Commissioner for Inland Revenue v Ticktin Timbers CC

• Jurisdiction: South Africa
• Judge: Conradie J, Farlam J, Cleaver J
• Judgment Date: 07 February 1997
• Docket Number: A168/96
• Hearing Date: 31 January 1997
• Counsel: O L Rogers for the appellant T S Emslie for the respondent
• Court: Cape Provincial Division

Conradie J:

A corporation cannot borrow money to pay a dividend and then expect the Revenue to allow interest on the borrowed money as a deduction in arriving at its taxable income. Money borrowed by a corporation to finance a dividend is not money borrowed in order to produce income. Nicholas AJA in Commissioner for Inland Revenue v Giuseppe Brollo Properties (Pty) Ltd 1994 (2) SA 147 (A) at 153G D points out that borrowed money must have the capacity to produce income. The transaction need not, I need hardly add, produce any income, but it must have been the intention of the corporation taxpayer that it should. If borrowed money is not intended to be a factor of production, it is fiscally ignored. The principle is not a new E one. It was stated in Income Tax Case 3749 (unreported) and restated in Income Tax Case 678 (1949) 16 SATC 348. The approach has since been consistently followed. (See Income Tax Case 988 (1962) 25 SATC 113 at 118; Commissioner of Taxes v Avenue Buildings (Pvt) Ltd 1963 (4) SA 954 (SR) (25 SATC 366); Income Tax Case 1466 (1989) 52 SATC 25; Income Tax Case 1517 (1990) 54 SATC 109 (1990 The Taxpayer 193).) F

The reasoning of Nicholas AJA was applied by a Full Bench of this Division in Commissioner for Inland Revenue v Elma Investments CC (1996) 58 SATC 295. That case, like the one of Brollo Properties, involved the distribution of income by a corporation and the borrowing back of the distribution for the purpose of the G corporation's business. It was held on the facts that the taxpayer had not discharged the onus, which s 82 of the Income Tax Act 58 of 1962 imposed on it, of proving that the loan had been incurred in the production of income and hence that the interest expense was deductible. The only question in this case is whether it can be said that the appellant has proved these elements of its case. The evidence establishes the following. H

The respondent, a timber merchant, was previously a company formed in the 1930s by the father of the respondent's sole member, Dr Ticktin. During the 1970s, Dr Ticktin's father sold his shareholding to four trusts for the benefit of his four sons. During the 1980s, when Dr Ticktin's father was advanced in years, it was decided that the equity I of the business would be acquired by Dr Ticktin, the only child interested in continuing the business. This was achieved by the dissolution of the trust of which Dr Ticktin was the beneficiary, the...