is not
prima facie wrongful and will not give rise to a claim for damages unless policy considerations consistent with constitutional norms dictate otherwise. The court noted that Ms Hawarden was not a client of ENS, and her loss was not caused by any failing in the ENS system but rather from her email being infiltrated. She was aware of the risk, having been warned by the estate agents but inexplicably failed to take the same precautions she had taken with the payment of the deposit. A finding that ENS' failure to warn Ms Hawarden attracts liability would have profound implications not just for the attorneys' profession, but all creditors who send their bank details by email to their debtors. The High Court should have declined to extend liability in this case because of the real danger of indeterminate liability. The appeal was dismissed on the basis that she had ample means available to her, and must, in the circumstances, take responsibility for her failure to protect herself against a known risk.
CGT implications
Could Ms Hawarden have claimed a capital loss of R5,5 million for the loss she suffered?
The typical response to this question would be that Ms Hawarden did not dispose of an 'asset' as defined in para 1, since an electronic funds transfer comprises currency. But does such a view stand up to scrutiny?
Asset
The term 'asset' as defined in para 1 includes
'property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum ...'.
The starting point for determining whether an asset falls within the definition is to determine whether it comprises 'property'. In
CIR v Estate CP Crewe & another in the context of estate duty, Watermeyer CJ said the following on the meaning of 'property':
'One would expect that when the estate of a person is described as consisting of property, what is meant by property is all rights vested in him which have a pecuniary or economic value. Such rights can conveniently be referred to as proprietary rights and they include
jura in rem, real rights such as rights of ownership in both immovable and movable property, and also
jura in personam such as debts and rights of action.'
A debt claim is an incorporeal, movable asset and comprises property and hence an 'asset' as defined in para 1.
The word 'currency' is not defined in the Act, but its ordinary meaning in the present context according to the
Merriam-Webster Dictionary is
'a: something (such as coins, treasury notes, and banknotes) that is in circulation as a medium of exchange
b: paper money in circulation'.
The question whether an EFT involves a transfer of currency is a debatable point as most inter-bank transfers occur through a ledger system that does not require a physical transfer of money. But even if it is accepted to be a transfer of currency, nothing really turns on this because it is the asset acquired with that currency that is of importance. In this instance, that asset is a delictual claim against the fraudster.
Base cost
Paragraph 20(1)(a) states that the base cost of an asset is equal to the expenditure actually incurred in respect of its cost of acquisition or creation.
The principle of expenditure being incurred when giving up a right was confirmed by Harms AP in
C: SARS v Labat Africa Ltd in which he stated the following:
'The term "expenditure" is not defined in the Act and since it is an ordinary English word and, unless the context indicates otherwise, this meaning must be attributed to it. Its ordinary meaning refers to the action of spending funds; disbursement or consumption; and hence the amount of money spent.
'The Afrikaans text, in using the term "onkoste", endorses this reading. In the context of the Act it would also include the disbursement of other assets with a monetary value. Expenditure, accordingly, requires a diminution (even if only temporary) or at the very least movement of assets of the person who expends. This does not mean that the taxpayer will, at the end of the day, be poorer because the value of the counter-performance may be the same or even more than the value expended.'
Step 1: Acquisition of the EFT right and part-disposal of the bank account
When the payer presses the 'Pay' button on their banking app, they acquire a personal right against their bank to carry out their payment instruction (the EFT right). The EFT right constitutes the proceeds on part-disposal of the bank account, and usually there would be no capital gain or loss as the base cost of the bank account would equal the proceeds in the form of the EFT right.
Step 2: Acquisition of the delictual right and disposal of the EFT right
After the instruction is carried out by the bank, the EFT right is extinguished, and the payer now acquires a new asset in the form of a delictual claim against the fraudster. If we assume that the claim is worth the amount paid at the time of payment, there would be no capital gain or capital loss on the disposal of the EFT right.
The base cost of the delictual claim under para 20(1)(a) is equal to the market value of the EFT right that was extinguished through payment. This extinction of the EFT right impoverishes the payer by the market value of the payment and creates expenditure. In this instance, the market value of the payment is the same as its face value.
Disposal
For a capital loss to be claimed, there must be a disposal of an asset. Thus, it is necessary to identify the disposal event in para 11. Paragraph 11(1)(b) and (c) provide as follows:
'11. Disposals.—(1) Subject to subparagraph (2), a disposal is any event, act, forbearance or operation of law which results in the creation, variation, transfer or extinction of an asset, and includes—
(b)
the forfeiture, termination, redemption, cancellation, surrender, discharge, relinquishment, release, waiver, renunciation, expiry or abandonment of an asset;
(c)
the scrapping, loss, or destruction of an asset;'
Likely trigger events include
- the extinction of an asset (opening words);
- the relinquishment or abandonment of an asset (item (b)); and
- the loss of an asset (item (c)).
There is an argument that the word 'loss' in para 11(1)(c) applies only to corporeal things based on the words 'scrapping' and 'destruction' and the maxim
noscitur a sociis (the meaning of a word should be determined by the words that surround it — 'birds of a feather flock together'). However, personal rights can also be destroyed and given that the term 'asset' includes both corporeal and incorporeal rights, in my view such a narrow interpretation cannot be justified. But if I am wrong, the debt should be regarded as disposed of when abandoned under para 11(1)(b).
In
Stone v SIR Corbett AJA (as he then was) in considering whether the taxpayer had sustained a loss on a loan for purposes of s 11(a) stated that
'the irrecoverability of the capital loaned constituted a loss in the sense of an involuntary deprivation'.
Interestingly, when a person has disposed of an asset in a prior year of assessment and part of the proceeds on that disposal become irrecoverable, a capital loss can be claimed under para 4(b)(i)(bb), which refers to so much of the proceeds
'as has become irrecoverable during the current year of assessment'.
It is strange that the legislature chose to deal with the capital loss in this way instead of simply allowing a capital loss on the irrecoverable debt under para 11. In these circumstances any capital loss on the loan asset under para 11 must be disregarded on the basis that para 4(b)(i)(bb), being the more specific provision, takes precedence.
Any capital loss arising from the disposal of the delictual claim will not relate to the loss of a personal-use asset, as para 53(3)(e) specifically excludes a financial instrument from comprising a personal-use asset. Paragraph (a) of the definition of 'financial instrument' in s 1(1) includes a loan, a debt and similar instruments.
Any capital loss because of BEC should therefore be allowable.
Time of disposal
Abandonment
Paragraph 13(1)(b) provides that the time of extinction of an asset, including by way of relinquishment or abandonment of an asset is the date on which the asset is extinguished.
The debt could be extinguished in a variety of ways, for example, if the fraudster could be identified and their estate were sequestrated, or they died without sufficient funds in their estate. The debt could also be extinguished through prescription, novation or compromise although the latter two are unlikely to occur. It may in the alternative be possible to interpret 'extinguished' in a looser sense as representing the time when any of the events in para 11(1)(b) occurs. This interpretation can arguably be inferred because para 13(1)(b) refers to 'the extinction of an asset
including by way of ... abandonment'.
The abandonment of an asset seems to be the closest event to a debt that becomes irrecoverable. However, there is some uncertainty whether the disposal occurs when the debt is abandoned or whether it occurs later when the debt is extinguished, assuming that extinction is a separate event.
Loss
Paragraph 13(1)(c) provides that the time of disposal of an asset disposed of by way of scrapping, loss or destruction is
- when the full compensation is received; or
- if no compensation is payable, the later of the date when the scrapping, loss or destruction is discovered or the date on which it is established that no compensation will be payable.
Paragraph 13(1)(c) seems to offer more clarity as to when the time of disposal will occur compared to para 13(1)(b). Its reference to compensation also fits in well with a damages claim.
In ITC 592 the President of the court, CJ Ingram stated in relation to the time when a debt can be claimed as bad that
'the taxpayer is entitled to claim the deduction of bad debts up to and as at the time he finally regards the debts to be bad'.
It would therefore seem reasonable to regard a debt as having become irrecoverable, and hence lost, when the taxpayer has exhausted all reasonable steps to recover it.
I am mindful that the SARS
Comprehensive Guide to Capital Gains Tax (Issue 9) limits the claiming of a loss on a debt that does not arise from the disposal of an asset to the extinction of the debt. It does not consider the alternative that a debt can be disposed of through 'loss' under para 11(1)(c) read with para 13(1)(c). In my view, this was an oversight that results in inconsistent treatment of debts arising from the disposal of an asset in a prior year, in which the proceeds are reduced when they become irrecoverable (para 4(b)(i)(bb)).
Whichever disposal event one chooses, from a tax policy perspective, there is no reason why a debt that is not recoverable should not qualify as a capital loss. Tax treatment should be aligned with economic reality and victims of cybercrime should be treated fairly.
Conclusion
We should all take our email security very seriously and not fall for those phishing scams that are so prevalent these days. Being able to claim a capital loss because of being duped with incorrect banking details is some consolation but that is cold comfort for a victim of fraud.
This article was first published by ASA in its
September 2025 issue.
