Cactus Investments (Pty) Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: Hefer JA, Howie JA, Schutz JA, Scott JA, Farlam AJA
• Judgment Date: 20 November 1998
• Citation: 1999 (1) SA 315 (SCA)
• Docket Number: 1/97
• Hearing Date: 05 November 1998
• Counsel: PA Solomon (with him GE Turner) for the appellant AG Derksen for the respondent
• Court: Supreme Court of Appeal

Hefer JA:

Normal tax is levied in terms of s 5(1) of the Income Tax Act 58 of 1962, as amended, on income received by or accrued to a person during the year of assessment. 'Gross income' is defined in s 1 as

'the total amount, in cash or otherwise, received by or accrued to or in favour of such person during (any) year or period G of assessment . . . excluding receipts or accruals of a capital nature'.

This includes, as explained in Commissioner for Inland Revenue v People's Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), not only income actually received, but also rights of a non-capital nature which accrued during the relevant year and are capable of being valued in money. H

When the events occurred to which the present appeal relates the appellant ('Cactus') was a subsidiary of Union Acceptances Ltd ('UAL'). UAL traded as a merchant bank and Cactus' main function was to hold and manage its preference share book. Initially this involved no more than purchasing preference shares in other companies and I issuing similar shares of its own. But during 1987 a scheme was devised to enable Cactus to make interest-bearing investments without attracting liability for income tax. It involved the exchange of taxable interest income for non-taxable dividend income by way of cession and counter-cession. The scheme was put into operation during 1988. During that year and 1989 Cactus made several interest-bearing fixed deposits and J

Hefer JA

loans, and executed a number of cessions of its right to receive the interest. In return it took cession of rights to A receive dividends.

The respondent assessed the interest as subject to normal tax during the 1988 and 1989 tax years. After an objection to the assessments had been disallowed, Cactus appealed in terms of s 83 of the Act. The Special Court B found that the interest had been ceded before its accrual and set aside the assessments. However, in an appeal by the respondent under s 86A, the Transvaal Provincial Division of the High Court reversed the Special Court's decision (Commissioner for Inland Revenue v Cactus Investments (Pty) Ltd 1999 (1) SA 264 (T) ((1997) 59 SATC 1)). The majority of the Court (Southwood J and Ginsburg AJ) held that the right to claim interest accrued C to Cactus on the days on which the investments were made and was not affected by the subsequent cessions. In a separate judgment Wunsh J came to the conclusion that the interest vested only when the investments matured, but that it was deemed to have accrued to Cactus in terms of s 7(1) of the Act. He agreed with the D majority that the accrual occurred during 1988 and the assessment for that year was accordingly confirmed.

Argument in this Court centered mainly on Cactus' obligations under the agreements in terms of which the loans and deposits were made. Mr Solomon, who appeared for Cactus, supported the Special Court's view that, E

'(h)aving regard to the nature of a contract of loan, in the present (case) where interest is payable only at the end of a fixed period, the lender's entitlement to interest is conditional upon his willingness and ability to make the money available to the borrower for the whole of the fixed period; and therefore the right to the interest does not accrue to him until the end of the fixed period, unless the...