Tuck v Commissioner for Inland Revenue

• Jurisdiction: South Africa

Tuck v Commissioner for Inland Revenue
1988 (3) SA 819 (A)

1988 (3) SA p819

Citation	1988 (3) SA 819 (A)
Court	Appellate Division
Judge	Corbett JA, Van Heerden JA, Smalberger JA, Vivier JA and Boshoff AJA
Heard	May 4, 1988
Judgment	May 16, 1988

Flynote: Sleutelwoorde

B Revenue — Income tax — Income or capital accrual — Management incentive plan whereby appellant awarded stock in holding company on contingent basis while employed as managing director of local subsidiary — Delivery of stock made in ten annual instalments after retirement — C Delivery conditional upon recipient's refraining from engaging in activity in competition with holding company or any of its subsidiaries — Nature of receipt of shares — Appellant, in income tax return, asserting receipt to be partly revenue, partly capital, and proposing 50/50 apportionment — Respondent insisting that entire receipt of revenue nature and assessing taxable income accordingly — Court on D appeal holding that characterisation of receipt to be determined by asking what quid pro quo had been given for receipt — Quid pro quo having two elements:(a) service, and(b) restraint of trade — Fact that service preceded restraint not altering basic conclusion that quid pro quo comprising both elements — Similar conclusion reached by E applying principles of legal causation — As to apportionment between revenue and capital, obvious from terms of incentive plan that both service and restraint important features in quid pro quo — Not possible to infer that one element more important than other — Court concluding that 50/50 apportionment between capital and revenue thus fair and F reasonable.

Headnote: Kopnota

The appellant had been the managing director of a local subsidiary of an American company (hereafter referred to as the 'parent' company) for 28 years prior to his retirement. He had benefited from the parent company's management incentive plan in terms whereof outstanding service to the company was rewarded by the allocation of shares in the parent G company to the credit of a contingent stock award account in his name. In terms of the plan, the shares credited to the contingent award account were only distributed to the recipient after his retirement in ten approximately equal annual instalments. The recipient's entitlement to delivery of the shares was conditional upon his having refrained from participating in any business in competition with that of the parent company or any of its subsidiaries. Recipients were required to complete a questionnaire each year from which it was determined whether they were H eligible to receive the annual instalment of shares. When submitting his income tax return for the year in which he had received his first instalment of shares, the appellant had explained their origin as being partly as remuneration for services rendered and partly for being restrained from competing with the company, had submitted that half the value of the shares had been in respect of services rendered and half in respect of the restraint, and that the latter receipt had been one of a I capital nature. He had been taxed on that basis. A similar explanation and submission accompanied his income tax return for the following year when the second instalment of shares had been delivered. The respondent did not, however, accept the apportionment and, instead, included the entire receipt in his assessment of the appellant's taxable income. He also raised an additional assessment in respect of the previous year. In the letter of objection written on the appellant's behalf, his attorneys contended that the appellant's claim to only 50% of the award as being J of a capital nature had been motivated by the idea of being

1988 (3) SA p820

reasonable to the fiscus, whereas their (the attorneys') submission was that, in principle, the dominating nature of the award had been the restraint and that therefore no part of the receipt had been of a revenue nature. In the alternative, they submitted that the appellant's original apportionment as reflected on his income tax return had been fair and reasonable. A Special Court found that the entire receipt had been of a capital nature. In an appeal by the respondent to a Provincial Division, the Court found that the dominant purpose of the incentive B plan had been to reward excellent management, and held that the receipt had not been of a capital nature. In an appeal to the Appellate Division,

Held, that the characterisation of the appellant's receipt of shares could be dealt with simply: by asking what work, if any, had the taxpayer done in order to earn the receipt in question, or what had been the quid pro quo which he had given for the receipt.

The test formulated in Commissioner for Inland Revenue v Lever Bros and Another 1946 AD 441 at 450 applied.

Held, further, applying the above-mentioned test, that, according to the management incentive plan, there had been two main elements to the quid pro quo given by the appellant: firstly, there had been the element of service to the company which had so contributed to the success of the parent company that the appellant had earned the award of shares which D had been credited to his contingent award account and, secondly, there had been the element of restraint of trade, compliance with which had been a prerequisite to the appellant's receiving his annual instalment of shares over a ten-year period.

Held, further, that the mere fact that one element, viz the service, had occurred chronologically before the other, viz the restraint, could not alter the basic conclusion that the quid pro quo given by the appellant E had comprised both elements.

Held, further, applying the legal causation test in the alternative, that the appellant's excellent service had been obviously a conditio sine qua non of the ultimate receipt of the shares and had thus qualified as a cause in fact; the appellant's compliance with the restraint, too, had been obviously a contributory cause in fact, but had not introduced an independent, unconnected and extraneous causative factor of such significance as to relegate the excellent service to the F status of a mere historical antecedent or background feature.

Held, further, that since the service and restraint condition had been part and parcel of the same scheme, and it had rested with the appellant as to whether the restraint condition had been complied with or not, both factors had been causally relevant.

Held, accordingly, that the contention that the dominant feature of the award had been the restraint, and that the receipt had thus been G entirely of a capital nature had to be rejected.

Held, further, as to the apportionment of a single receipt, that in a proper case apportionment provided a sensible and practical solution to the problem which arose when a taxpayer received a single receipt and the quid pro quo contained two or more separate elements, one or more of which would characterise it as capital.

Held, further, that, while, having regard to the inherent nature of the receipt and its origin in the management incentive plan, it was not H possible to find an arithmetical basis for apportionment, that did not constitute an insuperable obstacle.

Held, further, that it was obvious from the plan that both service and restraint were important features in the quid pro quo which the employee provided in return for receiving the shares: if he did not provide the prerequisite service, he did not qualify for the award; if he failed to comply with the restraint, he forfeited the award.

Held, accordingly, since it had not been possible to infer that one element was more important than the other, a 50/50 apportionment would I be fair and reasonable. The appeal was thus allowed.

The decision in Commissioner for Inland Revenue v Tuck 1987 (2) SA 219 (T) reversed.

Case Information

Appeal from a decision in the Transvaal Provincial Division (Eloff DJP, Goldstone J and Kriegler J). The facts appear from the judgment of J Corbett JA.

1988 (3) SA p821

R S Welsh QC for the appellant: The main question is whether the accrual and receipt of the shares were of a capital nature. The first alternative question is whether the accrual and receipt were at least partly of a capital nature and, if so, whether there should be an apportionment. The second alternative question is whether the provisions of s 7A(4A), read with s 5(10), of the Income Tax Act 58 of 1962 are B applicable. The Transvaal Income Tax Special Court found in favour of the appellant on the main question. The Transvaal Provincial Division found in favour of the Commissioner on the main question and also on the question arising under s 7A(4A). Neither Court dealt with the question of a possible apportionment.

C Wyeth Laboratories (Pty) Ltd is a wholly owned subsidiary of American Home Products Corporation (a United States corporation). The appellant became Wyeth's sales manager in 1949 and its managing director and general manager in 1951. He retired in September 1979. During the 30 years of his service with Wyeth, his 'contingent award account' was credited with certain shares in American Home in terms of the D 'management incentive plan'. By the time of his retirement, 7 675 shares in American Home had been so credited. It is, however, quite clear from the provisions of the plan that at the time of his retirement, the appellant had no rights to his 'contingent award account', except 'to receive the contingent award at the time and in the form determined by the committee (of American Home), subject to the fulfilment of the E conditions prescribed herein'. The conditions on which the shares credited to the appellant's 'contingent award account' were to be delivered to him after his retirement are set out in para VI(3)(b) and para VI(4)(d) of the plan, the most...