Commissioner for Inland Revenue v Friedman and Others NNO

• Jurisdiction: South Africa
• Judge: Joubert JA, Botha JA, Kumleben JA, Nicholas AJA, Harms AJA
• Judgment Date: 05 November 1992
• Citation: 1993 (1) SA 353 (A)
• Hearing Date: 18 May 1992
• Court: Appellate Division

Joubert, JA.:

This is an appeal against a judgment of McCreath J in the Witwatersrand Local Division granting an application by the respondents in D their capacities as trustees ('the trustees') of the Phillip Frame Will Trust ('the trust') for a declaratory order against the Commissioner for Inland Revenue ('the Commissioner') as appellant. The declaratory order was granted in terms of prayers 1 and 2 of the notice of motion, dated 22 November 1989. Prayer 1 provided as follows: E

'An order declaring that

(a)

The Phillip Frame Will Trust ("the trust") created by the late Phillip Frame in terms of his will dated 24 July 1974 is not a "legal persona" and therefore is not a person within the meaning of that word in the Income Tax Act 58 of 1962 (as amended) ("the F Act"); and

(b)

therefore the respondent was and is not entitled

(i)

to levy taxation on the trust, in terms of the Act, or

(ii)

to appoint applicants, in terms of s 95(1) of the Act, as the trust's "representative taxpayers".'

Prayer 2 sought an order for costs against the Commissioner. With leave of G the Court a quo the Commissioner appeals to this Court. The judgment of the Court a quo, delivered on 29 October 1990, has been reported:

Friedman and Others NNO v Commissioner for Inland Revenue: In re Phillip Frame Will Trust v Commissioner for Inland Revenue 1991 (2) SA 340 (W).

The facts material to this appeal are not in dispute. They may be H summarized as follows:

1.

The late Phillip Frame in terms of clause 13 of his will, dated 24 July 1974, created the trust in respect of the residue of his estate and the income derived therefrom. After providing in clause 16(a), (b), (c) and (d) for certain payments to be made by the trustees from the income of the trust, he directed them in clause 16(f) to deal I with the balance of the income (termed 'nett income') as follows. Firstly, they were to decide and determine in what manner and to what extent the whole or any portion of the 'nett income' was to be utilised by them for the maintenance, education and reasonable pleasures of his grandchildren born or to be born of his two daughters until each grandchild attained the age of 25 years. J Secondly, the balance of the

Joubert JA

A 'nett income' not utilised by them for the aforementioned purposes was to remain undistributed by being accumulated and added to the capital of the trust (clause 16(f)). On the accepted interpretation of the will the undistributed trust income did not accrue to any potential income beneficiary of the trust. According to clause 16(g) a share of the 'nett income' of the trust was to 'accrue' to a B grandchild on attaining the age of 25 years subject to further directions not relevant to the present matter. Finally, upon a grandchild attaining the age of 50 years his or her share of the trust capital was to vest in and be paid over to him or her (clause 17(a)).

2.

C For the tax years from 1984 onwards the Commissioner levied income tax on the undistributed trust income which had neither accrued to nor been received by any income beneficiary of the trust. All the assessments in question were raised against the trust and not against the trustees. The Commissioner, however, in terms of s 95(1) of the Income Tax Act 58 of 1962 ('the 1962 Act') treated the trustees as D the representative taxpayers of the trust.

3.

In the judgment of the Court a quo (at 344F) reference is made to a lacuna in the 1962 Act to create liability for income tax in respect of the undistributed trust income as described supra. This lacuna has been partially filled by amendments introduced by the Income Tax Act E 129 of 1991 with retrospective effect to the years of assessment which commenced on or after 1 March 1986. The amendments, however, do not affect the years of assessment prior to that of 1 March 1986, ie the undistributed trust income for the 1984, 1985 and 1986 tax years is not affected by the amendments introduced by the Income Tax Act F 129 of 1991.

4.

The legal dispute between the parties concerning the validity of the levy of income tax on the undistributed trust income for the 1984, 1985 and 1986 years of assessment accordingly has to be determined according to the law as it stood before the passing of the Income Tax Act 129 of 1991. G

5.

The parties are agreed that the income tax paid by the trustees for the 1984 to 1986 years of assessment will be refunded to them should the appeal by the Commissioner fail.

At the commencement of the hearing of the appeal the Trustees were granted an order of amendment to substitute the following clause for H clause 1(b)(ii) of their notice of motion dated 25 November 1989, viz

'(ii)

to treat the applicants, in terms of s 95(1) of the Act, as the trust's representative taxpayers in respect of any income of the trust in any of the tax years in question which was not utilised in terms of clause 16(f) of the will for the benefit of the testator's grandchildren but was added to and formed part of the capital of the estate.'

I Three issues fall to be decided.

First issue. Does the 1962 Act impose on the trust per se as a taxpayer any liability for income tax on its undistributed income which does not accrue to any potential income beneficiary?'Taxpayer' is defined in s 1 as 'any person chargeable with any tax leviable under this Act . . .' (My italicising.)

Joubert JA

A The heading of s 5 is 'Levy of normal tax and rates thereof'. The relevant provisions of s 5(1) provide as follows:

'. . . there shall be paid annually for the benefit of the State Revenue Fund, an income tax (in this Act referred to as the normal tax) in respect of the taxable income received by or accrued to or in favour of

(a)

B any person . . .

(b)

any person . . .

(c)

B any person . . .

(d)

any company during every financial year of such company.'

(My italicising.) Section 5(1) is the charging section which provides for the levy of income tax in respect of taxable income received by or C accrued to any person or company during the years of assessment.

Various categories of incorporated associations and registered companies are included in the definition of 'company' in s 1.'Person' is defined in s 1 as including 'the estate of a deceased person' for purposes of the 1962 Act. Section 2(x) of the Interpretation Act 33 of 1957 assigns to 'person' an inclusive meaning comprising 'any company incorporated or registered as such under any law' and 'any body of persons corporate or unincorporate.' This statutory definition does not mention a trust.

Is a trust a legal persona? According to the Anglo-American law of trusts a trust has no legal personality. P W Duff Personality in Roman E Private Law Cambridge University Press (1938) at 206:

'Maitland showed [Collected Papers vol 3 (1911) 321-404)] that by vesting property in trustees, rather than in corporations or associations, English lawyers evaded many questions that have caused difficulty abroad.'

See R W Ryan in his unpublished Cambridge doctoral thesis entitled 'The F Reception of the Trust in the Civil Law' (1959) at 11: 'A trust is certainly not a legal person'. The position is the same in our law of trusts. See Commissioner for Inland Revenue v MacNeillie's Estate 1961 (3) SA 833 (A) at 840G-H: 'Neither our authorities nor our Courts have recognised it as a persona or entity. It is trite law that the assets and G liabilities in a trust vest in the trustee.' Consult also Braun v Blann and Botha NNO and Another 1984 (2) SA 850 (A) at 859E-H:

'In its strictly technical sense the trust is a legal institution sui generis . . .The trustee is the owner of the trust property for purposes of administration of the trust but qua trustee he has no beneficial interest therein.'

H It is clear therefore that a trust is not an incorporated company. Nor is a trust a body of persons unincorporate whose common funds are the collective property of all its members. There is also no basis for a submission that because the statutory definition of 'person' in s 1 of the 1962 Act was extended to include a deceased estate, it should by analogy I be further extended to include a trust. The conclusion is inescapable that a trust is not a 'person' within the meaning of that word in the 1962 Act.

The answer to the first issue is therefore No. In view of the nature of the second and third issues such answer is, in my judgment, not by itself conclusive of the entire declaratory order as sought by the trustees. The second and third issues still remain for determination.

Second issue. Is the trust despite its lack of legal pesonality J nonetheless

Joubert JA

A for purposes of the 1962 Act a 'taxable entity' that is liable as a 'person' for income tax in regard to its undistributed trust income which does not accrue to any potential income beneficiary?

The second issue is based on a contention advanced by Mr Levin on behalf of the Commissioner. According to The Shorter Oxford English Dictionary the word 'entity' has the following meanings: B

'1.

Being, existence, as opp to non-existence; the existence, as dist from the qualities or relations of anything.

2.

That which makes a thing what it is; essence, essential nature 1643.

3.

Concr. An ENS, as dist from a function, attribute, relation etc 1628.

4.

"Being" generally 1604.' C

The word 'ENS' means:

'Philos

a.

A being, entity, as opp to an attribute, quality etc 1614.

b.

An entity as an abstract notion 1581.'

Juridically it is well-known to refer to a natural person or a legal D persona as a being in law. A 'taxable entity' in the sense of a taxable being (as an abstract notion) other than a natural person or a legal persona would seem to be, juridically speaking, an extremely loose concept...