Case No 11100

• Jurisdiction: South Africa
• Judge: Southwood J
• Judgment Date: 13 June 2005
• Docket Number: 11100
• Hearing Date: 07 June 2005
• Citation: 2005 JDR 1153 (PSpCrt)

Southwood J:

[1]

This appeal is concerned with the appellant's receipt of R1 million, part of which, it is common cause, was in respect of a restraint of trade undertaking. The respondent issued an assessment in respect of the appellant for the 2000 year of assessment on the basis that 50 % of 5/8 of the R1 million was gross income and therefore taxable. The appellant unsuccessfully objected to the assessment and then noted an appeal which the parties agreed should be heard by the Tax Board established in terms of section 83A of the Income Tax Act 58 of 1962 ('the Act'). The Board found that the whole amount of R1 million was received in respect of the restraint of trade undertaking and was therefore of a capital nature and not taxable. The Board directed that the assessment for the 2000 year of assessment be amended accordingly. The parties agreed that the Board need not decide whether the receipt of R1 million should have been assessed in the 1999 year of assessment rather than in the 2000 year of assessment. The respondent was dissatisfied with the decision of the Board and referred the appeal to this court for hearing. The parties agreed that the issues to be decided in this appeal are -

(1)

whether the whole of the R1 million was the quid pro quo for the restraint undertaking and therefore of a capital nature and not taxable or whether 50 % of 5/8 of the R1 million was correctly subjected to tax; and

(2)

whether this court should award the appellant costs in terms of section 83(17)(c) of the Act if the appeal succeeds as it did before the Board.

At the hearing, the appellant's counsel informed the court that the appellant did not intend to proceed with the issue of whether the appellant should have been assessed in the 1999 year of assessment.

[2]

The appellant called the only witness, Mr A. Mr A's evidence was not challenged and may be summarised as follows:

[3]

During about 1975 he and his brother, B, commenced business in a partnership. Initially the partnership carried on a plant hire business and later it became involved in mining. The vehicle by which the brothers conducted the business also changed. They formed a close corporation and then converted it to a private company. By 1998 the company, A Mining and Construction (Pty) Ltd ('A Mining') was engaged more in mining than in construction. It still conducted its plant hire business and it also conducted open cast mining operations at a number of sites. Mr A was the managing director and was primarily responsible for the administration of the company.

2005 JDR 1153 p2

Southwood J

Mr B managed the plant hire business and a number of senior employees, including the appellant, managed the open cast mining operations.

[4]

On 8 September 1998 A and B ('the vendors'), C Foods Ltd ('C'), C Investments (Pty) Ltd and the vendors' family trusts entered into a written agreement, the salient terms and conditions of which were the following:

(1)

With effect from 1 July 1998, the vendors sold to C their shares and claims against A Mining for a purchase price of R48 million;

(2)

the purchase price was payable by C allotting and issuing to the vendors C 'N' ordinary shares at an issue price of 700c each;

(3)

clause 10, which provided that the agreement was subject to conditions precedent which were to be fulfilled by 15 September 1998, one of which was that the key personnel referred to in the agreement, signed service and restraint agreements with A Mining;

(4)

clause 16, which provided that these service and restraint agreements would provide for each of the key personnel to remain in the employ of A Mining for a period of five years from the signature date and for each of the key personnel to be restrained for a period of three years from the date of termination of his employment by A Mining;

(5)

clause 17, which provided that to ensure that A Mining had sufficient management and staff and to protect the proprietary interests of the purchaser, the vendors were obliged to procure the signature of restraint agreements by all of the key personnel;

(6)

appendices 1 and 2 which recorded that the appellant was one of the key personnel and one of the restrainees.

[5]

On 30 September 1998 the appellant entered into service and restraint agreements with A Mining.

[6]

In terms of the restraint agreement -

(1)

the appellant undertook to enter into a service agreement with A Mining contemporaneously with the signing of the restraint agreement;

(2)

the appellant acknowledged and agreed that by virtue of his association with A Mining he had and would have access to A Mining trade secrets and confidential information including, but not limited to, the matters listed in clause 3.1 to 3.14 of the agreement;

(3)

the appellant undertook in favour of A Mining, its successors in title and assigns, in order to protect the proprietary interest of A Mining that -

'He shall not whilst he is employed by the company or employed by any member of the (A) Group and for a period of (3) three years thereafter, be directly or indirectly interested, engaged or concerned, whether as principal, agent, partner, representative, shareholder of a private company, consultant, advisor, financier, administrator or any other like...