Income Tax Case NO 9660

• Jurisdiction: South Africa
• Judge: Wunsh J
• Judgment Date: 04 September 1995
• Citation: 1997 JDR 0125 (TSpCrt)
• Docket Number: 9660
• Court: Transvaal Income Tax Special Court

Wunsh. J:

In this judgment the following expressions has the following meanings respectively:

"the Act" - the Income Tax Act 58 of 1962;

A - A complete ??? dealer.

"the Furness & Dawson cases" - the decisions of the House of Lords in which the Ramsay doctrine (enunciated and developed in inter alia Ramsay (WT) Ltd v IRC) relating to a pre-ordained series of transactions was evolved and has been applied;

B Owner ??? in D town.

"the lease" - the lease between the appellant and the provident fund;

C - Mini ??? Bank.

"paragraph (h)" - paragraph (h) of the definition of "gross income" in section 1 of the Act;

1997 JDR 0125 p3

Wunsh. J

"the properties and "the property" - the two adjacent stands in D sold by B to the appellant;

"the provident fund" - E and owner of appellant and (a dormant company)

"section 11(9) - section 11(9) of the Act;

"section 103(1)" - section 103(1) of the Act;

"the sublease" - the sublease between the provident fund and A;

"the taxable right" - the right to have improvements effected on leased land the value of which is included in the lessor's gross income in terms of paragraph (h);

"the Trust" - F - Controlled by B.

Save for conflicting contentions as to the true terms of written agreements which in their written form are common cause, there is no material dispute on the facts in issue.

A was a growing computer software company owned by B . For business reasons it was thought advisable for it to acquire its own corporate property. B had acquired two adjacent pieces of land in D Township. He approached a large merchant bank for finance for a building development. The project was too small

1997 JDR 0125 p4

Wunsh. J

for it so it referred B to C , a Mini merchant" bank involved in activities which included corporate finance and property development. The erection of a small building with a view to possible subsequent expansion was, due to external restrictions, not feasible. What was designed was a building of which the cost would exceed R800 000. B , on behalf of A. and C consulted the same attorneys with a view to structuring a financing transaction. It is not clear whether the tax advantages of the eventual scheme were sought by A or offered by C. At any rate they were an ingredient of the financial package which C offered. What was proposed to B and which he found acceptable was that the investment in the building construction would be deductible for tax purposes over a period of 10 years B calculated and was advised that the then net present value of the tax saving would be between R400 000 and R500 000 which worked out to between R40 000 and R50 000 per annum. The net after tax cost to A of securing occupation or ownership (indirectly) would be less than it would have been if it had hired the premises to be erected or if it had financed the cost, to the extent that it exceeded its own cash investment, by mean of a conventional mortgage bond. Obviously A or B wanted to have eventual ownership of the property. The building was designed by architects commissioned by B to specifications prescribed by him which were in accordance with A's special requirements. On 29 March 1993 a series of agreements were signed to mplement the proposal put forward by C and accepted by

1997 JDR 0125 p5

Wunsh. J

1. B sold to the appellant for R100 000 the two stands in D which he had purchased for R80 000 . The appellant was a dormant company owned by the provident fund which it introduced to serve as a vehicle to own the property.

2. The appellant let the property to the provident fund. The provident fund's participation in the transactions arose from the fact that its income was exempt from tax in terms of section 10(1)(d) of the Act.

The lease which was conditional on the purchase of the properties by the lessor was for a minimum period of 10 years. It was obligatory that the properties be "used for the erection of office buildings and for activities ancillary thereto and for no other purpose without the (appellant's) consent". The governing provision was that the property "shall", not "may", be used for those purposes.

The monthly rent was R1 750.

The lessee was prohibited from sub-letting the property without the lessor's consent.

Structural alterations or additions to the premises required the lessor's consent. If consent was given, the aIteration or addition had to be

1997 JDR 0125 p6

Wunsh. J

effected at the cost of the lessee which had to pay also any architect's fees.

At the termination of the lease the lessor was precluded from requiring the lessee to restore the premises to their condition at the commencement of the lease. Any additions or improvements were to be the property of the lessor without any obligation to compensate the lessee therefor.

if the premises were destroyed or damaged to such extent as to render them untenantable, the tenant, not the landlord, had the right to terminate the lease. If the premises were damaged but remained substantially tenantable, the tenant had to restore them.

The lease was stated to constitute "the sole record of the agreement between the parties in regard to subject matter (sic) thereof", continuing: "Neither party shall be bound by any express or implied term, representation, warranty, promise or the like not recorded herein.

3. The provident fund lent the appellant the R100 000 to pay the purchase price of the properties. The loan bore interest at 21%, payable monthly in advance, and was repayable on the expiry of the lease. The annual interest, it will be seen, was equal to the rent receivable by the appellant under the lease. On 15 August 1993 B "pledged" an amount of

1997 JDR 0125 p7

Wunsh. J

R100 000 to the provident fund as security for the appellant's loan indebtedness. It was a short-term pledge, required to satisfy the prudential requirements of the provident fund until the value of the properties had been enhanced by the buildings. The deed of pledge recorded that the appellant had used the R100 000 to pay the purchase price of the properties but it appears that transfer of the properties was registered only on 24 October 1983.

4. The appellant signed a consent to the subletting of the properties to to in accordance with a draft of the sublease referred to in 5.

5. The provident fund sublet the properties to A for a period contemporaneous with the main lease.

The use version was identical to that of the main lease as was the monthly rental. The sublessee was responsible for all outgoings and expenses. The sublease was conditional on the appellant acquiring the properties from B, this being a condition for the benefit of A. The following crucial provision departed from the corresponding clause in the main lease:

"7 Erection of the buildings

The sub-tenant shall be obliged to effect improvements on the property in accordance with the following provisions -

1997 JDR 0125 p8

Wunsh. J

7.1

Office buildings, together with all other buildings and facilities ancillary thereto (collectively 'the buildings') shall be erected on. the property by the sub-tenant at the sole cost and expense of the sub-tenant.

7.2

The buildings shall be erected at a cost to the sub-tenant of not less than R820 000.

7.3

The architects, contractors, quantity surveyors, construction engineers and such other consultants as may be employed or used in connection with the erection of buildings shall be selected by the sub-tenant and approved by the tenant, which approval may not be unreasonably withheld.

7.4

The fees, costs and expenses of the persons referred to in 7.3, shall form part of the cost to be borne by the sub-tenant in terms of 7.1.

7.5

At all reasonable times during the erection of the buildings, the tenant shall be entitled to access thereto for the purpose of inspecting the work in progress; provided that the tenant shall not interfere, impede or obstruct anyone engaged in or about the erection of the buildings and the

1997 JDR 0125 p9

Wunsh. J

provisions of 18 (which gave the provident fund a right of inspection of the premises) shall apply, mutatis mutandis, in connection with any such inspection. Nothing herein contained however, shall be construed as obliging the tenant to make such inspections and it shall be the sole obligation of the sub-tenant to ensure that the buildings are completed in compliance with the provisions of this sub-lease."

The remaining material provisions of the sublease were:

"8

Main lease

8.1

The sub-tenant shall have no claim against the tenant under this sub-lease by virtue of a breach by the landlord of the main lease but the tenant shall take reasonable measures to enforce the relevant obligations of the landlord in respect of which such breach occurs.

..."

14.2

The tenant shall not be entitled to require the sub-tenant, at the termination of this lease, to restore the premises to the condition in which they were at the commencement of this lease, but -

1997 JDR 0125 p10

Wunsh. J

14.2.1

any such alteration or addition; and

14.2.2

any improvements of any kind made to the premises,

shall be the property of the landlord which shall not be obliged to compensate the sub-tenant in respect thereof.

21.1

Sole contract

This document constitutes the sole record of the agreement between the parties in regard to subject matter thereof. Neither party shall be bound by any express or implied term, representation, warranty, promise or the like not recorded herein."

6.

The provident fund granted the trust an option to purchase the share capital of and its claims against the appellant for a purchase price equal to the nominal value of the shares and the face value of the claims, subject to an adjustment account. Various warranties relating to the appellant were given. The time when the option would be exercised was governed by conflicting provisions, one saying "after the tenth\

1997 JDR 0125 p11

Wunsh. J

anniversary...