Pienaar Brothers (Pty) Ltd v Commissioner, South African Revenue Service and Another

• Jurisdiction: South Africa
• Judge: Fabricius J
• Judgment Date: 29 May 2017
• Citation: 2017 (6) SA 435 (GP)
• Docket Number: 87760/2014
• Hearing Date: 29 May 2017
• Counsel: M Chaskalson SC (with S Budlender) for the first respondent. W Trengove SC (with S Budlender) for the first respondent. I Semenya SC (with N Mayet and Z Gumede) for the second respondent.
• Court: Gauteng Division, Pretoria

Fabricius J:

[1] 'Tax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code.' (Justice Blackmun in United States v Carlton 512 US 26 (1994). Does this dictum apply in South African law? In this opposed application, the applicant initially sought the following E relief:

'1.

Declaring Section 34(2) of the Taxation Laws Amendment Act 8 of 2007 (the Amending Act) to be inconsistent with the Constitution and invalid to the extent that it provides that Section 44(9A) of the Income Tax Act 58 of 1962 (the ITA), which was F introduced by virtue of Section 34(1)(c) of the Amending Act, shall be deemed to have come into operation on 21 February 2007 and to be applicable to any reduction or redemption of the share capital or share premium of a resultant company, including the acquisition by that company of its shares in terms of Section 85 of the Companies Act, 1973 (Act No 61 of 1973), on or G after that date;

2.

In the alternative to paragraph 1 and in any event:

2.1

Declaring that the provisions of Section 44(9A) of the ITA did not apply to the distribution by the Applicant on 3 May 2007, to its registered shareholders at that date pro rata to their shareholding, of an amount of R29 500 000 out of H Appellant's share premium account;

2.2

Declaring, in consequence thereof, that the First Respondent's assessment of the Applicant on 13 December 2011 to secondary tax on companies (STC), in relation to a dividend cycle commencing on 23 September 2005 and ending on 3 May 2007, and to interest calculated from 1 July 2007 to the date payable (given as 5 January 2012) (the STC I assessment), was invalid; and

2.3

To the extent necessary, setting aside the STC assessment;

3.

Referring the order sought in paragraph 1 above to the Constitutional Court for confirmation.'

At the hearing of the application, Mr M Chaskalson SC suggested that I J could insert a full stop after the word 'invalid' in the first sentence of the

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first prayer, and that the remainder of the prayer was not necessary. After A the hearing, applicant's counsel provided me an amended draft order which read as follows:

'It is ordered that:

1.

To the extent necessary for the purposes of order 2 below:

1.1

Section 34(2) of the Taxation Laws Amendment Act 8 of B 2007 (the Amending Act) is declared to be inconsistent with the Constitution and invalid; and

1.2

The order sought in paragraph 1.1 above is referred to the Constitutional Court for confirmation.

2.

It is declared that:

2.1

The provisions of Section 44(9A) of the ITA did not apply to C the distribution by the Applicant on 3 May 2007, to its registered shareholders at that date pro rata to their shareholding, of an amount of R29 500 000 out of the Appellant's share premium account;

2.2

In consequence thereof, the First Respondent's assessment of the Applicant on 13 December 2011 to secondary tax on D companies (STC), in relation to a dividend cycle commencing on 23 September 2005 and ending on 3 May 2007, and to interest calculated from 1 July 2007 to the date payable (given as 5 January 2012) (the STC assessment), was invalid; and

3.

The STC assessment is declared invalid and set aside.' E

[2] First respondent's counsel, Mr Trengove SC, was not in agreement that prayer 2.2 was a competent prayer and as a result thereof further brief heads of argument in that context were requested, and supplied. With reference to Medox Ltd v Commissioner, South African Revenue Service 2015 (6) SA 310 (SCA) paras 13 – 15, it was contended that no F order by this court should result in precedent whereby taxpayers are permitted to bypass the specialist tribunal of the Tax Court in favour of a direct approach to this court. I agree.

[3] After the applicant filed its original heads of argument, it was apparently advised to file a further supplementary affidavit alleging a new G cause of action for the unconstitutionality of s 34(2) of the Taxation Laws Amendment Act 8 of 2007 (the Amendment Act) on the basis of its inconsistency with s 25(1) of the Constitution (the property clause).

[4] It was contended that the challenge to the constitutionality of s 34(2) would only arise in the event that the applicant's primary 'interpretational H argument' was rejected, and s 34(2) was held to have retroactive effect to the applicant's completed transaction. The challenge to s 34(2) was based on the fundamental right to property proceeds, on the basis that the retroactive removal of the exemption STC in para (f) of the definition of 'dividend', without adequate notice, would have amounted to a deprivation of property that was both procedurally and substantively arbitrary, and thus inconsistent with s 25(1) of the Constitution. I

[5] In the founding affidavit, applicant says that the primary purpose of this application was to declare unconstitutional and invalid a retrospective amendment to the Income Tax Act 58 of 1962 as amended (the ITA). On the basis of such invalidity, and in any event (ie even if invalidity is J

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not A established) on a proper interpretation of said amendment, the applicant sought an order that the amendment did not apply to the distribution by it to its shareholders, on 3 May 2007, of an amount of R29 500 000 in respect of which first respondent assessed it for secondary tax on companies (the STC assessment). The applicant accordingly B also sought the setting-aside of the STC assessment and ancillary relief.

Factual background

The transaction

[6] Applicant gave a lengthy explanation of the factual background and C the relevant transaction in the founding affidavit. I was informed by counsel for the parties that for purposes of their argument, the motive of the applicant to enter into the relevant transaction was irrelevant. For present purposes a summary of the facts therefore suffices, and this summary is given by applicant itself in a memorandum by its chartered D accountants to the first respondent dated 22 September 2011:

'1.

Serurubele Trading 15 (Pty) Ltd (the Taxpayer) entered into an amalgamation transaction in terms of s 44 of the Income Tax Act 58 of 1962 (the Act) in which it acquired all the assets of Pienaar Brothers (Pty) Ltd on 16 March 2007, which acquisition had effect from 1 March 2007 in terms of the Sale of Business Agreement.

2.

As part settlement of the purchase consideration the taxpayer E issued shares to Pienaar Brothers at the purchase price less the assumed liabilities, (equity consideration), which equity consideration less the par value of the shares was credited to share premium account of the tax payer.

3.

On 3 May 2007 the Board of Directors of the Taxpayer resolved, in terms of Section 90 of Companies Act No 61 of 1973 read with F Article 21A of the Taxpayer's Articles of Association, to make a distribution to its shareholders pro rata to their shareholding, of an amount of R29 500 000 out of the tax payer's share premium account (the Distribution). The applicable law on 3 May 2007 in the context of the definition of a dividend in Section 1 of the Act meant that a dividend excluded from its ambit any amount G distributed out of the share premium account (not being profits previously capitalised to the share premium account). It was Applicant's submission that as at 3 May 2007 when the distribution was made, the Distribution did not constitute a dividend as defined in the Act and no STC was therefore due and payable by the tax payer on the Distribution as the Distribution was made out of H the share premium account of the tax payer which share premium arose from the issue of ordinary shares at a premium over the par value.'

[7] In the founding affidavit applicant explained the position as follows:

'1.

Applicant was previously known as Serurubele Trading 15 (Pty) I Ltd. On 7 August 2007, it changed its name to its current name following the transactions that will be referred to.

2.

Applicant operates a business supplying and distributing personal protective clothing for use in various industries and it acquired this business on 16 March 2007 with effect from 1 March 2007 as a going concern from the company then known as Pienaar Brothers J (Pty) Ltd (OLDCO).

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3.

It was deemed necessary to introduce a Black Economic Empowerment A Equity partner into the business and accordingly OLDCO sought advice from its Attorneys pertaining to the method to be used to implement a BEE transaction. It was regarded as important that such BEE partner should be able to buy into a new company which would take over business from OLDCO, so as to ensure that the new shareholders would not be exposed to any unexpected B historical liability in OLDCO. The price of the shares to be acquired by the new partner also had to be affordable;

4.

Applicant's Attorneys advised OLDCO to apply the group restructure provisions in Section 44 of the ITA (pertaining to so-called amalgamation transactions), which will allow for the achievement of these commercial objectives in a tax efficient manner. C

5.

In March 2006 the Applicant (then called Serurubele Trading 15 (Pty) Ltd) was acquired with a view to bring a vehicle for the envisaged amalgamation transaction.

6.

Based on the advice of the Attorneys, it was envisaged that the Applicant would acquire the business from OLDCO in an amalgamation transaction and that the BEE partner would thereupon take up D an equity's taken the Applicant.

7.

The relevant agreements were drawn, company resolutions were prepared and the final Sale of Business Agreement between OLDCO and Applicant was signed on 16 March 2007, with effect from 1 March 2007.

8.

All relevant conditions precedent were...