Commissioner for Inland Revenue v Pick 'n Pay Employee Share Purchase Trust

• Jurisdiction: South Africa
• Citation: 1992 (4) SA 39 (A)

Commissioner for Inland Revenue v Pick 'n Pay Employee Share Purchase Trust
1992 (4) SA 39 (A)

1992 (4) SA p39

Citation	1992 (4) SA 39 (A)
Court	Appellate Division
Judge	Hoexter JA, Smalberger JA, Goldstone JA, Nicholas AJA and Howie AJA
Heard	March 2, 1992
Judgment	May 22, 1992

Flynote : Sleutelwoorde

H Revenue — Income tax - Income or capital accrual — Share purchase scheme for employees — Company forming trust to implement scheme — Trust acting primarily as conduit for acquisition of shares by employees entitled to them in terms of scheme's rules — Trust not operating along accepted business lines, ie shares not bought and resold at profit but I bought when trust obliged to do so and sold when required to do so — Even if trust could be said to operate a business in broad sense, such not business carried on as part of scheme of profit-making - While possibility of profits probably contemplated, such neither purpose of company in founding the trust nor of trustees in conducting its affairs — Sole purpose of trust to place shares in hands of eligible employees — J Provision that

1992 (4) SA p40

A employees under certain circumstances forfeiting shares not intended to yield profit but rather to deter resignations — Receipts accruing to trust purely fortuitous in the sense of being an incidental by-product — Majority of Court holding that income of capital nature and accordingly not taxable.

Headnote : Kopnota

B The respondent was formed by the P group of companies under s 38(2)(b) of the Companies Act 61 of 1973 to administer a share purchase scheme for the benefit of its employees. The shares were initially allotted to the respondent by a division of the P group. The respondent in turn sold them to employees of the P group. When shares were sold to an employee the respondent held them in trust for at least five years, unless the employee C left the group prior to the expiry of the five-year period. In the event of an employee leaving prior thereto, or where an employee left at any time because of dishonesty or fraudulent conduct, he forfeited his shares. In the ordinary course payment for the shares had to be made by not later than the tenth anniversary of the date of purchase, while the price payable was the middle market price on the Johannesburg Stock Exchange at the time of acceptance of the application concerned. After the initial D allotment, the trust acquired scheme shares in one of three ways: (1) from employees who had paid for their shares and wished to realise their holdings; (2) as a result of their forfeiture by employees; and (3) by purchase on the open market. The price payable for the shares under method (1) was the then current middle market price, while under method (2) it was the amount of share debt owed by the employee concerned. This inevitably meant that the trust made a profit where an employee forfeited shares he had held for some time. In his assessment of the respondent's E liability for income tax in respect of the years 1982 to 1984, the appellant included the profits made by the respondent on the sale of shares in those years. After an unsuccessful objection that these profits constituted receipts of a capital nature, the respondent appealed to the Cape Income Tax Special Court, which upheld the appeal and set aside the Commissioner's decision to 'assess the respondent on the basis that its profits and losses constitute gross income'. Leave having been granted by the Special Court, the appellant appealed directly to the Appellate F Division, the issue being whether the profits made by the respondent in the above-mentioned tax years were receipts of a capital nature (in which case they were not taxable) or of a revenue nature (in which case they were).

Held (per Smalberger JA; Goldstone JA and Howie AJA concurring), that in a matter such as the present the appropriate test was a well-established one: the receipts were revenue if they derived from 'an operation of G business in carrying out a scheme for profit-making', and non-revenue if they did not.

Held, further, that the application of this test involved a consideration of the objectives of the taxpayer (the respondent) and what its purpose or, if there was more than one, what its dominant purpose was.

Held, further, that whether the respondent had been 'operating a business' had to be determined by applying ordinary common sense and business standards.

H Held, further, that it appeared from the facts that the respondent operated primarily as a conduit for the acquisition of shares by employees entitled to them in terms of the scheme's rules, and not along accepted business lines: shares were not bought and resold at a profit but bought when the respondent was obliged to do so and sold when it was required to do so.

Held, further, that in view of the constraints placed upon the trustees in dealing with the shares, which were foreign to trading or business in the I accepted commercial sense, the respondent was not on a common-sense approach carrying on a business by trading in shares.

Held, further, that, even if the trust could be said in a broad sense to have been conducting a business, it was not a business carried on as part of 'a scheme for profit-making': while they might have contemplated the possibility of profits, it was never the actual purpose of either the founding company or the trustees to carry on a profit-making scheme, but J rather to place shares in the hands of eligible employees.

1992 (4) SA p41

A Held, further, that a different conclusion might have been justified had the making of profits been inevitable, but that this was not so in the instant case where the profit factor was influenced by a number of variables: this was proved by the fact that the scheme showed a loss in the 1985 year of assessment.

Held, further, that inasmuch as any receipts accruing to the trust were purely fortuitous, in the sense of being an accidental by-product, and therefore non-revenue, they were accruals of a capital nature falling outside the definition of 'gross income' in the Income Tax Act and thus B not subject to tax.

Held, further, that the view that the shares held by the respondent from time to time constituted floating capital which did not on realisation amount to receipts of a capital nature was also disposed of by the finding that it was never the intention of the founder of the respondent or of the trustees that the respondent should carry on business by trading in shares for profit: where no trade was conducted there could be no floating C capital. Appeal dismissed. (Hoexter JA and Nicholas AJA dissenting.)

Case Information

Appeal from a decision in the Cape Income Tax Special Court (Tebbutt J). The facts appear from the judgment of Nicholas AJA.

M Seligson SC (with him L S Kuschke SC) for the appellant referred to the following authorities: Rennie NO v Gordon and Another NNO 1988 (1) SA 1 (A) D at 20B-C; Goolam Ally Family Trust t/a Textile, Curtaining and Trimming v Textile, Curtaining and Trimming (Pty) Ltd 1989 (4) SA 985 (C) at 988D-I; Honoré South African Law of Trusts 3rd ed at 253; Secretary for Inland Revenue v Trust Bank of Africa Ltd 1975 (2) SA 652 (A) at 669F; Secretary for Inland Revenue v Rile Investments (Pty) Ltd 1978 (3) SA 732 (A) at 737; Commissioner for Inland Revenue v Malcomess Properties E (Isando) (Pty) Ltd 1991 (2) SA 27 (A); Commissioner for Inland Revenue v African Oxygen Ltd 1963 (1) SA 681 (A) at 691A; John Bell & Co (Pty) Ltd v Secretary for Inland Revenue 1976 (4) SA 415 (A) at 427; Overseas Trust Corporation Ltd v Commissioner for Inland Revenue 1926 AD 444 at 453; Commissioner for Inland Revenue v Tod 1983 (2) SA 364 (N) at 376; Barnato Holdings Ltd v Secretary for Inland Revenue 1978 (2) SA 440 (A); F Sekretaris vir Binnelandse Inkomste v Aveling 1978 (1) SA 862 (A); ITC 1413 (1986) 48 SATC 167 (C); ITC 1450 (1989) 51 SATC 70 (N).

D Meyerowitz SC for the respondent referred to the following authorities: Overseas Trust Corporation Ltd v Commissioner for Inland G Revenue 1926 AD 444 at 453; Commissioner for Inland Revenue v Stott 1928 AD 252 at 261; De Beers Holdings (Pty) Ltd v Commissioner for Inland Revenue 1986 (1) SA 8 (A) at 30E-I; Commissioner for Inland Revenue v Strathmore Exploration and Management Ltd 1956 (1) SA 591 (A) at 597C-H; ITC 1208 (1974) 36 SATC 80 (R) at 83; Matla Coal Ltd v Commissioner for Inland Revenue 1987 (1) SA 108 (A) at 128H-129B; Berea West Estates (Pty) Ltd v Secretary for Inland Revenue 1976 (2) SA 614 (A) at 628A, 630D, H 634A; Malone Trust v Secretary for Inland Revenue 1977 (2) SA 819 (A) at 826D-H, 827C, 827H; Crowe v Commissioner for Inland Revenue 1930 AD 122 at 132; Commissioner for Inland Revenue v Paul 1956 (3) SA 335 (A) at 340H-341B, 344E-H; Secretary for Inland Revenue v Trust Bank of Africa I Ltd 1975 (2) SA 652 (A) at 668H-669G; Secretary for Inland Revenue v Rile Investments (Pty) Ltd 1978 (3) SA 732 (A) at 737D; ITC 1450 (1989) 51 SATC 70 (N); ITC 1413 (1986) 48 SATC 167 (C).

Cur adv vult.

J Postea (May 22 1992).

1992 (4) SA p42

Judgment

A Nicholas AJA:

This is an appeal by the Commissioner for Inland Revenue ('the Commissioner') against a decision of the Cape Income Tax Special Court. The case concerned the liability to normal tax of profits made by Pick 'n Pay Employee Share Purchase Trust ('the Trust'). This was established by the Pick 'n Pay group of companies pursuant to the B provisions of s 38(2)(b) of the Companies Act 61 of 1973 to administer a share purchase scheme for the benefit of employees of the group.

In his determinations of the Trust's liability for normal tax in respect of the 1982-1984 years of assessment, the Commissioner included the following profits on the sale of shares, namely,

C Year of assessment	Profit
1982

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