ABC Ltd v Commissioner for the South African Revenue Service

• Jurisdiction: South Africa
• Judge: Southwood J, Matala J and Kilani J
• Judgment Date: 06 October 2010
• Citation: 2013 JDR 0339
• Docket Number: 11038/2006
• Court: Tax Court

Southwood J:

[1]

On 15 February 2002 the Commissioner issued tax assessments in respect of the appellant for the 1998, 1999 and 2000 years of assessment. In respect of the 1998 year of assessment the Commissioner assessed normal tax in the amount of R13 887 384,00, additional tax (200%) in the amount of R27 774 768,00 and section 89quat(2) interest in the amount of R19 963 093,15 resulting in a total payable of R61 625 245,15. In respect of the 1999 year of assessment the Commissioner assessed normal tax in the amount of R237 241 761,80, additional tax (200%) in the amount of R474 483 523,50 and section 89quat(2) interest in the amount of R220 338 286,20 resulting in a total payable of R932 063 571,50. In respect of the 2000 year of assessment the Commissioner assessed normal tax in the amount of R134 703 271,80, additional tax (200%) in the amount of

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R269 406 543,60 and section 89quat(2) interest in the amount of R70 045 701,34 resulting in a total payable of R474 155 516,74. The assessments were based on the profits (and losses) made by the appellant on the sale of shares and the additional tax was imposed in terms of section 76(1)(a) of the Income Tax Act 58 of 1962 ('the Act') because the appellant made default in rendering a return in respect of each year of assessment. Most of the profits were from the sales of shares in DEF Ltd ('DEF Ltd') a company listed on the Johannesburg Stock Exchange ('JSE'). After unsuccessfully objecting to the assessments the appellant noted an appeal to this court.

[2]

The appellant was incorporated in the Sunshine Islands on 16 July 1993. The X Trust was established in BB on 9 September 1993 and Y Trust (BB) Limited ('the Y Trust') was appointed the trustee. The Y Trust held the shares in the appellant on behalf of the X Trust and managed the company by means of nominee companies. The Y Trust's nominee companies continued to hold the shares in the appellant until late 1999 when the shares were transferred to the Z Trust, a trust established on 3 September 1996 and administered by the MR Trust Company Ltd ('MR Trust Co'). In March 2000 MR Trust Co resigned as the trustee of the Z Trust and the Y Trust was appointed to administer the trust. Both trust companies held the appellant's shares through two nominee companies, each holding half of the appellant's shares, and they appointed nominee companies as directors of the appellant. However, in practice, employees of the trust companies managed the appellant's affairs. Trust companies such as the Y Trust and MR Trust Co provide corporate trustees, corporate directors and managerial services to administer trusts set up for wealthy individuals from all over the world. As from 1 January 2005 the YTBB Ltd Banking Group in BB merged with the Bank of AA Group and from then on the corporate services were provided by YTBB Trustee (BB) Limited.

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Southwood J

[3]

As already mentioned, this appeal arises out of the assessment to tax of the proceeds of shares sold by the appellant on the JSE during the period August 1997 to February 2000 (i.e. during the 1998, 1999 and 2000 years of assessment). The Commissioner assessed the proceeds to tax because he considers that they were receipts of a revenue nature. Until the hearing of this appeal the appellant contended that all the proceeds from the sale of the shares were receipts of a capital nature and, accordingly, that they are not subject to tax as they do not fall within the definition of 'gross income' in the Act. The issues raised and the essential facts relied upon by the appellant are set out in the appellant's Consolidated Statement of Grounds of Appeal ('Consolidated Statement') as follows:

(1)

Whether the profits on all of the sales of shares reflected in the assessments (set out in the schedules in the Dossier pp31-44) were receipts of a capital nature. The essential facts alleged are that:

(i)

The appellant is an investment holding company which acquired the shares with the purpose and intention of holding them as a capital investment;

(ii)

The shares when acquired were not intended to be and did not constitute stock in trade and were not acquired or sold as part of a profit-making scheme;

(iii)

The disposal of the shares in DEF Ltd was actuated to satisfy a sudden and/or unexpected and/or fortuitous and unsolicited demand, particularly from institutions, at windfall prices unlikely ever to be realised again which in the view of Mr. N rendered it uneconomic to continue to hold the shares and

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without any intent on his part or that of the appellant thereby to engage in a scheme of profit-making or in the business of dealing or trading in shares;

(iv)

The shares other than the DEF Ltd shares were disposed of for commercial reasons and as part of a process of disinvestment other than a profit-making scheme.

(2)

Sale of the shares in OP Ltd

Whether the profit on the sale of the shares in OP Ltd arose in the 2001 tax year and should not have been included in the 2000 year of assessment.

(3)

Interest

Whether the interest included in the assessments (set out in the Dossier pp24-28) is exempt from normal tax as the appellant is a non-resident company;

(4)

Additional Tax in terms of section 76(1) of the Act

Whether additional tax, particularly, additional tax at the rate of 200%, should not have been levied, alternatively, should have been remitted, there being extenuating circumstances and the appellant not having acted or omitted to act with intent to evade taxation.

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Southwood J

The essential facts alleged are that –

(i)

The ultimate shareholder of the appellant is a trust governed by the laws of BB;

(ii)

The appellant is an investment holding company registered in the Sunshine Islands;

(iii)

The directors of the appellant, two companies controlled by the Y Trust which was the trustee of the aforesaid trust:

(a)

Had no reason to believe that the appellant was liable to pay income tax, whether in South Africa or elsewhere;

(b)

Were not aware that the appellant was obliged to render returns in South Africa;

(c)

Were not aware that the appellant was a 'company' as defined by the Act, or that it was subject to the provisions of the Act;

(d)

Were not aware that the appellant had engaged in any business in South Africa or in any scheme of profit-making, and they did not intend to do so;

(e)

In the event of it being found that Mr. N had engaged in any business in South Africa or in any scheme of profit-making which would or could expose the appellant to liability for income tax:

(aa)

were not alive to the fact that Mr. N had engaged in such business or scheme of profit-making;

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(bb)

had not authorised Mr. N to engage in such business or scheme of profit-making;

(f)

Were not advised by Mr. N that the appellant was obliged or had failed to render returns or that the Commissioner had required it to render returns, or that it had registered it as a taxpayer or that it had appointed him as the representative of ABC Ltd;

(g)

Were kept in the dark by Mr. N concerning the affairs of the appellant, including his dealings with its assets and its income tax affairs;

(h)

Took steps as soon as they were reasonably in a position to do so

(aa)

to cooperate with SARS in regard to all litigation involving SARS including this appeal in an honest and transparent fashion;

(bb)

to correct any wrong information or misinformation provided to SARS by Mr. N,

it being constrained by the non-cooperation of Mr. N due to his pending criminal prosecution.

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Southwood J

(5)

Interest levied in terms of section 89quat(2) of the Act

Whether interest should not have been levied in terms of section 89quat(2), having regard to the provisions of section 89quat(3), and more particularly, in that the appellant, on reasonable grounds, contends that it is not liable to tax in the amounts assessed or at all.

The essential facts alleged are that the appellant acted reasonably in making its contentions (given what is set out in relation to the fourth ground) and given that it has been unable to obtain information from Mr. N other than what is contained in the section 74C enquiry record or the record of the proceedings before the Panel, and it is unable to consult with him.

[4]

During the appeal the appellant's witness Mr. N, the Mr. N referred to in the Consolidated Statement, conceded that he had purchased some of the shares with a view to make a profit on selling them and that the proceeds of these sales were of a revenue nature. During argument the appellant's counsel advanced no argument in respect of the tax levied on the interest earned on the proceeds of the shares and the Commissioner's counsel conceded that the Commissioner had wrongly included in the 2000 year of assessment the proceeds of the sale of the OP Ltd shares.

[5]

In terms of section 82 of the Act the burden of proof in respect of the facts in issue rests on the appellant. The section provides that the Commissioner's decision shall not be reversed or altered unless it is shown by the appellant that the decision is wrong. With regard to the issue of whether the proceeds of the sale of the shares constituted receipts of a revenue or capital nature the parties agreed that it is only the intention of Mr. N which is relevant (Dossier 127/5 read with 130/5 and 132-134 read with 135 and 136). Mr. N took all the

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Southwood J

decisions to acquire and dispose of the shares. Apart from the first sale of DEF Ltd shares he never consulted the appellant or the trustees.

[6]

It is clear that Mr. N played a central role. He established the two offshore discretionary trusts, the X Trust and the Z Trust, which at different times held...