Solaglass Finance Co (Pty) Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa

Solaglass Finance Co (Pty) Ltd v Commissioner for Inland Revenue
1991 (2) SA 257 (A)

1991 (2) SA p257

Citation	1991 (2) SA 257 (A)
Court	Appellate Division
Judge	Botha JA, E M Grosskopf JA, Nicholas AJA, Friendman AJA and Nienaber AJA
Heard	September 13, 1990
Judgment	September 30, 1990

Flynote : Sleutelwoorde F

Revenue — Income tax — Deductions — Losses of a revenue nature — G Subsidiary company of major group acting as banker for the whole group — All surplus funds of companies in group channelled to its finance company which also made loans to other companies in group — One of the companies in group sold when it was realised that it was not viable and finance H company suffering a substantial loss in having to write off large debt owed to it — Question whether taxpayer carrying on business of money-lender or banker depending on facts of each case — Although there were features of finance company's business not normally associated with ordinary commercial money-lending business it could be regarded as such I and the capital it used was not fixed but circulating capital and loss thereof of a revenue nature — As finance company's trading activities geared to achievement of dual purpose, viz furthering interests of group and making a profit for itself, expenditure not exclusively laid out for J the purposes of trade and deduction prohibited by virtue of s 23 (g) of the Income Tax Act 58 of 1962.

1991 (2) SA p258

A Revenue — Income tax — Deductions — Income Tax Act 58 of 1962 s 23 (g) — Prohibition on deductions not laid out wholly and exclusively for the purposes of trade — Prohibition of wide import and includes losses.

Headnote : Kopnota

B The appellant company was the wholly-owned subsidiary of a public company quoted on the Johannesburg Stock Exchange which was the holding company for a group of almost 200 companies. Until about 1973 the finances of each company in the group were the responsibility of the particular company itself. In 1973 however it was decided that it would be advantageous for the financial affairs of the group if a finance company within the group secured, arranged and monitored the funds required by all the companies in the group. To this end, the appellant C company, which was dormant at that stage, was utilised. In terms of the new arrangements, subsidiary companies in the group requiring funds would apply to appellant which would provide funds by way of loans. No security for the loans was required but the companies were charged interest at varying rates depending on the financial position of the company concerned but generally 1% higher than the rate at which the appellant itself borrowed money from other companies in the group, the holding company and commercial banks. Surplus funds in the hands of the D subsidiaries were required to be placed with the appellant on a daily basis. Although initially appellant's borrowings and lendings were confined to the holding company and companies in the group, this was later extended to include staff members of companies in the group and bills were discounted for customers of trading subsidiaries in the group, in many cases with the object of enabling customers to settle their accounts with the subsidiaries. One of the companies in the group, E PGES, owed approximately R5,9 million on loan account to the appellant and was apparently irrecoverable. In 1977 the holding company concluded an agreement with a third party to take over PGES and take cession of the loan account. The consideration paid for the loan amounted to R1,4 million. The difference of R4,5 million was written off as irrecoverable and the appellant sought to deduct it from its income in the 1978 tax year as a loss incurred on the disposal of a debtor. In respect of the 1979 tax year the appellant sought to deduct an amount of R55000 being F debts written off as irrecoverable and arising from loans made to employees or ex-employees of subsidiaries and from bills discounted for customers, which bills were subsequently dishonoured and the customers placed in liquidation. The deductions were disallowed by the respondent and after its objection having been overruled the appellant appealed to a Special Court. The Special Court dismissed the appeal except in one G minor respect. In a further appeal the appellant contended that it conducted the business of a banker or money-lender or a business sufficiently similar to and analogous with such a business and that the losses were accordingly losses of floating or circulating capital and were thus deductible from its taxable income in terms of s 11(a) of the Income Tax Act 58 of 1962. The appellant contended further that the losses were not disqualified from deduction in terms of s 23(g) of the Act as they had been wholly or exclusively laid out for the purposes of trade and in any event s 23(g) did not prohibit the deduction of losses. H The respondent contended however that appellant was not conducting the business of a banker or money-lender: what it did was merely carrying on an administrative business and the income it derived was derived from the managerial functions it performed in the course thereof.

Held, that the question whether a taxpayer could be said to be carrying on the business of a money-lender or banker was to be decided on the I facts of each particular case but the following were guidelines which helped in such determination: (i) there had to be an intention to lend to all and sundry provided they were, from the taxpayer's point of view, eligible; (ii) the lending had to be done on a system or plan which disclosed a degree of continuity in laying out and getting back the capital for further use and which involved a frequent turnover of the capital; (iii) the obtaining of security was a usual though not essential feature of a loan made in the course of a money-lending business; (iv) the fact that money had on several occasions been lent at remunerative rates of interest was not enough to show that the business J of

1991 (2) SA p259

A money-lending was being carried on: there had to be a certain degree of continuity about the transactions; and (v) the proportion of the income from loans to the total income: the smallness of the proportion could not however be decisive if the other essential elements of a money-lending business existed.

Held, further, that, although the appellant did not fall within the ambit of all the guidelines referred to above and there were features of appellant's business which were not normally found in an ordinary commercial money-lending business, appellant's business could be B described as one consisting entirely of the borrowing of money and the lending of that money at a profit.

Held, accordingly, that the capital used by the appellant for that purpose was not fixed but circulating capital and the capital which it lost as a result of being unable to recover the loans was therefore of a revenue nature and correctly deductible.

Held, further, per Botha JA, Nicholas AJA and Nienaber AJA concurring, E M Grosskopf JA and Friedman AJA dissenting, that s 23(g) did apply to C the deduction of losses: the prohibition was of wide ambit and there was no indication that it was to be restricted so as not to exclude losses.

Held, further, that it was impossible to devise any precise universal test for determining whether expenditure comprised 'moneys exclusively laid out for the purposes of trade' and each case had to be decided on its particular facts.

Held, further, that in the instant case the appellant's trading activities were geared to the achievement of a dual purpose: furthering D the interests of the group's subsidiaries and thus of the group itself and making a profit for the appellant.

Held, accordingly, that the losses were hit by the prohibition in s 23(g) and could therefore not be deducted. Appeal dismissed.

Case Information

Appeal from a decision in the Transvaal Income Tax Special Court. The E facts appear from the judgment of Friedman AJA.

A J Swersky SC (with him M C Goldblatt) for the appellant referred to the following authorities: Section 11 of the Act allows deductions specified in that section to be made against income derived from the carrying on of a trade within the Republic. Section 11(a) of the Act provides for the deduction of expenditure and losses actually incurred F in the Republic in the production of the income, provided such expenditure and losses are not of a capital nature. The Act contains no definition of what is expenditure or loss of a capital nature. There is no universal test that will provide for all situations. Each case must be considered on its own merits. Generally accepted tests have been formulated over the years to decide the issue of capital or revenue. For G example: Does the expenditure form part of the cost of the taxpayer's income-earning operations, as distinct from the cost of expanding his income-producing structure? Was it a 'once-for-all' expenditure or one that was likely to recur? Did it bring an asset into existence? Secretary for Inland Revenue v Cadac Engineering Works (Pty) Ltd 1965 (2) SA 511 (A) H ; New State Areas Ltd v CIR 1946 AD 610; Atlantic Refining Co of Africa (Pty) Ltd v Commissioner for Inland Revenue 1957 (2) SA 330 (A) at 334G - H; Commissioner for Inland Revenue v African Oxygen Ltd 1963 (1) SA 681 (A) at 688A - D; 691A - B. The key to the resolution of the present case is the distinction that has to be made between fixed and what is known as floating, circulating or working capital. I Commissioner for Inland Revenue v George Forest Timber Co Ltd 1924 AD 516 at 524, 525; Stone v Secretary for Inland Revenue 1974 (3) SA 584 (A) at 595; Ammonia Soda Co v Chamberlain [1918] 1 Ch 266 at 286 - 7; Verner v General & Commercial Investment Trust [1894] 2 Ch 239 (CA). A distinction...