Hicklin v Secretary for Inland Revenue

• Jurisdiction: South Africa
• Judge: Trollip JA, Muller JA, Diemont JA, Galgut AJA and Botha AJA
• Judgment Date: 09 November 1979
• Citation: 1980 (1) SA 481 (A)
• Hearing Date: 20 September 1979
• Court: Appellate Division

Trollip JA:

B This is an appeal by the appellant taxpayer, under the new s 86A of the Income Tax Act 58 of 1962 ('the Act'), against the decision of the Transvaal Income Tax Special Court. Leave to appeal direct to this Court was granted by the learned President of that Court under s 86A (5).

The problem raised by the appeal is whether or not the Secretary C (respondent) justifiably invoked the tax avoidance provisions of s 103 of the Act for the purpose of attributing liability to appellant for tax on part of the distributable profits of a dormant, private company of which he had been a shareholder. To solve that problem the facts giving rise to the appeal have to be canvassed in some detail. But first, before doing D that, a few observations on the new appeal procedure under s 86A. It was introduced into the Act by s 24 (1) of Act 103 of 1976.

The old s 86 is not applicable to this appeal because the judgment of the Special Court was given after s 86A became operative - see ss 86 (6) and 86A (1). In terms of s 86 an appellant was bound by the facts reasonably found by the Special Court; he could only assail its determination as E being erroneous in law on a stated case setting out those facts. Under s 86A, on the other hand, an appellant has a full right of appeal 'against any decision of that court' (ss (1)), ie, on fact or law or both, on the full record of the proceedings (ss (17)). The appeal is therefore a re-hearing of the case in the ordinary, well-known way in which this F Court, while paying due regard to the findings of the Special Court on the facts and credibility of witnesses, is not necessarily bound by them. Contrast this new approach under s 86A with that of this Court under s 86 in, eg, Secretary for Inland Revenue v Geustyn, Forsyth and Joubert 1971 (3) SA 567 (A) at 577 and Secretary for Inland Revenue v Gallagher 1978 (2) SA 463 (A) at 473H - 474C. They were cases similar to The present one. G In the present case the Special Court made no findings as to the demeanour or credibility of the witnesses who testified before it. It determined the issues on the admitted facts and the probabilities. This Court is therefore in as good a position as it was to make its own findings of fact where necessary. Section 86A is silent about the powers of this Court in H such an appeal. Contrast that with the powers which are expressly conferred on it by s 86 (1) in an appeal under that section. Manifestly the intention was that under s 86A this Court is to have those general powers that are conferred upon it by s 22 of the Supreme Court Act 59 of 1959.

The relevant facts in this appeal can be summarized as follows:

1. Appellant and two others, P du T Viljoen and G W Milroy, were the shareholders and directors of a company called Reklame Bestuur (Edms) Bpk ("Reklame"). It was registered on 4 March 1968 with an authorized

Trollip JA

capital of R3 000 comprising 3 000 shares of R1 each of which 2 880 were issued. They were held thus:

P du T Viljoen	2 130 shares	(73,96 per cent)
G W Milroy	510 shares	(17,71 per cent)
Appellant	240 shares	(8,33 per cent)

Reklame's main activity was the management of another company, Adverto (Pty) Ltd ('Adverto'), an advertising agency, in which the above-mentioned B shareholders were also interested. Reklame itself acquired 40 per cent of the shares in Adverto. It also acquired other interests but these were not important.

2. From Reklame's inception its income or profits were retained for use as working capital for Adverto or for investment if a suitable opportunity C therefor arose. No dividends were declared or paid out. By 1 March 1971 these accumulated, undistributed profits ('distributable profits') amounted to some R97 000. They were not at any stage subjected to undistributed profits tax under the Act since they apparently were within the exemption mentioned in s 50 (f) as amended from time to time.

D 3. With effect from 1 March 1971 Reklame and Adverto sold their businesses to a new company in which an overseas advertising agency, appellant and his two co-shareholders acquired shares. Reklame was to receive R150 000 for the sale of its business. This was a capital accrual and shown on its balance sheets as a 'non-distributable reserve'. The new company took over E the name of Adverto in order to retain the good-will attaching to that name. I shall refer to this company as 'the new Adverto'. The old Adverto changed its name to P Vilijoen Advertisers (Pty) Ltd ('Viljoen Advertisers'). This latter company then apparently became the wholly-owned subsidiary of Reklame. Reklame's balance sheet of 28 February 1972 shows F an investment by it of 4 000 R2 shares in Viljoen Advertisers at a cost of R100 000. In consequence of these transactions both Reklame and Viljoen Advertisers became dormant companies. Thereafter Reklame borrowed money from Viljoen Advertisers. During the year ended 28 February 1973 the amount was R48 093; as at 28 February 1974 it totalled R80 342; and by 31 G December 1974 it amounted to R94 742. The note on the balance sheet of 28 February 1974 says that it was an interest-free loan repayable when funds became available.

4. From time to time after the transactions mentioned in the preceding paragraphs appellant and his co-shareholders caused Reklame to make interest-free and unsecured loans to them. From the balance sheets it H appears that the following amounts were lent during the periods ending on the dates indicated.

	29.2.72	28.2.73	28.2.74	31.12.74	Totals
P du T Viljoen	R28 031	R29 801	R58 213	R21 744	R137 789
G W Milroy	6 872	6 981	13 938	5 206	32 997
Appellant	3 303	3 212	6 559	2 450	15 524
Totals	R38 206	R39 994	R78 710	R29 400	R186 310

The amounts of the loans were roughly proportioned to the shareholding of each of them in Reklame. The shareholders were also directors of

Trollip JA

Reklame but, since it was a private company, such loans were permissible under s 70 (1) (a) of the Companies Act 46 of 1926, and its successor, s 226 (1) of the present Companies Act 61 of 1973.

A 5. The shareholders, in causing Reklame to make these loans to them, probably did not consciously or deliberately use its distributable profits for the purpose but used any sources of money that happened to be available in Reklame at the time. There were other such resources: the amounts paid from time to time by the new Adverto in respect of the R150 B 000 and the loans from Viljoen Advertisers. Indeed, appellant indicated in his evidence that Reklame's distributable profits, which had become available prior to March 1971, were not used for that purpose. He said that during the year ending 29 February 1972 they 'had been invested in various assets... had been used as capital'. This probably refers to C Reklame's investment in Viljoen Advertisers. As at 31 December 1974 the new Adverto had paid R92 957 (ie the R150 000 less R57 043 still owing according to the balance sheet of that date). At that date the loans from Viljoen Advertisers amounted to R94 742. These two sources therefore totalled R187 699 and the loans to the shareholders R186 310. It is therefore by no means clear that the loans to shareholders came wholly or D even mainly from Reklame's distributable profits prior to 1975.

6. At the annual general meeting of Reklame on 30 July 1973, attended by appellant and his co-shareholders, they resolved that a dividend of R30 000 should be paid out of its distributable profits. The dividend was E obviously to be set-off against the shareholders' loans. A draft balance sheet of 28 February 1974 reflected the proposed reduction in the loans. However, the resolution was not implemented. The shareholders as directors subsequently decided not to pay or give effect to the payment of the dividend. The balance sheet was accordingly altered. The directors' report for the year ending 28 February 1974 stated:

F 'Despite the fact that it was recommended at our previous annual general meeting that the company pay a dividend in the year under review, it was decided that, because of the money market generally, this recommendation would not be carried out and no dividend was paid. There is, however, the intention to pay a dividend when matters improve.'

That, however, did not truly reflect the real reason or intention of the G shareholders. According to appellant and the major shareholder, Viljoen, the real reason for not proceeding with the dividend payment was that the shareholders would have become liable to income tax on it. They therefore abandoned all intention of declaring and paying dividends out of the H distributable profits for the foreseeable future ('unless something unforeseen happened'). And indeed thereafter no dividends were declared while they still controlled Reklame.

7. According to Reklame's balance sheet of 31 December 1974 its financial position was this:

Issued share capital	R2 880
Non-distributable reserve	150 000
Distributable profits	96 906
Loan from Viljoen Advertisers	94 742
	R344 528

Trollip JA

Investment in Viljoen Advertisers	100 000
Loan levy	1 275
Balance due by the new Adverto for purchase of business	57 043
Loans to directors (shareholders)	186 310
	R344 628
	100
Less current liabilities	R344 528

B 8. The difficulty confronting appellant and the...