Income Tax Case No: 11483

• Jurisdiction: South Africa
• Judge: Jansen J
• Judgment Date: 31 March 2006
• Docket Number: 11483
• Hearing Date: 31 March 2006
• Citation: 2006 JDR 0509 (PESpCrt)

Jansen J:

This is an appeal against the Commissioner's revised assessment in respect of the appellant's 2000/2001 tax period. The appeal involves only a matter of law. I, therefore, sat alone as stipulated by section 83(4)(c) of the Income Tax Act No. 58 of 1962.

It is common cause that the appellant from 2 November 1999 to 4 August 2000 on six occasions invested various amounts of money totalling R865 963 with one A. When making these investments the appellant concluded an acknowledgement of debt with A. Paragraph 1 of this acknowledgement of debt provides that A as debtor acknowledged his indebtedness to and in favour of the appellant as creditor. Paragraph 2 thereof provides for interest to be paid in respect of monies lent and advanced by the creditor to the debtor. Paragraph 3 provides that all payments to the creditor in terms of the acknowledgement of debt shall be appropriated firstly in reduction of interest and thereafter capital. It is common cause that the appellant withdrew three amounts of R50 000 each. It is further common cause that no interest was paid by A to the appellant.

A was sequestrated by an order of the High Court of South Africa, Eastern Cape Division, on 16 November 2000. On 31 January 2001 the appellant submitted a claim to the trustees of the insolvent estate of A. The amount of the claim was R1 166 000. It is common cause that the appellant in submitting his claim against the insolvent estate stipulated an amount of R449 036 as a claim for interest due to him. The assessments which formed the basis of this dispute were based on the claims submitted by the appellant against the insolvent estate.

It is common cause that A was operating a scheme which is known as a pyramid scheme. It was agreed by the parties that a pyramid scheme can be defined as a scheme "whereby the operator borrows money from one investor using the proceeds to pay the other investors and for personal benefit".

The only issue to be determined at this stage, as agreed by the parties, is whether interest accrued to the appellant as a result of the investments he made with A in terms of the definition of gross income in section 1 of the Income Tax Act read with the provisions of section 5. "Gross income" is defined as the total amount in cash or otherwise received by or accrued to or in favour of a resident. Section 5(1)(c) provides that subject to the provisions of the Fourth Schedule there shall be paid annually income tax in respect of the...