Looking for a hobby? Try collecting diamonds. Your friends will envy you and even the taxman will become interested when you start to realise your collection.
According to an article in KPMG's latest "Business Update", the Income Tax Special Court recently heard a case of a taxpayer who bought diamonds. He was also a director and shareholder of a firm of auctioneers. To prove to the court that he was not involved in a profit-making scheme, he argued that:
* He became interested in diamonds and studied their features, learning about their different sizes, colours and qualities;
* He decided to collect diamonds and bought a scale, special lights and a magnifying glass, to enable him to select them;
* After acquiring the diamonds he had to have them assessed and classified by an official body in the diamond industry which issued a certificate of grading;
* He started to buy diamonds in 1979 but stopped in 1981 when he realised that his hobby was "most expensive";
* He intended to keep the collection until his retirement, when he might sell them or eventually pass them to his heirs.
The taxpayer bought 22 diamonds during that period and between 1986 and 1990 he sold five of them to friends and relatives. His total profit was R131 045.
However, he failed to convince the court that he was not involved in a profit-making scheme and was taxed on this profit.
The court concluded that as an auctioneer and a share dealer, the taxpayer had acquired the diamonds with a clear view as to their value. They could not have provided him with any real pleasure as they were kept under lock and key.
The court could not accept he had bought 22 diamonds and then sold five of them as a hobby.