Commissioner, South African Revenue Service v BP South Africa (Pty) Ltd

• Jurisdiction: South Africa

Commissioner, South African Revenue Service v BP South Africa (Pty) Ltd
2006 (5) SA 559 (SCA)

2006 (5) SA p559

Citation	2006 (5) SA 559 (SCA)
Case No	92/05
Court	Supreme Court of Appeal
Judge	Howie P, Streicher JA, Nugent JA, Cloete JA and Heher JA
Heard	May 3, 2006
Judgment	May 25, 2006
Counsel	P A Solomon SC (with L F Fichardt) for the appellant.; O L Rogers SC and A R Sholto-Douglas SC for the respondent.

Flynote : Sleutelwoorde B

Revenue — Income tax — Deductions — Expenditure incurred in production of income — Income Tax Act 58 of 1962, s 11(a) — Interest paid by company on loan procured at same time as payment of dividend — Whether deductible — Company having procured loan not to pay dividend but to produce income — Accordingly, interest on C loan deductible under s 11(a) of Act.

Revenue — Income tax — Deductions — Expenditure incurred in production of income — Income Tax Act 58 of 1962, s 11(a) - Lump sum rental paid in advance in respect of long leases — Whether deductible — Purpose of prepayments being to secure sites for 20 years without incurring further expenditure in respect of D them — Purpose thus being to acquire assets — Prepayments thus expenditure of capital nature — Accordingly not deductible under s 11(a) of Act.

Headnote : Kopnota

In terms of the appellant's assessment of the respondent's income tax liability for the 1993 tax year, it disallowed, as a E deduction from the respondent's income, (1) the interest payable on a loan to the respondent by its parent company which had been utilised to finance the payment of a dividend; and (2) lump sum rental paid by the respondent, in advance, for 20 years, in respect of various filling station sites. The respondent denied that the loan had been used to finance the payment of a dividend and alleged, rather, that it had been utilised as working capital. It also contended that F the lump sum rental payments constituted expenditure of a revenue nature. The respondent appealed the appellant's assessment to the Court a quo, the Cape Tax Court, and the Court overruled the appellant's assessment, finding both the interest and the prepaid rental to be deductible as expenditure incurred in the production of income, in terms of s 11(a) of the Income Tax Act 58 of G 1962.

Held, in respect of the interest on the loan, that in determining whether expenditure was incurred in the production of income, for purposes of s 11(a) of the Act, the purpose of the expenditure and what it was that the expenditure actually effected were sometimes important, if not overriding, factors. On the one hand, where a loan was procured as a means of earning income, it was H expenditure incurred in the production of income. On the other hand, where a loan was procured not as a means of producing income but for some other purposes, such as paying a dividend, it was not ex- penditure incurred in the production of income. (Paragraph [6] at 563A - E.)

Held, further, on the evidence, that the loan had not been procured in order to pay the dividend, but in order I to provide the respondent with the liquid funds required to enable it to pursue its income-earning activities. (Paragraphs [12] and [14] at 565F - G and 566A/B.)

Held, further, that the Court a quo had therefore correctly found that the purpose of the loan had been to enable the respondent to continue its income-producing activities and, consequently, that the interest on the loan was J

2006 (5) SA p560

deductible as an expense incurred in the production of income, in terms of A s 11(a) of the Act. (Paragraph [15] at 566B - D.)

Held, accordingly, that the appeal in respect of the interest on the loan had to be dismissed. (Paragraph [15] at 566D.)

Held, further, in respect of the lump sum prepaid rental, that while rental was generally an expense incurred in the production of income and was not of a capital nature, that was not always the case. (Paragraph [19] at 567C - D.) B

Held, further, that the true nature of the transaction had to be enquired into in order to determine whether a particular rental expense qualified as capital or as revenue expenditure. The purpose of the expenditure was an important factor in determining the true nature of the transaction. If the expenditure was incurred for the purpose of acquiring a capital asset for the business, it was capital expenditure. (Paragraph [21] at 568B - C.) C

Held, further, on the evidence, that by paying lump sums in respect of prepaid rental, the respondent had secured the filling station sites for a period of 20 years, ie it had acquired assets which were intended to endure for 20 years, and which were going to produce income for 20 years, without any further expenditure required in respect of the acquisition of the assets. (Paragraph [22] at 568E.) D

Held, further, that a test that had been devised for determining whether expenditure was of a capital or a revenue nature was to enquire whether the expenditure was more akin to income-producing operations of the taxpayer or whether it was more akin to the income-earning structure of the taxpayer, or to ask whether it was expenditure required to carry on a business or whether it was to establish a business. Money spent in creating an income-producing E concern was capital expenditure; it was invested to yield future profit. In the present case the respondent's purpose was to establish a base for its income-producing operations for the next 20 years. In the circumstances, the lump sum expenditures were more closely related to the income-earning structure of the respondent than its income-producing operations. They were incurred not to carry F on the business of the respondent, but to establish it, and were therefore of a capital nature. (Paragraph [23] at 568F - 569A.)

Held, accordingly, that the appeal in respect of the lump sum prepaid rental had to succeed since the respondent was not entitled to a deduction in terms of s 11(a) of the Act (but, by agreement between the parties, to a deduction in terms of G s 11(f)). (Paragraph [26] at 569H - 570A.)

The decision of Davis J in the Cape Tax Court in BP South Africa (Pty) Ltd v Commissioner for South African Revenue Service, confirmed in part and reversed in part.

Cases Considered

Annotations

Reported cases H

Southern African cases

Commissioner for Inland Revenue v George Forest Timber Co Ltd 1924 AD 516: dictum at 526 applied

Commissioner for Inland Revenue v Giuseppe Brollo Properties (Pty) Ltd 1994 (2) SA 147 (A): dictum at 152I - 153D applied I

Commissioner for Inland Revenue v Nemojim (Pty) Ltd 1983 (4) SA 935 (A): dictum at 947F - H applied

Commissioner, South African Revenue Service v Scribante Construction (Pty) Ltd 2002 (4) SA 835 (SCA): referred to

New State Areas Ltd v Commissioner for Inland Revenue 1946 AD 610: dicta at 620 - 1 and 627 applied J

2006 (5) SA p561

Secretary for Inland Revenue v Cadac Engineering Works (Pty) Ltd 1965 (2) SA 511 (A): dictum at 522B A applied

Ticktin Timbers CC v Commissioner for Inland Revenue 1999 (4) SA 939 (SCA): dicta at 943A - B, 944E - F and 944H - J applied

Turnbull v Commissioner for Inland Revenue 1953 (2) SA 573 (A): referred to.

Foreign cases B

Federal Commissioner of Taxation v Creer (1986) 65 ALR 485 (FC): followed

Hallstroms Proprietary Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634: applied

Regent Oil Co Ltd v Strick (Inspector of Taxes); Regent Oil Co Ltd v Inland Revenue Commissioners [1965] 3 All ER 174 (HL): followed

Vallambrosa Rubber Co Ltd v Farmer (Surveyor of Taxes) [1910] 5 TC 529 (1910 SC 519): referred to. C

Statutes Considered

Statutes

The Income Tax Act 58 of 1962, s 11(a) and (f): see Juta's Statutes of South Africa 2005/6 vol 3 at 2-354 and 2-356.

Case Information

Appeal from a decision in the Cape Tax Court (Davis J). The facts appear from the judgment of Streicher JA. D

P A Solomon SC (with L F Fichardt) for the appellant.

O L Rogers SC and A R Sholto-Douglas SC for the respondent.

Cur adv vult. E

Postea (May 25).

Judgment

Streicher JA:

[1] This is an appeal by the Commissioner of the South African Revenue Service (the Commissioner) against a judgment in the Cape Tax Court (the Tax Court) upholding an appeal by BP Southern Africa (Pty) F Ltd (BPSA) against the Commissioner's income tax assessment for the 1993 year of assessment. In terms of the assessment, the Commissioner disallowed the deduction from income of interest in the amount of R81 755 944 payable by BPSA in respect of a loan by its only G shareholder, British Petroleum Company plc (BP plc), and rental expenditure incurred by BPSA in respect of filling station sites of R13 483 420 (less R31 008 and R71 464). The Tax Court held that these expenditures constituted expenditures incurred in the production of income and that they were to be treated as expenses deductible from BPSA's income for the 1993 year of assessment. H

Deduction of interest

[2] BPSA markets petroleum products in South Africa. Some of the petrol that it markets is refined by South African Petroleum Refineries, a joint venture by BPSA and Shell. BP plc, the holding company of BPSA, is a company incorporated outside the Republic. It I required that dividends of profits available for distribution be declared quarterly. As at 25 March 1990 BPSA held distributable profits amounting to R682 499 575 which it would have liked to retain. BP plc, on the other hand, considered its investment in South Africa risky, wanted to take the J

2006 (5) SA p562

Streicher JA

money out and insisted that a dividend be declared. Eventually, in terms of an agreement reached with the A management of BPSA, a general meeting of the members of BPSA, on 6 August 1990, resolved that the amount of R682 499 575 be declared as a dividend and that a loan of R348 374...