INCOME TAX IN SOUTH AFRICA

CASES & MATERIALS

Fourth Edition
INCOME TAX IN SOUTH AFRICA
CASES & MATERIALS
Fourth Edition

RC Williams
BA LLB (Cape Town) LLM (London) H Dip Tax (Wits) PhD (Macquarie)
Attorney, Notary and Conveyancer of the High Court of South Africa
Professor in the Faculty of Law, University of KwaZulu-Natal, Pietermaritzburg

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 PREFACE TO THE FIRST EDITION

The Income Tax Act 58 of 1962 – garbled, verbose, contradictory, chaotically structured,
conceptually barren and silent on fundamental issues – would be incomprehensible
without extensive judicial interpretation. A heavy burden has thus fallen on the courts to
interpret the Act and shape the law.
A commensurately heavy burden falls on students and practitioners of income tax who
must devote much time to the study of case law, both domestic and foreign. The volume
of South African case law alone is daunting, and there is the added difficulty that many
judges have allowed themselves to be mesmerised by the ipsissima verba of the Income
Tax Act instead of searching for principled and practical interpretations that draw on
the collective wisdom of law, accountancy, economics and sound business practice. This
blinkered outlook has retarded the development of our tax jurisprudence.
My primary objective in this work has been to assist students of income tax, including
those studying at post-graduate level, not just to understand each judicial decision in
isolation, but to gain insight into underlying (often unarticulated) general principles,
and to grasp the inter-relationship between the Income Tax Act and the principles of
common law. To this end, I have appended explanatory notes to many of the cases.
I have also tried to structure this work as a quick and convenient reference for
attorneys, accountants, advocates and other professional and businesspeople.
I have taken minor liberties with the original text of the material by standardising case
references, citations, abbreviations and punctuation, and by moving case and literary
references from the text into footnotes.
I thank my publishers, LexisNexis for valuable assistance and efficiency in the
production of this work.

RC Williams
Pietermaritzburg
May 1995

v
 PREFACE TO THE FOURTH EDITION

This work has been revised and updated to include significant reported decisions of the
Tax Court and the Superior Courts as at 30 September 2015. I thank my publishers,
LexisNexis, for their valuable assistance in the production of this new edition.

RC Williams
Pietermaritzburg
September 2015

vi
 CONTENTS

Page
Chapter 1 Income tax in perspective and the interpretation of fiscal legislation .. 1
Chapter 2 Residence .................................................................................................. 15
Chapter 3 Source........................................................................................................ 37
Chapter 4 Receipts and accruals ............................................................................... 99
Chapter 5 Income: the general concept.................................................................... 189
Chapter 6 Trading or carrying on business and schemes of profit-making ........... 221
Chapter 7 Capital receipts and accruals ................................................................... 353
Chapter 8 Statutory inclusions in gross income ....................................................... 367
Chapter 9 Deductions: general principles; assessed losses of prior years.............. 417
Chapter 10 Capital expenditure and losses ……………………………..................... 535
Chapter 11 Statutory deductions and allowances....................................................... 577
Chapter 12 Trusts......................................................................................................... 635
Chapter 13 Farming ..................................................................................................... 649
Chapter 14 Tax avoidance and evasion ...................................................................... 685
Table of cases ................................................................................................................. 737
Tax court decisions ........................................................................................................ 751

ix
 1
INCOME TAX IN PERSPECTIVE AND THE
INTERPRETATION OF FISCAL LEGISLATION

§ Page
1 What is a tax? ............................................................................................................ 1
[1] South African Reserve Bank v Shuttleworth (Constitutional Court) .......... 2
2 Fiscal legislation is subordinate to the Constitution .............................................. 3
[2] First National Bank of SA Ltd t/a Wesbank v CSARS ................................. 3
[3] South African Reserve Bank v Shuttleworth (Constitutional Court) .......... 3
3 Income tax in perspective ....................................................................................... 3
[4] Canadian Royal Commission on Taxation Report (1966) .......................... 3
[5] Downing, Taxation in Australia .................................................................... 4
[6] The Asprey Report – the desiderata of an effective income tax system ...... 4
[7] Allan, ‘The Theory of Taxation’ ................................................................... 5
[8] Eisenstein, ‘Ideologies of Taxation’ .............................................................. 5
[9] The Asprey Report – a comparison of various different taxes .................... 6
4 The interpretation of fiscal legislation ................................................................... 8
[10] Natal Joint Municipal Pension Fund v Endumeni Municipality ................. 9
[11] CSARS v Bosch ............................................................................................... 14

§1 What is a tax
The question – what is a ‘tax?’ – can arise in many contexts. Of particular significance in
South Africa is that the Constitution prescribes the procedure that must be followed in
order to enact a ‘money bill’. If a tax is imposed without parliamentary approval for the
relevant ‘money bill’ by way of the constitutionally prescribed process, the resultant
charge is unconstitutional and therefore invalid. A major difficulty in this regard is to
distinguish a ‘tax’ (whose main purpose is the raising of revenue for the fiscus) from a
regulatory measure which has the incidental effect of raising revenue for, as Mosen-
eke DCJ said in his judgment in South African Reserve Bank v Shuttleworth, quoted below,
‘Not every duty, levy, charge or surcharge that raises national revenue is a national tax.’
The cardinal and undisputed principle, however, as Moseneke DCJ said, is that, ‘It is
plain that in our jurisdiction a decision or law that purports to impose a tax will be
invalid to the extent of its inconsistency with the limits imposed by the Constitution or
other law.’
A charge is not a ‘tax’ (and therefore does not have to be imposed by law in accordance with the
constitutional requirements for a money bill if the dominant purpose of the measure was not to raise
revenue, but some other purpose.
2 Income Tax in South Africa: Cases & Materials

[1]
South African Reserve Bank v Shuttleworth
[2015] ZACC 17
Shuttleworth, a South African entrepreneur, emigrated in 2001to the Isle of Man. In
terms of South Africa’s exchange control regulations, capital in excess of R750 000 could
not be transferred out of the country without the authorisation of the South African
Reserve Bank. Shuttleworth applied to transfer out of the Republic approximately R2.5
billion and the Reserve Bank, purporting to act on a determination by the Minister of
Finance, imposed an ‘exit charge’ of 10% on the capital to be exported. Shuttleworth
paid this amount under protest and challenged the constitutionality of the exit charge
on the ground that it constituted a ‘tax’ and that it had been imposed in a manner not
permitted by the Constitution or the applicable statute. The High Court held that the
exit charge was not a revenue-raising measure and had been lawfully imposed. The Supreme
Court of Appeal reversed that decision, holding that the exit charge was indeed a tax and
that it was unconstitutional and therefore invalid because it had not been imposed in
accordance with the procedure that the Constitution prescribes for a ‘money Bill’. In a
further appeal, the Constitutional Court reversed the decision of the Supreme Court of
Appeal and held that the exit charge was not a tax and had been lawfully imposed because
(see paras [55] and [57], below) the dominant purpose of the measure was not to raise revenue;
its avowed purpose was to curb or regulate the export of capital from South Africa.
Moseneke DCJ: (giving the majority judgment; footnotes omitted):
[42] A blissful starting point would be to affirm that the power to tax residents is an incident of,
and subservient to, representative democracy. The manner and the extent to which national
taxes are raised and appropriated must yield to the democratic will as expressed in law. It is the
people, through their duly elected representatives, who decide on the taxes that residents must
bear. An executive government may not impose a tax burden or appropriate public money with-
out due and express consent of elected public representatives. That authority, and indeed duty,
is solely within the remit of the Legislature . . . It is plain that in our jurisdiction a decision or
law that purports to impose a tax will be invalid to the extent of its inconsistency with the limits
imposed by the Constitution or other law.
[47] So the recurring question is: how does one distinguish a regulatory charge from a tax that
may be procured only through a money Bill?
[48] . . . the seminal test is whether the primary or dominant purpose of a statute is to raise
revenue or to regulate conduct. If regulation is the primary purpose of the revenue raised under
the statute, it would be considered a fee or a charge rather than a tax. The opposite is also true.
If the dominant purpose is to raise revenue then the charge would ordinarily be a tax. There are
no bright lines between the two. Of course, all regulatory charges raise revenue. Similarly, “every
tax is in some measure regulatory.”
[49] Since the 1950s, in a small trickle, our courts have pronounced on whether certain statutes
authorised a tax or regulatory charge. None of the cases is on all fours. Most of the decisions
plainly shy away from defining the word “tax” because it defies precise description outside the
context of a specific statute and its purpose. For example, Ramsbottom J in Permanent Estate and
Finance declined to define the term “tax” and rather listed features that would make a tax easily
identifiable: (i) when the money is paid into a general revenue fund for general purposes; and
(ii) when no specific service is given in return for payment. In that case he found the money
paid by a township developer not to be a tax because it would be re-invested in the infrastructure
of the township, and the power to impose the charge was reasonably required to carry out the
object of that statute.
[50] In Israelsohn v CIR, a taxpayer complained that a punitive super tax was not a tax because its
purpose was not to raise revenue but to punish. The Appellate Division held the measure to be a
tax because it was subject to the general machineries of tax assessment and collection. . . .
[51] In Maize Board, the Court held a levy not to be a tax, in part because it was not imposed on the
public as a whole or on a substantial part of it. The revenues were not utilised for public benefit
as only a few would benefit and a large portion of the revenue was used to defray administrative
costs. More recently, in Gaertner, this Court examined the primary and secondary purposes of
 Income tax in perspective and the interpretation of fiscal legislation 3

custom and excise duties, concluding that their primary function is “to ensure a constant stream
of revenue for the State, with a secondary function of discouraging consumption of certain
products”. The Court concluded that although the regulatory aspect of customs and excise legis-
lation served an important public purpose, the statute was “essentially a fiscal piece of legisla-
tion”.
[52] None of our cases disavow the obvious need to identify the dominant object of a statute in
order to typify it as fiscal or regulatory.. . . In the end it boils down to whether the dominant
object of the enactment was to raise revenue to fund the State and its public operations or to
regulate public conduct by charging a fee or levy.
[53] Here we are dealing with exchange control legislation. Its avowed purpose was to curb or
regulate the export of capital from the country. . .
[55] The exit charge was not directed at raising revenue. The uncontested evidence of the Min-
ister is that the exit charge was part of the regulation directed at easing in the dismantling of
exchange controls.
[56] There are other factors that also point away from revenue-raising. The charge was imposed
on a discrete portion of the population. Only those who had capital to externalise in excess of
R750 000 were to be affected.
[57] The Supreme Court of Appeal was in error when it concluded that the dominant purpose
of the exit charge was to raise revenue and it had to be subjected to the requirements of section
75 of the Constitution.
[64] . . . . . Not every duty, levy, charge or surcharge that raises national revenue is a national
tax.

§2 Fiscal legislation is subordinate to the Constitution

Fiscal legislation, no less than other legislation, is subordinate to the Constitution.

[2]
First National Bank of SA Ltd t/a Wesbank v CSARS
2002 (4) SA 768 (CC)
Ackermann J: (giving the judgment of the court):
[It is] necessary to emphasise that even fiscal statutory provisions, no matter how indispensable
they may be for the economic well-being of the country – a legitimate governmental objective of
undisputed high priority – are not immune to the discipline of the Constitution and must con-
form to its normative standards.

[3]
South African Reserve Bank v Shuttleworth
[2015] ZACC 17
Moseneke DCJ (giving the majority judgment):
It is plain that in our jurisdiction a decision or law that purports to impose a tax will be invalid to
the extent of its inconsistency with the limits imposed by the Constitution or other law.

§3 Income tax in perspective

[4]
Canadian Royal Commission on Taxation Report (1966)1
A tax system can be judged from different points of view. Is the system fair? Does it contribute as
much as possible to the growth and stability of the economy? Are the rights and liberties of the
________________________

1 Vol 1 at p 3.
4 Income Tax in South Africa: Cases & Materials

individual protected? Does it help to strengthen the federation? These questions reflect not only
the many facets of taxation but also what we believe to be the principal objectives that Canadians
wish to realize through their tax system. They want equity, more goods and services, full
employment without inflation, a free society and a strong, independent federation.
Evaluating an existing tax system or designing a new tax system is complicated because we seek
to realize all of these objectives simultaneously and they are frequently in conflict. In trying to
achieve one objective more fully, another is less adequately realized. For example, adopting a
particular tax provision might increase the rate of economic growth. However, the same provi-
sion might also reduce the fairness of the system by providing some group of individuals with a
tax advantage relative to others in the same circumstances. Similarly, making a tax system more
equitable may necessitate increased complexity in the tax law. This greater complexity may mean
that fewer individuals know and understand the law so that individual rights and liberties are
jeopardized.

[5]
Downing, Taxation in Australia2
Taxation changes the income or wealth at the disposal of private individuals and firms
and hence the level of their expenditure. By varying tax revenues relative to public expenditure
– that is, by varying the size of their current surplus or deficit – governments can contribute
to the avoidance of unemployment on the one hand and of inflation on the other. This they
can do by attempting to stabilize total expenditure in the economy at a level that will just
absorb the production, valued at stable prices, which the economy is capable of achieving – re-
ducing private expenditure through higher taxes and/or reducing government expenditure
when total expenditure threatens to cause inflation, and conversely when there is a danger of
unemployment.

[6]
The Asprey Report – the desiderata of an effective income tax system
(Full Report of the Taxation Review Committee under the Chairmanship of Mr Justice
KW Asprey).3
3.19 After equity, simplicity is perhaps the next most universally sought after of qualities in
individual taxes and tax systems as a whole: like fairness it is a word that, in this context,
points to a complex of ideas.
3.20 Two of these are explicitly stated in the Committee’s terms of reference. A tax will be
called simple, relatively to others, if for each dollar raised by it the cost of official admin-
istration is small, and if the ‘compliance costs’, the costs in money and effort of all kinds
to the taxpayer, are also small. These two ideas are of course connected, and add up to
much the same as the ancient canon of certainty. Both costs will be the less if assessor and
assessed can each establish with certainty what is due: uncertainty entails the costs of con-
sultation with experts and sometimes the yet greater costs of litigation. Both kinds of cost
are increased, and certainty is endangered, when a tax, whether in the interests of equity
or of efficiency, requires the drawing of fine distinctions between what is and what is not
liable, and when these distinctions involve such uncertain ideas as ‘purpose’ or ‘value to
the recipient’. Then the legal definitions get longer and longer and beyond the compre-
hension of those untrained in the law, and the relevant facts in particular cases become
more and more disputable.
3.21 Two further aspects of simplicity require specific mention here. First, when (as is often
unavoidable) a quite complex operation is needed before the administrators can make
the assessment or the taxpayer can ascertain his liability, it is desirable that the tax be such
that the taxpayer, for private purposes unconnected with tax, already needs to perform
such operations. A tax on company income may be fairly regarded as a simple tax if the
________________________

2 Melbourne University Press, 1984.

3 Australian Govt Publishing Service, 1975.
 Income tax in perspective and the interpretation of fiscal legislation 5

company already calculates its income or profits on the same or very similar basis. A tax
on personal income is not a simple tax if it be so structured that many taxpayers who
would not otherwise wish (or without hired help be able) to keep accounts at all, have to
preserve many records and learn sophisticated accounting. The point, though obvious, is
often forgotten.
3.22 A second observation is perhaps even more obvious and even more frequently forgotten.
The fewer, per million dollars raised, are the individuals or organisations from whom tax
is collected the simpler is a taxation system. The sheikdom that can raise all the revenue it
requires (and maybe much more) from a single tax on a single oil company has what is
unquestionably the simplest tax system of all.

[7]
C M Allan, ‘The Theory of Taxation’4
Most descriptions of the aims of taxation start by saying that taxation is required to finance
government spending. This is misleading. If that were all that was required of taxation, a benevo-
lent government would abolish taxation and finance all its expenditure by printing money or
borrowing it (or simply increasing the deficit). Of course, this would be inflationary in all likely
circumstances and of course the financing of government expenditures is an incidental role of
taxation. The aim of taxation is to reduce private consumption and private investment so that
the government can provide social goods and merit goods and subsidise the poor without caus-
ing inflation or balance-of-payments difficulties . . .
The basic function of taxation, then, is to reduce the demands made by the private sector on the
country’s productive capacity.

[8]
Louis Eisenstein, ‘Ideologies of Taxation’5
At times, there is much to be said for stating the obvious. And so I start with what seems beyond
dispute. Our taxes reflect a continuing struggle among contending interests for the privilege of
paying the least. I am not unaware that others have a loftier view of the matter. They prefer to
believe that our tax laws are usually inspired by more generous motives which are then insidi-
ously subverted for some unworthy purpose. The triumph of a special interest is considered an
unfortunate deviation from the general rule. However, if we are to discuss taxes intelligently, we
should gracefully abandon such pleasing illusions. In the words of an admirable conservative, we
must clear our minds of cant. Tax legislation commonly derives from private pressures exerted
for selfish ends . . .
Adams was a prominent economist who had served as a high official of the Treasury and closely
participated in the formulation of tax policy. His experiences in Washington led him to con-
clude that ‘modern taxation or tax-making in its most characteristic aspect is a group contest in
which powerful interests vigorously endeavour to rid themselves of present or proposed tax bur-
den. It is first of all, a hard game in which he who trusts wholly to economics, reason, and justice,
will in the end retire beaten and disillusioned. Class politics is of the essence of taxation.’
Mr Justice Holmes tried to make taxes less disagreeable by means of a definition. Taxes, he
wrote, ‘are what we pay for civilized society’. He even said, ‘I like to pay taxes. With them I buy
civilization’. Yet a skilful definition can only accomplish so much and no more. We may cheerful-
ly concede that taxes are an inevitable overhead of civilization, and that civilization is well worth
having and saving. But it hardly follows that everyone should be happy to bear his allotted share
of the overhead. For the question always remains whether the cost is properly allocated among
the many beneficiaries. A taxpayer may readily wonder whether he is paying too much of the
cost. If he regards his burden as excessive, he may even infer he is paying too much of that cost.
If he regards his burden as excessive, he may even infer that civilization is in a very sorry state.
Holmes also overlooked another difficulty in his effort to be helpful. Various groups are firmly
________________________

4 Penguin Books, 1971 p 23.

5 Ronald Press, New York, 1961, p 3.
6 Income Tax in South Africa: Cases & Materials

persuaded that their functions are peculiarly vital to the progress of civilization. And so they
easily reason that since their contributions are exceptional, their taxes should be small. Holme’s
aphorism on civilization is more quotable than meaningful. . . .
Whether taxes are high or low, they are a constitutional means of appropriating private property
without just compensation. The power to tax is the power to confiscate. In short, taxes are dis-
tinctly disagreeable burdens, and so there is a constant striving to place them on the backs of
others. The tax laws record the terms of the uneasy peace which happens to prevail at a particu-
lar moment. The terms periodically change as the contentions continue. I am not suggesting
that taxes raise only questions of how they are to be distributed among those disinclined to pay
them. The elected statesmen and the appointed experts who labour over taxes are troubled by
other questions as well. They have to decide how much money is to be collected and how much
money is to be spent. They have to say whether it is better to try for a surplus or to acquiesce in a
deficit. They have to consider economic effects and political consequences. But so far as tax-
payers are concerned, all such questions are subsidiary to the critical issue of distribution. As our
tax hearings repeatedly reveal, it is usually assumed that other problems may be best resolved by
shifting the burdens elsewhere. And there is no lack of ingenuity in proving the necessary ra-
tionalizations for the desired results. . . .
I turn to what I regard as the three primary ideologies. For convenience I refer to them as the
ideology of ability, the ideology of barriers and deterrents, and the ideology of equity. These
three provide a framework of reason and rhetoric within which classes, groups, and interests
assert themselves . . .
The ideology of ability declares that taxes should be apportioned in accordance with the ability
to pay them, and that ability to pay is properly measured by income or wealth. Therefore, the
ideal levies are a progressive income tax and a progressive death tax. The ideology of barriers
and deterrents takes a dim view of this conclusion. It embraces three related precepts that point
to the inevitable disintegration of private enterprise if the precepts are disregarded. Progressive
taxes dangerously diminish the desire to work; they fatally discourage the incentive to invest; and
they irreparably impair the sources of new capital. Our economic system must come to an un-
timely end if private capital cannot accumulate and private initiative is destroyed. The three
precepts merge into a more general perception of impending disaster. Progressive taxes are
critically viewed as barriers and deterrents to the economic growth and stability of the nation.
Even if the system is not on the verge of collapse, the barriers and deterrents must be rapidly
removed. Otherwise the system must eventually decline and decay, since neither capital nor
ambition will be available to sustain it. Finally, we have the ideology of equity. This ideology is
closely concerned with the eloquent theme of equality among equals. It maintains that those
who are similarly situated should be similarly treated, and those who are differently situated
should be differently treated.

[9]
The Asprey Report – a comparison of various different taxes
(Full Report of the Taxation Review Committee under the Chairmanship of Mr Justice KW
Asprey Australian Govt Publishing Service, 1975.)
3.30 Personal income tax. If income can be accepted as the primary feature in comparisons
between the ability to pay of individuals, it follows that, if the problems of definition and
information-collection can be solved, a personal income tax is an admirable vehicle for
fairness. An almost limitless range of provisions for horizontal equity can be introduced
into it. Any degree of progressivity can be enacted. It is indeed the only tax currently in
the tax system that is capable of raising large revenues and into the structure of which a
refined set of progressive provisions can be incorporated. To the extent, however, that
consumption represents a superior measure of ‘economic well-being’, at least for some in-
come groups, it might still be less fair than a progressive consumption tax, were such a
thing practicable. But on the whole personal income tax scores highly in terms of equity
...
3.31 By contrast . . . it must rank lowest for simplicity. Complexity is introduced when many
allowances are believed to be called for by horizontal equity; and more, when with a highly
 Income tax in perspective and the interpretation of fiscal legislation 7

progressive scale, measures have to be taken to prevent or control the transfer of incomes
from persons in high tax ranges to those lower down. As a main revenue-raiser it must fall
on almost every person with income, many of whom have little taste for or skill at form-
filling and many of whom, but for income tax, would have no need to keep financial rec-
ords. The definition of what taxable income is to include is a matter of the greatest diffi-
culty. It is a tax on which the administrators must perpetually compromise between the
expense and intrusiveness of a rigorous administration and the losses of revenue suffered
when administration is comfortably trustful. It is one too that presents the largest number
of citizens with annual temptations to evade and avoid and to suspect misbehaviour in
others.
3.32 As regards resource efficiency, personal income can certainly be made the vehicle for
deliberate non-neutralities. Considered as a neutral tax, faults can be found with it. Since
it must, in large measure, be a tax on the proceeds of work, it is not neutral between work
and not working though it shares this defect with almost every tax. Nor, as noted already,
is any general tax on income neutral between current consumption and savings. This
makes the income tax rather discouraging to growth.
3.33 Company income tax. This is a most difficult tax to appraise, especially with respect to equity,
not least because in this area the international aspects of tax are of the highest im-
portance. Equity is essentially a matter of comparative justice between individuals. Any tax
on corporations may (or may not) be fair to its owners, its employees or the purchasers of
its products; but it cannot be said either to be fair or unfair to the corporation as such.
When the tax is held to fall upon the income rights of the proprietors, its fairness will turn
upon whether the sum paid is equal to what would be paid were the income in question
simply added to the other income of these individual proprietors. Neither in Australia nor
elsewhere is this in fact often the case.
3.34 For simplicity it will rate higher than personal income tax. The problem of ascertaining the
income of a company is, in principle, no different than in the case of personal income,
but the necessary accounting procedures are likely to be, if anything, more readily available,
more fully required already for the company’s own purposes. Furthermore, though the
vast majority of companies are not large, in Australia as elsewhere a comparatively small
number among them produce the bulk of the substantial revenue this tax yields.
3.35 The efficiency of company income tax is also hard to judge. It is adaptable to deliberate
non-neutralities – almost too conveniently so. But even when neutrality is sought there are
ways in which it will probably fail; there is likely to be some discrimination between com-
panies and other types of legal organisation.
3.36 Capital gains taxes . . . The fundamental case for such a tax rests upon equity. It is almost
universally agreed that capital gains (when ‘real’ and not simply the result of inflation) are
so closely akin to income in its everyday sense that equity requires that they be taxed if in-
come is. By the test of fairness, therefore, a capital gains tax has merit, in principle, as a
supplement to personal income tax. On the other hand it must be a tax of great complex-
ity, and efforts to bring it within the bounds of administrative practicability must lead to
some evaporation of its equitable advantages. It is a tax not without attractions in terms of
resource efficiency. When capital gains are untaxed but income gains are, investments in
the kinds of asset on which the returns come (or can be arranged to come) in the form of
capital appreciation will be made relatively the more profitable. A misallocation of re-
sources is therefore likely which the tax serves to correct.
3.37 Estate and gift duties. These taxes may be taken together, since . . . they lead into a tangle of
inequalities and avoidances without even the merit of producing large revenues unless
they be integrated and tightly administered. As a supplement to income tax – or even to
a consumption tax – an estate duty ranks high for equity. It taxes those assets the income
from which could only with difficulty be ‘imputed’ for income tax purposes. It can
also bear specifically upon inherited wealth if equity is believed to require a special levy
upon it.
3.38 Estate and gift duties, and such variants as inheritance and accession duties, must however
be very complex taxes. They cause less continuous trouble to those concerned than annu-
al taxes – and this gains one good mark for simplicity – but their provisions need to be
elaborate. However, if it be possible to confine them to large fortunes, they will be simple
8 Income Tax in South Africa: Cases & Materials

in the sense of not affecting the majority of the population. They need not be inimical to
resources efficiency. They inevitably contain a non-neutrality in terms of their discour-
agement of accumulation for the benefit of heirs, in the same say as a progressive income
tax may contain a more general discouragement to savings. But in both cases the conflict
is between distinct ultimate ends and has to be resolved by judgment.
3.39 Wealth taxes. They have some of the advantages of estate and gift duties in terms of equity
and all their disadvantages in terms of simplicity – and more, since they will be so much
more frequently levied.
3.40 Taxes on goods and services. A distinction must be made here between ‘narrow based’ taxes
falling upon only a few consumption goods and services (even though they be ones that
absorb quite a significant proportion of total expenditure) and ‘broad-based’ taxes levied
on very large ranges of goods and services even if not quite all consumption. The Australi-
an sales and excise taxes are an obvious example of the former category, the British and
Continental value-added taxes belong to the latter . . .
3.41 Narrow-based taxes rank badly for equity. They discriminate between persons with the same
incomes but different tastes. It may perhaps be desirable to levy a heavier burden on the
smoker and the drinker than on other people but if so it will be on the grounds of effi-
ciency rather than equity and even then it has to be remembered that the real sacrifice
may well be borne by the families of those on whom it is intended to lay the impost. Nor
can such taxes be made in any way effectively progressive in terms either of consumption
or income. They are however taxes of extreme simplicity. Exceptionally few enterprises
have the legal responsibility for payment; they will have the machinery for calculating
their liability as part of their normal activities; generally their assessment can quickly be
settled with the official administration. In terms of resource efficiency it is obvious that
these are non-neutral taxes. They rank well for efficiency only when they are deliberately
tailored to fit some desired non-neutrality, and they can be made fees of particular gov-
ernment services rather than taxes required for general revenue.
3.42 Various forms of broad-based taxes . . . The choice between them chiefly turns on points of
technical detail. What is more relevant here are the qualities such taxes have when a high
uniform level and when very widely based.
3.43 A broad-based tax serves horizontal equity by not discriminating between savings and con-
sumption; but by itself it cannot be adapted to the varying situations of individuals. Nor is
it, by itself, suitable for vertical equity. It is essentially a proportionate consumption tax,
and actually regressive as a tax on income since the proportion of consumption to income
normally falls as income increases. It stands high by the test of simplicity, certainly far
higher than personal income tax when both are compared as major revenue-raisers.
Whatever its form it would be levied on far fewer persons or enterprises. A much higher
proportion of them would have little difficulty with the paper work, much of which would
be only a small addition to ordinary commercial recording. This latter advantage would be
greatly diminished if the rate were not uniform. Such taxes certainly have problems of
definition at their edges, even though uniformity within the boundary avoids them there,
and the higher the rate the more acute they will be. However, it seems unlikely that these
would ever reach the scale of those encountered in income tax. A broad-based tax at a
uniform rate is inherently neutral within its ambit. Were all savings made solely for the
purpose of savers’ own future consumption, it would also be neutral between consump-
tion and savings, but to the extent that other motives enter into savings, this would not be
so.

§4 The interpretation of fiscal legislation

Interpretation is the process of attributing meaning to the words in a document, whether legislation
or a contract, having regard to the context. The process is objective, not subjective and is unrelated to
whatever intention those responsible for the words may have had at the time they selected them. The
true inquiry is restricted to ascertaining the meaning of the language of the provision itself.
 Income tax in perspective and the interpretation of fiscal legislation 9

[10]
Natal Joint Municipal Pension Fund v Endumeni Municipality
2012 (4) SA 593 (SCA)
Wallis JA: (FARLAM, VAN HEERDEN, CACHALIA AND LEACH JJA CONCURRING)
The proper approach to interpretation
[17] The trial judge said that the general rule is that the words used in a statute are to be given
their ordinary grammatical meaning unless they lead to absurdity. He referred to authorities that
stress the importance of context in the process of interpretation and concluded that:
‘A court must interpret the words in issue according to their ordinary meaning in the context of the regu-
lations as a whole, as well as background material, which reveals the purpose of the Regulation, in order to
arrive at the true intention of the draftsman of the rules.’
While this summary of the approach to interpretation was buttressed by reference to authority, it
suffers from an internal tension because it does not indicate what is meant by the ‘ordinary
meaning’ of words, whether or not influenced by context, or why, once ascertained, this would
coincide with the ‘true’ intention of the draftsman. . . . In view of this it is necessary to say some-
thing about the current state of our law in regard to the interpretation of statutes and statutory
instruments and documents generally.
[18] Over the last century there have been significant developments in the law relating to the
interpretation of documents, both in this country and in others that follow similar rules to our
own.6 It is unnecessary to add unduly to the burden of annotations by trawling through the case
law on the construction of documents in order to trace those developments. The relevant au-
thorities are collected and summarised in Bastian Financial Services (Pty) Ltd v General Hendrik
7
Schoeman Primary School. The present state of the law can be expressed as follows: Interpretation
is the process of attributing meaning to the words used in a document, be it legislation, some
other statutory instrument, or contract, having regard to the context provided by reading the
particular provision or provisions in the light of the document as a whole and the circumstances
attendant upon its coming into existence. Whatever the nature of the document, consideration
must be given to the language used in the light of the ordinary rules of grammar and syntax; the
context in which the provision appears; the apparent purpose to which it is directed and the
material known to those responsible for its production. Where more than one meaning is possi-
8
ble each possibility must be weighed in the light of all these factors. The process is objective, not
subjective. A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike
results or undermines the apparent purpose of the document. Judges must be alert to, and
guard against, the temptation to substitute what they regard as reasonable, sensible or business-
like for the words actually used. To do so in regard to a statute or statutory instrument is to cross
the divide between interpretation and legislation; in a contractual context it is to make a con-
tract for the parties other than the one they in fact made. The ‘inevitable point of departure is
9
the language of the provision itself’, read in context and having regard to the purpose of the
provision and the background to the preparation and production of the document.
________________________

6 Spigelman CJ describes this as a shift from text to context. See ‘From Text to Context: Contemporary Contractu-
al Interpretation’, an address to the Risky Business Conference in Sydney, 21 March 2007, published in
Spigelman Speeches of a Chief Justice 1998 – 2008, 239 at 240. The shift is apparent from a comparison be-
tween the first edition of Lewison, The Interpretation of Contracts and the current fifth edition. So much has
changed that the author, now a judge in the court of appeal in England, has introduced a new opening
chapter summarising the background to and a summary of the modern approach to interpretation that
has to a great extent been driven by Lord Hoffmann.
7 Bastian Financial Services (Pty) Ltd v General Hendrik Schoeman Primary School 2008 (5) SA 1 (SCA) paras
16-19. That there is little or no difference between contracts, statutes and other documents emerges from
KPMG Chartered Accountants (SA) v Securefin Ltd 2009 (4) SA 399 (SCA); [2009] 2 All SA 523 (SCA) para 39.
8 Described by Lord Neuberger MR in Re Sigma Finance Corp [2008] EWCA Civ 1303 (CA) para 98 as an
iterative process. The expression has been approved by Lord Mance SCJ in the appeal: Re Sigma Finance
Corp (in administrative receivership) and In Re the Insolvency Act 1986 [2009] UKSC 2 ([2010] 1 All ER 571
(SC)) para 12; and by Lord Clarke SCJ in Rainy Sky SA v Kookmin Bank [2011] UKSC 50 ([2012] Lloyds
Rep 34 (SC)) para 28. See the article by Lord Grabiner QC ‘The Iterative Process of Contractual Interpre-
tation’ (2012) 128 LQR 41.
9 Per Lord Neuberger MR in Re Sigma Finance Corp supra n15 para 98. The importance of the words used was
stressed by this court in South African Airways (Pty) Ltd v Aviation Union of South Africa 2011 (3) SA 148
(SCA); [2011] 2 BLLR 112 (SCA) paras 25-30.
10 Income Tax in South Africa: Cases & Materials

[19] All this is consistent with the ‘emerging trend in statutory construction’.10 It clearly adopts
as the proper approach to the interpretation of documents, the second of the two possible ap-
proaches mentioned by Schreiner JA in Jaga v Dönges NO; Bhana v Dönges NO,11 namely that from
the outset one considers the context and the language together, with neither predominating
over the other. This is the approach that courts in South Africa should now follow, without the
need to cite authorities from an earlier era that are not necessarily consistent and frequently
reflect an approach to interpretation that is no longer appropriate. The path that Schreiner JA
pointed to is now received wisdom elsewhere. Thus Sir Anthony Mason CJ said:
‘Problems of legal interpretation are not solved satisfactorily by ritual incantations which emphasise the
clarity of meaning which words have when viewed in isolation, divorced from their context. The modern
approach to interpretation insists that context be considered in the first instance, especially in the case of
12
general words, and not merely at some later stage when ambiguity might be thought to arise.’
More recently, Lord Clarke SCJ said ‘the exercise of construction is essentially one
unitary exercise’.13
[20] Unlike the trial Judge I have deliberately avoided using the conventional description of this
process as one of ascertaining the intention of the legislature or the draftsman,14 nor would I use
its counterpart in a contractual setting, ‘the intention of the contracting parties’, because these
expressions are misnomers, insofar as they convey or are understood to convey that interpreta-
tion involves an enquiry into the mind of the legislature or the contracting parties.15 The reason
is that the enquiry is restricted to ascertaining the meaning of the language of the provision
itself. Despite their use by generations of lawyers to describe the task of interpretation it is
doubtful whether they are helpful. Many judges and academics have pointed out16 that there is
no basis upon which to discern the meaning that the members of parliament or other legislative
body attributed to a particular legislative provision in a situation or context of which they may
only dimly, if at all, have been aware. Taking parliament by way of example, legislation is drafted
by legal advisers in a ministry, redrafted by the parliamentary draftsmen, subjected to public
debate in committee, where it may be revised and amended, and then passed by a legislative
body, many of whose members have little close acquaintance with its terms and are motivated
only by their or their party’s stance on the broad principles in the legislation. In those circum-
stances, to speak of an intention of parliament is entirely artificial.17 The most that can be said is
that, in a broad sense, legislation in a democracy is taken to be a reflection of the views of the
electorate expressed through their representatives, although the fact, that democratically elected
legislatures sometimes pass legislation that is not supported by or unpopular with the majority of
the electorate, tends to diminish the force of this point. The same difficulty attends upon the
search for the intention of contracting parties, whose contractual purposes have been filtered
through the language hammered out in negotiations between legal advisers, in the light of
________________________

10 Bato Star Fishing (Pty) Ltd v Minister of Environmental Affairs 2004 (4) SA 490 (CC); (2004 (7) BCLR 687;
[2004] ZACC 15) para 90.
11 Jaga v Dönges NO; Bhana v Dönges NO 1950 (4) SA 653 (A) at 662G-663A.
12 K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd [1985] HLA 48 ((1985) 157 CLR 309) at 315.
13 Rainy Sky SA v Kookmin Bank supra para 21.
14 ‘A slippery phrase’ according to Lord Watson in Aron Salomon v A Salomon & Co Ltd [1897] AC 22 (HL) at
38. For its use see Ebrahim v Minister of the Interior 1977 (1) SA 665 (A) at 677-678 and the authorities there
cited; Protective Mining & Industrial Equipment Systems (Pty) Ltd (formerly Hampo Systems (Pty) Ltd) v Audiolens
(Cape) (Pty) Ltd 1987 (2) SA 961 (A) at 991F-H; Summit Industrial Corporation v Claimants against the Fund
Comprising the Proceeds of the Sale of the MV Jade Transporter 1987 (2) SA 583 (A) at 596G-597B; and Manyasha
v Minister of Law and Order 1999 (2) SA 179 (SCA) at 185B-C.
15 In Lewison The Interpretation of Contracts (5 ed, 2011) para 2.05, the heading reads: ‘For the purpose of the
interpretation of contracts, the intention of the parties is the meaning of the contract. There is no inten-
tion independent of that meaning.’ The whole discussion in this paragraph makes it clear that the interna-
tional trend in countries with which we share some common heritage is to treat the ‘intention of the
parties’ as a myth or abstraction remote from the reality of interpretation and unnecessary.
16 The earliest that I have found is Jerome Frank Law and the Modern Mind 29 (6 ed, 1960) originally pub-
lished in 1930. He points out that statutes directed at horse-drawn vehicles before the advent of motor cars
were applied to the latter. For a South African instance, see S v Sweers 1963 (4) SA 163 (E).
17 See Lord Nicholls of Birkenhead in ‘My Kingdom for a Horse: the Meaning of Words’ (2005) 121 LQR
577 at 589-590. In his judicial capacity, he said in R v Secretary of State for the Environment, Transport and the
Regions, Ex parte Spath Holme Ltd [2001] 2 AC 349 at 395 that the intention of the legislature is ‘a shorthand
reference to the intention which the court reasonably imputes to Parliament in respect of the language
used.’
 Income tax in perspective and the interpretation of fiscal legislation 11

instructions from clients as to their aims and financial advice from accountants or tax advisers,
or are embodied in standard form agreements and imposed as the terms on which the more
powerful contracting party will conclude an agreement.18
[21] Alive to these difficulties, there have been attempts to justify the use of the expression ‘the
intention of the legislature’ on broader grounds relating to the manner in which legislation is
drafted and passed and the relationship between the legislature as lawgiver and the judiciary as
the interpreter of laws. Francis Bennion, an eminent parliamentary draftsman and the author of
a standard work on statutory interpretation,19 says that ‘[l]egislative intention is not a myth or
fiction, but a reality founded on the very nature of legislation’. He bases this on the undoubtedly
correct proposition that legislation is the product of the intentional volition of all participants in
the legislative process so that:
‘Acts are produced down to the last word and comma, by people. The law maker may be difficult to identi-
fy. It is absurd to say that the law maker does not exist, has no true intention or is a fiction.’
However, that criticism misses the point. Critics of the expression ‘the intention of the
legislature’ are not saying that the lawmaker does not exist or that those responsible for
making a particular law do not have a broad purpose that is encapsulated in the lan-
guage of the law. The stress placed in modern statutory construction on the purpose of
the statute and identifying the mischief at which it is aimed, should dispel such a notion.
The criticism is that there is no such thing as the intention of the legislature in relation
to the meaning of specific provisions in a statute, particularly as they may fall to be
interpreted in circumstances that were not present to the minds of those involved in
their preparation. Accordingly, to characterise the task of interpretation as a search for
such an ephemeral and possibly chimerical meaning is unrealistic and misleading.
20
[22] The other objection raised by Bennion, that the idea that there is no true intention be-
hind an Act of parliament is undemocratic, suggests that the debate is being conducted at cross-
purposes. In a constitutional democracy such as South Africa, or the United Kingdom, which is
Bennion’s terrain, no one denies that statutes and statutory instruments emanating from parlia-
ment and other legislative bodies are the product of the democratic process. Interpretation al-
ways follows upon the democratic process leading to legislation and is, in that sense, a secondary
and subordinate process. The interpreter does not write upon a blank page, but construes the
words written by others. Nor is it denied that the broad purpose of the relevant legislative body
(or legislator in the case of regulations or rules made by a functionary) is highly relevant to the
process of interpretation, as is the mischief at which the legislation is aimed. Courts have repeat-
edly affirmed their importance and thereby respect the legislature’s role in a democracy. Courts
do not set out to undermine legislative purpose but to give it effect within the constraints im-
posed by the language adopted by the legislature. If ‘the intention of the legislature’ was merely
an expression used to encompass these matters as a form of convenient shorthand, perhaps the
matter would not have provoked so much comment. But the problem lies in it being said that
the primary or ‘golden’ rule of statutory interpretation is to ascertain the intention of the legisla-
ture. At one extreme, as has been the case historically, it leads to a studied literalism and denies
resort to matters beyond the ‘ordinary grammatical meaning’ of the words. At the other, judges
use it to justify first seeking to divine the ‘intention’ of the legislature and then adapting the
language of the provision to justify that conclusion.21 It has been correctly said that:
‘It is all too easy for the identification of purpose to be driven by what the judge regards as the desirable
result in a specific case.’22

________________________

18 See the discussion of contracts of adhesion by Sachs J in Barkhuizen v Napier 2007 (5) SA 323 (CC) (2007
(7) BCLR 691; [2007] ZACC 5) paras 135-139. As to the process of preparing contracts, see Lord Neu-
berger MR in Re Sigma Finance Corp, supra n15, para 100 and Lord Collins in the appeal in para 35.
19 FAR Bennion Bennion on Statutory Interpretation (5 ed, 2008) s 164 at 472-4.
20 At 474.
21 Wilson CJ identified the illegitimacy of this latter approach in Richardson v Austin [1911] HCA 28 ((1911)
12 CLR 463 at 470) where he said – ‘as to the argument from the assumed intention of the legislature,
there is nothing more dangerous and fallacious in interpreting a Statute than first of all to assume that the
legislature had a particular intention, and then, having made up one’s mind what that intention was, to
conclude that that intention must necessarily be expressed in the Statute, and then proceed to find it’.
22 The Hon JJ Spigelman AC ‘The Intolerable Wrestle: Developments in Statutory Interpretation’ (2010) 84
ALJ 822 at 826. Lewison, supra n 22, para 2.06.
12 Income Tax in South Africa: Cases & Materials

When that occurs it involves a disregard for the proper limits of the judicial role.
[23] Three Australian judges have sought to explain the use of the expression on other
grounds. Gleeson CJ in Singh v The Commonwealth, 23 said that –
‘references to intention must not divert attention from the text, for it is through the meaning of the text,
understood in the light of background, purpose and object, and surrounding circumstances, that the legis-
lature expresses its intention, and it is from the text, read in that light, that intention is inferred. The
words intention, contemplation, purpose and design are used routinely by courts in relation to the mean-
ing of legislation. They are orthodox and legitimate terms of legal analysis, provided their objectivity is not
overlooked.’ . . .
[24] The sole benefit of expressions such as ‘the intention of the legislature’ or ‘the intention of
the parties’ is to serve as a warning to courts that the task they are engaged upon is discerning
the meaning of words used by others, not one of imposing their own views of what it would have
been sensible for those others to say. Their disadvantages, which far outweigh that benefit, lie at
opposite ends of the interpretative spectrum. At the one end, they may lead to a fragmentation
of the process of interpretation by conveying that it must commence with an initial search for
the ‘ordinary grammatical meaning’ or ‘natural meaning’ of the words used seen in isolation, to
be followed in some instances only by resort to the context. At the other, they beguile judges
into seeking out intention free from the constraints of the language in question, and then im-
posing that intention on the language used. Both of these are contrary to the proper approach,
which is from the outset to read the words used in the context of the document as a whole and
in the light of all relevant circumstances.24 That is how people use and understand language and
it is sensible, more transparent and conduces to greater clarity about the task of interpretation
for courts to do the same.
[25] Which of the interpretational factors I have mentioned will predominate in any given situa-
tion varies. Sometimes the language of the provision, when read in its particular context, seems
clear and admits of little if any ambiguity. Courts say in such cases that they adhere to the ordi-
nary grammatical meaning of the words used. However, that too is a misnomer. It is a product of
a time when language was viewed differently and regarded as likely to have a fixed and definite
meaning; a view that the experience of lawyers down the years, as well as the study of linguistics,
has shown to be mistaken. Most words can bear several different meanings or shades of meaning
and to try to ascertain their meaning in the abstract, divorced from the broad context of their
use, is an unhelpful exercise. The expression can mean no more than that, when the provision is
read in context, that is the appropriate meaning to give to the language used. At the other ex-
treme, where the context makes it plain that adhering to the meaning suggested by apparently
plain language would lead to glaring absurdity, the court will ascribe a meaning to the language
that avoids the absurdity. This is said to involve a departure from the plain meaning of the words
used. More accurately it is either a restriction25 or extension26 of the language used by the adop-
tion of a narrow or broad meaning of the words, the selection of a less immediately apparent

________________________

23 Singh v The Commonwealth [2004] HCA 43 ((2004) 222 CLR 322) para 19. Keith Mason J ‘Legislators’
Intent: How Judges Discern it and What Do They Do When They Find It?’ – available at
http://www.lawlink.nsw.gov.au/lawlink/Supreme_Court/ll_sc.nsf/vwPrint1/SCO_mason021106 – quotes
Gleeson CJ as saying: ‘The concept of the intention of Parliament expresses an important constitutional
principle rooted in political reality and judicial prudence’.
24 Spigelman CJ makes the point vividly in the speech referred to in n33 supra, where he said: ‘Context is
always important . . . [I]n an adaptation of an example originally propounded by Ludwig Wittgenstein,
parents leave their young children in the care of a babysitter with an instruction to teach them a game of
cards. The babysitter would not be acting in accordance with these instructions if he or she taught the
children to play strip poker. Furthermore, when a nanny is instructed to drop everything and come run-
ning she would know that it is not intended to apply literally to the circumstance in which she was holding
a baby over a tub full of water. As Professor Lon L Fuller said of this example: “Surely we have a right to
expect the same modicum of intelligence from the judiciary.” [Footnotes omitted.]
25 As in Venter v Rex 1907 TS 910; Rex v Detody 1926 AD 198 at 203; Rex v Schonken 1929 AD 36 at 42; Bertie van
Zyl (Pty) Ltd and Another v Minister for Safety and Security and Others 2010 (2) SA 181 (CC) (2009 (10) BCLR
978) para 31.
26 Barkett v SA Mutual Trust & Assurance Co Ltd 1951 (2) SA 353 (A) at 363; Hanekom v Builders Market Klerks-
dorp (Pty) Ltd 2007 (3) SA 95 (SCA) para 7.
 Income tax in perspective and the interpretation of fiscal legislation 13

meaning27 or sometimes the correction of an apparent error in the language in order to avoid
the identified absurdity.28
[26] In between these two extremes, in most cases the court is faced with two or more possible
meanings that are to a greater or lesser degree available on the language used.29 Here it is usually
said that the language is ambiguous, although the only ambiguity lies in selecting the proper
meaning (on which views may legitimately differ). In resolving the problem, the apparent pur-
pose of the provision and the context in which it occurs will be important guides to the correct
interpretation. An interpretation will not be given that leads to impractical, unbusinesslike or
oppressive consequences or that will stultify the broader operation of the legislation or contract
under consideration.

Notes
This is a watershed judgment regarding the principles governing the interpretation of
legislation or of a contract that will henceforth be cited as the locus classicus on the mod-
ern law in this regard in South Africa.
The language of the judgment leaves no doubt that the Supreme Court of Appeal is
deliberately drawing a line under earlier decisions in this regard and is trenchantly
declaring that what is laid down in this judgment (see para [19]) ‘is the approach that
courts in South Africa should now follow, without the need to cite authorities from an
earlier era that are not necessarily consistent and frequently reflect an approach to
interpretation that is no longer appropriate.
The core of the modern approach, says the court, is that the process of interpretation
is objective, not subjective. In other words, (see para [20]) expressions such as ‘the
intention of the legislature or the draftsman’ are misnomers ‘insofar as they convey or
are understood to convey that interpretation involves an enquiry into the mind of the
legislature or the contracting parties’. The true inquiry, says the court, ‘is restricted to
ascertaining the meaning of the language of the provision itself’. Modern statutory
construction (see para [21]) places stress on identifying the mischief at which it is aimed.
On the other hand, ‘Courts do not set out to undermine legislative purpose but to give it
effect within the constraints imposed by the language adopted by the legislature’.
The sole purpose of expressions such as the intention of the legislature or the intention of
the parties, says the court (at para [24]) is ‘to serve as a warning to courts that the task
they are engaged upon is discerning the meaning of words used by others, not one of
imposing their own views of what it would have been sensible for those others to say’ and
(see para [26]) ‘An interpretation will not be given that leads to impractical, unbusiness-
like or oppressive consequences or that will stultify the broader operation of the legisla-
tion or contract under consideration’.
There may be rare cases where words used in a statute are only capable of bearing a single meaning,
but outside of that situation it is pointless to speak of a statutory provision as having a plain
meaning.

________________________

27 Melmoth Town Board v Marius Mostert (Pty) Ltd 1984 (3) SA 718 (A) at 728F-H.
28 This possibility is referred to in English cases such as Investors Compensation Scheme Ltd v West Bromwich
Building Society [1998] 1 All ER 98 (HL) at 114-115; Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38
([2009] 4 All ER 677 (HL)) paras 14 and 15.
29 That they must be available on the language used is clear. S v Zuma 1995 (2) SA 642 (CC) (1995 (1) SACR
568; 1995 (4) BCLR 401) paras 17 and 18. As Kentridge AJ pointed out, any other approach is divination
rather than interpretation.
14 Income Tax in South Africa: Cases & Materials

[11]
CSARS v Bosch
[2014] ZASCA 171; [2015] 1 All SA 1 (SCA); 2015 (2) SA 174 (SCA)
Wallis JA: (BRAND, SHONGWE AND PILLAY JJA AND DAMBUZA AJA CONCURRING)
[9] . . . There may be rare cases where words used in a statute or contract are only capable of
bearing a single meaning, but outside of that situation it is pointless to speak of a statutory provi-
sion or a clause in a contract as having a plain meaning. One meaning may strike the reader as
syntactically and grammatically more plausible than another, but, as soon as more than one pos-
sible meaning is available, the determination of the provision’s proper meaning will depend as
much on context, purpose and background as on dictionary definitions or what Schreiner JA
referred to as ‘excessive peering at the language to be interpreted without sufficient attention to
the historical contextual scene’.30
[18] Lastly on the issue of the proper interpretation of section 8A(1)(a) some weight must at-
tach to the fact that in October 2004 the Act was amended by the insertion of section 8C, which
in part at least was enacted in order to render taxable the gains made by beneficiaries of DDS
[deferred delivery] schemes when they took delivery of shares under these schemes. It does this
by providing that the critical date for determining a tax liability is the date of vesting of the
shares in the taxpayer. As explained in the Explanatory Memorandum accompanying the amending
legislation when it was placed before Parliament, the existing provisions of section 8A(1)(a) ‘fail
to fully capture all the appreciation associated with the marketable security as ordinary income’.
That not only identifies the purpose of the amendment,31 but is also a permissible guide to Par-
liament’s understanding of the existing section.32

________________________

30 Jaga v Dönges NO; Bhana v Dönges NO 1950 (4) SA 653 (A) at 664G-H.
31 Westinghouse Brake & Equipment (Pty) Ltd v Bilger Engineering (Pty) Ltd 1986 (2) SA 555 (A) at 562E-563A.
32 Patel v Minister of the Interior 1955 (2) SA 485 (A) at 493A-D; National Education Health and Allied Workers
Union v University of Cape Town [2002] ZACC 27; 2003 (3) SA 1 (CC) para 66.
 2
RESIDENCE

§ Page
1 Introduction ............................................................................................................. 15
2 Taxing income on the basis of source or residence .............................................. 16
[12] Fifth Report of the Katz Commission (extract)............................................ 16
3 The residence of an individual ............................................................................... 18
[13] Interpretation Note 3: “ordinarily resident”................................................. 18
[14] CIR v Kuttell ................................................................................................... 20
4 The residence of a juristic person .......................................................................... 22
[15] The Oceanic Trust Co Ltd NO v CSARS ...................................................... 22
[16] (Draft) Interpretation Note 6 (issue 2): “place of effective
management” ................................................................................................. 28

§1 Introduction
From its first enactment in 1914,1 South Africa’s Income Tax Act, as a general principle,
levied tax only on income whose ‘source’ was or was deemed to be in South Africa. The tax
system was thus primarily source-based. This was a consequence of the definition of ‘gross
income’2 which was expressed as including only those amounts whose source was within or
deemed to be within the Union (later the Republic) of South Africa. Under this source-
based system it was generally irrelevant whether a taxpayer was or was not resident in the
country, and this principle applied equally to companies and persons other than companies.
Under the source-based system, non-residents paid income tax on their South African
sourced income at the same rate as residents and were entitled to the same deductions and
the same rebates. Dividends and royalties derived by non-residents were, in certain circum-
stances, taxed differently. A company did not escape tax merely because it was incorporated,
registered or resident outside South Africa. In certain circumstances, the tax liability of a
company depended on whether it was a ‘domestic company’, an ‘external company’ or a
‘South African company’.3
When non-resident shareholders’ tax was abolished in 1995, the only remaining South
African withholding tax in respect of payments to non-residents was the 12% withholding
tax on royalties,4 which might be reduced to less than 12% if the non-resident submitted a
South African income tax return.
________________________

1 The Income Tax Act 28 of 1914.

2 Section 1 sv ‘gross income’.
3 As defined in s 1.
4 See s 35.

15
16 Income Tax in South Africa: Cases and Materials

Under the source-based system, the Republic had one of the world’s most favourable tax
regimes for non-residents, giving the country the status of a quasi-tax haven. However, the
Republic’s secondary tax on companies was not recognised as a withholding tax by, inter
alia, the USA and the UK, which therefore did not give credit to the foreign investor for the
payment of this tax in the determination of his domestic tax liability, and STC was thus an
investor-unfriendly aspect of the South African tax regime.
In his budget review on 23 February 2000, the Minister of Finance said that the Republic’s
source-based system had become increasingly out of line with international practice and
inappropriate for the circumstances of the South African economy. He announced that, as
from 1 January 2001, the Republic would adopt a residence-based income tax system. The
enactment of s 9C and s 9D had been the first phase in this change. Section 9E (since re-
pealed) which provided for the taxation of foreign dividends and which came into operation
on 23 February 2000,5 was also a precursor of the overall change to a residence-based tax
system.
In accordance with the announcement in the Budget review, the definition of ‘gross in-
come’ was amended, with effect from years of assessment commencing on or after
1 January 2001, to provide that persons who are resident (as defined)6 in the Republic are
taxed on their total income (that is to say, on all amounts, received or accrued, other than
amounts of a capital nature) irrespective of the source – in other words, on their world-wide
income – whilst non-residents continue to be taxed in the Republic only on income which
has its source in the Republic. With this legislative amendment, the
Republic changed from a source-based to a residence-based tax system.
The system that has been adopted has been described as a ‘residence-minus’ system, by
which is meant that residents will, in essence, be taxed on their world-wide income, but that
certain categories of income and activities undertaken outside the Republic will be exempt
from tax.
The question whether income has its source in the Republic thus remains relevant in de-
termining the tax liability of persons who are not resident in the Republic.

§2 Taxing income on the basis of source or residence

[12]
Report of the Joint Standing Committee on Finance on The Third Interim Re-
port of the Katz Commission of Inquiry into Taxation7
5th Report of the Commission
BASING THE SOUTH AFRICAN INCOME TAX SYSTEM ON THE SOURCE OR RESIDENCE
PRINCIPLE - OPTIONS AND RECOMMENDATIONS
Chapter 1 – INTRODUCTION TO THE TAXATION OF INTERNATIONAL INCOME BY USING
THE SOURCE AND RESIDENCE PRINCIPLES OF TAXATION
When a country’s own citizens or residents transact business or invest abroad, or foreigners trade or
invest within its domestic jurisdiction, the tax system as it affects these activities needs to
________________________

5 Section 20(2) of the Taxation Laws Amendment Act 30 of 2000; s 9E was amended for a second time in 2000
(in the Revenue Laws Amendment Act) to excise all reference to the source of the profits from which the divi-
dend was declared, and to provide simply that a foreign dividend meant a dividend received by or accruing to
any person from a company which is not a resident
6 Section 1 sv ‘resident’.
7 The Commission of Inquiry under the chairmanship of Prof MM Katz into taxation in South Africa was
established on 22 June 1994. The mandate given to the Commission was very broad, namely, to investigate vir-
tually every aspect of the South African tax regime that had been inherited from the previous government.
This investigation was conducted against the backdrop of the political, social and economic goals of the in-
cumbent government of that time.
 Residence 17

balance carefully domestic and international economic objectives. On a global basis, countries need
to maintain orderly tax regimes to promote international trade, and there is a need for accepted
rules and conventions limiting any one country’s rights to tax its own citizens or residents operating
or investing abroad, or the citizens or residents of other countries doing so in its own jurisdiction.
Two mainstream principles or bases which have developed for this kind of “international” taxation
are respectively the source and the residence bases. On the international level, these are then ampli-
fied by a network of bilateral Double Tax Agreements which seek to remove any remaining potential
conflicts and to eliminate the danger of taxing the same income twice.

1.1 DEFINITION OF THE RESIDENCE PRINCIPLE

1.1.1 Under a residence system, income which accrues to a resident of a country should be subject
to the taxes of that country. In the case of the United States, all citizens, even if not resident,
may be so subject on their worldwide income; this is an exceptional position, and the possibil-
ity of basing tax on citizenship is not considered further in this report.
1.1.2 The basic rationale of a residence basis of taxation has been contrasted to that of a source
based system in the following terms by the Appellate Division (Kerguelen Sealing & Whaling
Co., Ltd v CIR 1939 AD 487, 10 SATC: 363):
“In some countries residence (or domicile) is made the test of liability for the reason, presumably, that
a resident, for the privilege and protection of residence, can justly be called upon to contribute towards
the cost of good order and government of the country that shelters him. In others (as in ours) the prin-
ciple of liability adopted is ‘source of income’; again, presumably, the equity of the levy rests on the as-
sumption that a country that produces wealth by reason of its natural resources or the activities of its
inhabitants is entitled to a share of that wealth, wherever the recipient of it may live. In both systems
there is, of course, the assumption that the country adopting the one or the other has effective means to
enforce the levy.”
1.1.3 A less convincing argument is that resident taxpayers should all be subject to the same tax
system since they live in the same country. The latter argument ignores the fact that the in-
come in question is generated under substantially different circumstances in other jurisdic-
tions. The differing tax treatment in the foreign country is usually related to the particular
circumstances pertaining to the taxpayers operating in that system, for example low tax rates
often compensate for poor infra-structure or other deficiencies in order to attract investment.

1.2 DEFINITION OF THE SOURCE PRINCIPLE

1.2.1 Under a pure source system income is taxed in the country where that income originates,
regardless of the physical or legal residence of the recipient of the income.
1.2.2 In addition to the motivation emphasising enjoyment of the source country’s resources as
noted by the Appellate Division in the Kerguelen case, a source system is also motivated by the
degree to which it ensures fair competition between taxpayers in the particular jurisdiction
and taxpayers (competitors) from other jurisdictions.
1.2.3 The primary right of the “source” country to tax “active” business income is widely recognised
internationally and soundly anchored in the principles underlying double taxation agree-
ments – even where the taxing country has a residence system.

1.3 APPLICATION OF THE RESIDENCE AND SOURCE SYSTEMS – INTERNATIONAL

TRENDS
1.3.1 Nowhere in the world are either of these systems applied with any degree of purity.
1.3.2 In terms of double tax treaties, and in many instances under the national regimes of resi-
dence based countries, these countries are generally required to exempt income generated in
the other contracting state or to provide a credit for the tax imposed in the source state. Ac-
cordingly, all residence based systems still tax non-residents on income sourced within their
jurisdictions.
1.3.3 Countries with a source system have gradually extended the scope of their taxes by statutorily
deeming certain types of income (especially of a passive nature) to be sourced within their ju-
risdictions, and therefore to be subject to tax there. (They then, too, grant relief to their tax-
payers for taxes suffered in the source jurisdiction.) The arguments in favour
18 Income Tax in South Africa: Cases and Materials

of taxing passive income generated abroad are more pragmatic than convincing. Essentially,
it is argued that the state of residence of the taxpayer has enabled him to accumulate capital
(to lend offshore), to develop intangible property (to license offshore), or to acquire a capital
asset (to lease offshore), and that the taxpayer does not actively use the infra-structure of the
other state where another taxpayer uses the capital or asset.
1.3.4 Both these systems, albeit in hybrid form, are strongly represented amongst the tax systems of
the world. In Latin America there is still a strong territorial sentiment, although fairly recently
both Brazil and Argentina changed over to a residence based system. In the case of Argenti-
na, the Commission had evidence from various sources that the change, introduced by way of
a few cryptic lines of legislation in 1992, is as yet unsupported by any form of regulation or
detail resulting in serious problems. Malaysia also experimented with both systems. From
1948 to 1967 the country’s tax system was territorial, with a remittance basis. In 1968 it
changed to a worldwide system, but this lasted only until 1973 thereafter it reverted to the ter-
ritorial basis.
1.3.5 International bodies are also pointing towards territoriality or source as a favoured system. In
1955 the International Chamber of Commerce changed their earlier support for a world-wide
basis of international taxation to suggest that the source country should have ‘the sole right’
to tax international income. At its 1984 Buenos Aires conference the International Fiscal As-
sociation pointed out the economic disadvantages of worldwide taxation. The Association
went on to recommend ‘a system of territorial taxation or exemption’, and appealed to gov-
ernments who had adopted the worldwide basis to reconsider their positions.
1.3.6 While the academic debate continues, the ultimate result of the two systems is not that differ-
ent once all the exceptions and compromises are recognised. The system appropriate to a
given country often is dictated more by other factors such as economic strategies, net cross-
border capital flows, the relative sizes of the national and domestic economies, relative tax
rates, history, and administrative capacity.

§3 The residence of an individual

[13]
SARS Interpretation Note 3: “ordinarily resident”
SOUTH AFRICAN REVENUE SERVICE
INCOME TAX INTERPRETATION NOTE NO 3
4 FEBRUARY 2002
SUBJECT: RESIDENT: DEFINITION IN RELATION TO A NATURAL PERSON – ORDINARILY
RESIDENT
1. Background The income tax system in South Africa changed from a source-based system of taxa-
tion to a residence basis of taxation with effect from years of assessment commencing on or after 1
January 2001. The consequential amendments to the Act have the effect that South African residents
are, but for certain exclusions/exemptions, subject to income tax on their worldwide income, ie
income derived within and outside South Africa.
Non-residents will remain taxable on their South African actual or deemed source income. The
normal source principles as determined and developed by our courts continue to be applicable and
can, therefore, not be ignored. The definition of “gross income” in section one of the Act has been
amended to include a reference to the word “resident” which has also been defined in section one
and means a natural person who is:
• ordinarily resident in South Africa; or
• physically present in South Africa for a specified period (physical presence test).
In other words, two tests are applicable to determine whether or not a person is a resident of South
Africa, ie the ordinarily resident test and physical presence test. The physical presence test is dealt
with in Interpretation Note No. 4 dated 4 February 2002. The implication of agreements for the
avoidance of double taxation is also not considered in this document.
The Act does not define “ordinarily resident”, and therefore the interpretation given by the courts
must be followed.
 Residence 19

2. The law Although the Act does not define “ordinarily resident”, the courts have interpreted the
concept to mean the country to which a person would naturally and as a matter of course return
from his/her wanderings. It might therefore be called a person’s usual or principal residence and it
would be described more aptly, in comparison to other countries as the person’s real home.
The above approach was followed in Cohen v CIR (13 SATC 362) and confirmed in CIR v Kuttel (54
SATC 298). The leading Canadian case is Thompson v Minister of National Revenue 2 DTC 812 (SCC).
In this case it was held that a person is ordinarily resident in the place “where in the settled routine
of his life he regularly, normally or customarily lives” or “at which he in mind and in fact settles into
or maintains or centralises his ordinary mode of living with its accessories in
social relations, interest and conveniences”. The English case of Shah v Barnet London Borough Council
and Other Appeals 1983 1 All ER 226 (HL) at 234b-c describes the meaning of “ordinarily resident” as
“that a person must be habitually and normally resident here, apart from temporary or occasional
absences of long or short duration”. A wider approach was followed in interpreting the concept of
“ordinarily resident” in the English case.
In the Kuttel judgment, Goldstone JA stated:
“In my judgment it is neither necessary nor helpful to discuss other English decisions in which the words
‘ordinarily resident’ were considered and interpreted with reference to English income tax legislation. I can
find no reason for not applying their natural and ordinary meaning to the provisions now under considera-
tion.”
In summary, the courts have held in ascribing a meaning to the concept “ordinarily resident” that it
refers to –
• living in a place with some degree of continuity, apart from accidental or temporary absence. If it
is part of a person’s ordinary regular course of life to live in a particular place with a degree of
permanence, he/she must be regarded as ordinarily resident (Levene v Inland Revenue Commission-
er [1928] All ER Rep. 746 (HL));
• the place where his/her permanent place of abode was, where his/her belongings were stored,
which he/she left for temporary absences and to which he/she regularly returned
after such absences (H v COT 24 SATC 738);
• the residence must be settled and certain and not temporary and casual (Soldier v COT 1943 SR
130);
• that ordinarily resident is narrower than resident. A person is ordinarily resident where he/she
normally resides, apart from temporary/occasional absences (CIR v Kuttel (supra)). In ITC 1170
(34 SATC 76) it was pointed out by the court that the question whether a taxpayer may be re-
garded as being “ordinarily resident” at a particular place during a particular period is one of de-
gree, and one is entitled to look at the taxpayer’s mode of life beyond the particular period under
consideration.
The case of Robinson v COT 1917 TPD 542, 32 SATC 41 deals with the interpretation of the word
“residence” only and not the term “ordinarily resident”. The case is important, though, because it
focuses on the physical presence of the taxpayer and his maintenance of a home as the crucial tests
to be applied in the determination of his residence. In ITC 961 (1061) 24 SATC 648 it was held that
a woman who marries a man ordinarily resident in a particular country and sets up home with her
husband in that country cannot be said to be ordinarily resident in some other country, even if im-
mediately before her marriage she was ordinarily resident in that other country.
3. Application of the law The question whether a person is ordinarily resident in a country is one
of fact and each case must be decided on its own facts having regard to principles already estab-
lished by case law, meanings expressed in the text books, etc. It is not possible to lay down hard and
fast rules. The concept must also not be confused with the terms ‘domicile’, ‘nationality’ and the
concept of emigrating or immigrating for exchange control purposes. A physical presence at all
times is not a requisite to be ordinarily resident in the Republic. The following two requirements
need to be present:
• an intention to become ordinarily resident in a country; and
• steps indicative of this intention having been or being carried out.
A person’s mode of life may be such that it cannot be said that he or she has a real home anywhere.
A common feature of multinational corporations is that certain staff are virtually permanent wan-
derers. In such a case the burden would be on the taxpayer to discharge the onus that
20 Income Tax in South Africa: Cases and Materials

he/she is not ordinarily resident in the Republic. It is not possible to lay down any clearly
defined rule or period to determine ordinarily residence.
The effect of the above is that a natural person may be resident in South Africa even if that person
was not physically present in South Africa during the relevant year of assessment. The purpose, na-
ture and intention of the taxpayer’s absence must be established to determine whether the taxpayer
is still ordinarily resident. The following factors will be relevant in considering the above two re-
quirements:
• most fixed and settled place of residence
• habitual abode, ie present habits and mode of life
• place of business and personal interest
• status of individual in country, ie immigrant, work permit periods and conditions, etc
• location of personal belongings
• nationality
• family and social relations (schools, church, etc)
• political, cultural or other activities
• application for permanent residence
• period abroad; purpose and nature of visits
• frequency of and reasons of visits
The above list is not intended to be exhaustive or specific, merely a guideline. The circumstances of
the person must be examined as a whole, and the personal acts of the individual must receive special
attention. As stated in ITC 1170, one is entitled to look at the taxpayer’s mode of life beyond the
particular period under consideration. It is not possible to specify over what
period the comparison must be made. The comparison must cover a sufficient period for it to be
possible to determine whether the person is ordinarily resident in South Africa.
A natural person, who became ordinarily resident, will become a resident as from a specific date.
That date will be the date on which he or she became ordinarily resident in the Republic. It there-
fore follows that a natural person will not be taxable in the Republic on any income earned outside
the Republic prior to the date on which he or she became ordinarily resident in the Republic, unless
it was deemed to be of a South African source and was therefore taxable in terms of paragraph (ii)
of the definition of “gross income” in section one of the Act.
Example:
Mr X became ordinarily resident in the Republic on 1 October 2001. All income received by or
accrued to Mr X from a source outside the Republic prior to 1 October 2001 will be excluded
from his income for the year of assessment ending 28 February 2002. All income (worldwide)
received by or accrued to Mr X on or after 1 October 2001 (excluding certain income that may
be exempt) will be included in his taxable income for the year of assessment ending 28 Febru-
ary 2002. A natural person who emigrates from the Republic to another country, will cease to
be a resident as from the date that he or she emigrates.
Example:
Ms. A emigrated to Zambia on 29 October 2001 and married a Zambian resident. She has no
business or financial connection in the Republic and does not intend to return to the Republic.
In these circumstances Ms A ceased to be a resident on 29 October 2001.
Further references
(1990) 29 Income Tax Reporter 195 ‘Ordinarily Resident’ and ‘Carrying on Business’
Law Administration
SOUTH AFRICAN REVENUE SERVICE
‘Ordinarily resident’ has a narrower meaning than ‘residence. A person is ordinarily resident where he
has his usual or principal residence’ – his real home.
[14]
CIR v Kuttell
1992 (3) SA 242 (A)
The taxpayer had been assessed to tax in South Africa in respect of interest and dividend
income for the years 1984-1986, a period when he contended he had not been ordinarily
 Residence 21

resident in South Africa. In terms of the Act, a taxpayer, other than a company, was exempt
from tax on interest or dividends if he was not ordinarily resident or carrying on business in
the Republic. SARS did not contend that he carried on business in the Republic, and the
sole issue was whether he was ordinarily resident in South Africa during the period in ques-
tion.
In 1983 the taxpayer had emigrated to the United States where he took up residence, es-
tablished a home, joined a church, acquired an office, registered with social security and
bought a car. His three children remained in Cape Town to complete their schooling. He
was granted permanent residence status in the United States and since then, apart from
visits to South Africa and other countries had lived and worked in the United States. He
liquidated most of his assets in South Africa, and would have taken all of his assets out of the
country if he had not been restricted from doing so by exchange control regulations. He
returned to South Africa on numerous occasions to pursue business activities and his hobby
of yachting, and to attend the funeral of his brother During a two year period between 1983
and 1985 he made nine visits to South Africa, staying for up to two months at a time. During
his visits he stayed in a house in Cape Town, owned by a company in which he and his wife
held all the shares, and which he had retained as a hedge against a decline in the interna-
tional value of the rand. The house was not let when he was not living in it.
It was held that, during the period in question, the taxpayer was not ordinarily resident in
the Republic.
Goldstone JA: That a person may have more than one residence at any one time is clear. In the pre-
sent case we are concerned with the words ‘ordinarily resident’ . . .
8
In R v Barnet London Borough Council: Ex parte Shah Lord Denning MR said that the natural and or-
dinary meaning of ‘ordinarily resident’ was –
‘that the person must be habitually and normally resident here, apart from temporary or occasional absences
of long or short duration’.
That view of the natural and ordinary meaning of the words was approved by the House of Lords on
appeal . . . [where] Lord Scarman said the following:
‘. . . I agree with Lord Denning MR that in their natural and ordinary meaning the words mean “that the per-
son must be habitually and normally resident here, apart from temporary or occasional absences of long or
short duration”. The significance of the adverb “habitually” is that it recalls two necessary features mentioned
by Lord Sumner in Lysaght’s case, namely residence adopted voluntarily and for settled
purposes.’
The reference to ‘Lysaght’s case’ is to Inland Revenue Commissioner v Lysaght 9 where Viscount Sumner
said:
‘I think the converse to “ordinarily” is “extraordinarily” and that part of the regular order of a man’s life,
adopted voluntarily and for settled purposes, is not “extraordinarily”.’
In Cohen v Commissioner for Inland Revenue 10 Schreiner JA, in the course of an obiter dictum gave a
very similar meaning to the words ‘ordinary residence’:
‘. . . [H]is ordinary residence would be the country to which he would naturally and as a matter of course re-
turn from his wanderings; as contrasted with other lands it might be called his usual or principal residence and
it would be described more aptly than other countries as his real home.’
It is unnecessary in this case to decide whether, as was also suggested by Schreiner JA, a person may
not be held to be ordinarily resident in more than one country at the same time.
. . . The policy of the Legislature in providing these exemptions from taxation in s 10 of the Act is to
encourage investors from outside the Republic to invest their money in the Republic: . . . I would
respectfully adopt the formulation of Schreiner JA and hold that a person is ‘ordinarily resident’
where he has his usual or principle residence, ie what may be described as his real home.

________________________

8 [1982] 1 All ER 698 (CA).

9 [1928] AC 234 (HL).
10 1946 AD 174.
22 Income Tax in South Africa: Cases and Materials

If one applies that meaning to the words, there can be no doubt that at the relevant times the re-
spondent was not ordinarily resident in the Republic. He had decided during 1983 that he and his
family would emigrate to the United States. Pursuant to that decision he and his wife set up their
home first in Florida and later in California. Such assets as he could take with him to the United
States he transferred there. But for the provisions of the exchange control regulations he would
have taken all of his South African assets to the United States. That he could not do, and he had no
choice but to make the most advantageous arrangements in the circumstances for the substantial
assets he retained in this country. As soon as they were able to do so, the respondent and the mem-
bers of his family became United States citizens.
. . . Counsel for the appellant did not refer us to any evidence which indicated that the respondent
did not set up his usual or principal residence, ie his home, in the United States of America. When
his three children completed their schooling in Cape Town they permanently joined the respondent
and his wife in their home in the United States. The respondent’s visits to South Africa were not for
purposes which one would normally associate with a ‘return home’. They were primarily for business
purposes relating to his companies and the building of the yacht which began prior to his decision
to emigrate. In the beginning those visits were for comparatively lengthy periods. During 1984 they
came to about five months in aggregate. In the subsequent years, as one would expect, they became
less frequent and of shorter duration.
The fact that the respondent kept his house at Llandudno [in Cape Town] is in no way inconsistent
with his usual or principal residence or home having been in the United States. He had sound fi-
nancial reasons for retaining an interest in immovable property and he required a place to live when
he visited Cape Town. In other words, he retained a residence in Cape Town and that was quite
consistent with his ordinary residence being in the United States . . .
It follows, in my judgment, that the Court a quo correctly came to the conclusion that the
respondent, at the relevant times, was not ordinarily resident in the Republic.
The appeal is dismissed with costs.
CORBETT CJ, SMALBERGER JA, KUMLEBEN JA and HARMS AJA concurred.

§4 The residence of a juristic person

The effective management of a company is located where key management and commercial decisions
necessary for the conduct of the taxpayer’s business as a whole are in substance made.

[15]
The Oceanic Trust Co Ltd NO v CSARS
(2012) 74 SATC 127 (Western Cape High Court)
The Oceanic Trust Co Ltd, a company registered and incorporated in Mauritius and with its
principal place of business in that country, was the sole trustee of a trust called Specialised
Insurance Solutions (Mauritius) (‘SISM’) which was established and registered in Mauritius
in 2000. The deed of settlement (that is to say, the trust deed which set out the terms of the
trust) provided that Oceanic Trust Co Ltd was to be the first trustee of SISM and went on to
provide that the trustees (that is to say, the persons who, in terms of the trust deed, were
vested with the power to manage the affairs of the trust) were required to maintain their
principal place of business in and to conduct their affairs from premises in Mauritius.
SISM carried on business as a captive re-insurer11 to a South African company, mCubed
Life Ltd, from 2000 to 2006 in terms of an agreement between these two parties. The rein-
________________________

11 A captive insurer or captive re-insurer is an insurance company all of whose shares are held by (in short, which is
wholly-owned by) the policy-holder, that is to say, by the company or other entity that takes out the insurance.
Thus, a company that requires insurance against certain risks may (instead of taking out an insurance policy with
an outside insurance company and paying premiums to that company) set up its own subsidiary company
whose only business is to provide that insurance. The holding company will then pay the insurance premiums
continued
 Residence 23

surance premiums that were payable by mCubed Life were therefore paid to SISM, and
SISM took the view that it had tax obligations only in Mauritius and that it had no tax obliga-
tions in South Africa on the grounds that it was not resident in South Africa, nor did its
income have its source in South Africa.
SARS assessed SISM to income tax, additional tax and interest for the tax years
2000–2007 in an amount of some R1.5 billion on the basis, inter alia, that the Trust was
resident in the Republic because it had its place of effective management in the Republic. (A
further ground of assessment was that SISM’s income had its source in South Africa.)
SISM lodged an objection to the assessment and Oceanic Trust Ltd, which was the origi-
nal trustee of the Trust, applied to the Cape High Court for a declaratory order that SISM
was not a ‘resident’ of South Africa as defined in section 1 of the Income Tax Act.
Held: the court held (at para [57] of the judgment) that the criteria to be applied in order
to make a declaration that SISM was not a resident of the Republic required the court to
make factual findings, inter alia, on whether ‘SISM’s key management and commercial
decisions that are necessary for the conduct in question were in substance made’ in South
Africa or in Mauritius.
Held further: on such facts as had been established, ‘at least some key management deci-
sions and at the very least, the commercial decisions necessary for the conduct of SISM’s
business were in substance made in South Africa’. (The court did not specify what those
decisions were, but it seems clear that the court must have had in mind the extent to which
important management decisions of the Trust were made by way of instructions emanating
from mCubed Holdings Ltd in South Africa, coupled with the fact (see para [55]) that SISM
had not, despite a request, provided SARS with any documentation or with any minutes of
trustees meetings of SISM in Mauritius to substantiate SISM’s claim that it did in fact take
management decisions in Mauritius.). The court was therefore of the view that, on the
Smallwood criteria, SISM had not made out a case for the declaratory relief it had applied for.
Louw J:
[11] . . . [T]his application as a matter of urgency on 29 October 2009. The application was brought
in two parts. . . . In Part B the applicant seeks declaratory orders declaring that:
‘SISM [ie a trust called Specialised Insurance Solutions (Mauritius) which was established and registered in
Mauritius] is not a ‘resident’ of South Africa as defined in section 1 of the Act; . . . ’
[13] The substantive relief sought . . . concerns two separate but related issues. The first concerns
SISM’s status and liability as a taxpayer in South Africa and involves the questions whether SISM is a
‘resident’ of, or whether it carried on a business in the Republic through a ‘permanent establish-
ment’, both as defined in section 1 of the Act. . . .
[16] In order to determine whether the declaratory relief sought by the applicant in this court
should be granted, it is necessary to consider some of the bases upon which SARS has assessed SISM
for tax. . . .
[17] The respondent relies first on the definitions in section 1 of the Act of ‘gross income’ and
‘resident’:

________________________

to its own subsidiary company and any profits made by that subsidiary company from providing such insurance
consequently remain within the group of companies. The premiums paid by the holding company are tax-
deductible for that company. There are thus significant tax advantages and commercial advantages for a busi-
ness entity that expends substantial sums on insurance in establishing a captive insurer, particularly if that cap-
tive insurer can be located off-shore, such that its profits are not taxable in South Africa. [Editor]
24 Income Tax in South Africa: Cases and Materials

‘ “gross income”, in relation to any period or year of assessment, means –

(i) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in
favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by
or accrued to or in favour of such person from a source within or deemed to be within the Re-
public …’ (my emphasis)
‘ “resident” means –
(b) any person (other than a natural person), which is incorporated, established or formed in the
Republic or which has its place of effective management in the Republic, . . . .
[18] The respondent further relies on the definition of ‘resident’ as it appears in article 4 of the
Double Tax Agreement:
‘1. For the purposes of this Agreement:
(a) the term “resident of Mauritius” means any person who, under the laws of that State, is liable to tax
therein by reason of his domicile, residence, place of management or any other criterion of a similar
nature. This term does not include any person who is liable to tax in Mauritius in respect only of in-
come from sources in Mauritius; and
(b) the term “resident of South Africa” means any individual who is ordinarily resident in South Africa
and any legal person which has its place of management in South Africa…..
3. Where by reason of the provisions of paragraph 1 of this Article a person other than an individual is a
resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of
effective management is situated.’
[19] The respondent initially did, but now no longer relies on its first ground for the assessment,
namely, that because SISM was registered with the Master of the South African High Court, who then
issued authority to the applicant to act as a trustee of SISM, SISM was ‘established in the Republic’
and therefore was a ‘resident’ as defined, in South Africa.12 It is therefore not necessary to consider
this first basis upon which the respondent in its assessment concluded SISM to be a resident of
South Africa.
[20] The respondent continues to contend, however, that SISM was a resident as defined by virtue
of it having its place of effective management (POEM) in South Africa and that consequently, its
worldwide receipt or accruals constituted gross income for purposes of the Act, and was taxable in
South Africa. In this regard, the respondent stated in the letter of assessment:
‘In the end, the question as to where an entity’s place of effective management is located is one of fact and of
substance over legal form. It will depend upon a conspectus of all the facts regarding the management and
operation of the business.’
[22] The relevant facts are set out as follows in the letter of assessment:
2 Reasons for assessment
The reasons for the assessment are as follows:
2.1. Facts
During SARS’s audit and its engagement with third parties, SARS ascertained the
following regarding SISM:
2.1.1 . . ..
2.1.2 . . .
2.1.3 The main activity of SISM is to carry out captive re-insurance business;
2.1.4 SISM derived all its business from MCubed Life Limited, a South African
registered company.

________________________

12 It may be inferred that that SARS abandoned this argument because it had come to the conclusion that the
mere fact that a trustee of a foreign trust applies to the Master of the High Court in South Africa for authorisa-
tion in terms of s 8 of South Africa’s Trust Property Control Act, (that is to say, for authorisation to act on be-
half of the trust in respect of transactions entered into in South Africa) does not, in and of itself mean that the
trust was ‘established or formed’ in the Republic, as envisaged in the definition of ‘resident’ in s 1 of the In-
come Tax Act, as it applies to a juristic person. S 8 of the Trust Property Control Act reads as follows: ‘When a
person who was appointed outside the Republic as trustee has to administer or dispose of trust property in the
Republic, the provisions of this Act shall apply to such trustee in respect of such trust property and the Master
may authorise such trustee under section 6 to act as trustee in respect of that property.’ (Editor)
 Residence 25

2.1.5 In 2000, SISM entered into a reinsurance agreement with MCubed Life
Limited. SISM was set up to conduct business as a captive re-insurer of
mCubed Life Limited. . . .
Paragraph 4.2.1 of the re-insurance agreement requires SISM to use the
reinsurance premiums from MCubed Life to:
‘acquire and hold in South Africa or procure that a South African registered cus-
todian or asset manager acquires and holds on its behalf in South Africa ... the as-
sets or categories of assets specified in the applicable policy for the purposes of
the applicable policy.’
According to the information in our possession, the instructions on reinsur-
ance premiums, policies and maturities emanated from MCubed Life Limited
and sometimes from MCubed Holdings Limited.
2.1.6 MCubed Life Limited made decisions in accordance with the re-insurance
agreement on how all the premiums were to be handled (ie invested and dis-
invested) by SISM.
2.1.7 . . .
2.1.8 . . . .
2.1.9 All investments of SISM were made in South Africa.
2.1.10 During the period under review, SISM generated its entire income from
business activities actually conducted in South Africa.
2.1.11 SISM held its bank account with Standard Bank in South Africa. A review of
SISM bank statements showed that SISM did not transfer money to Mauritius
from the bank account in South Africa, and vice versa, throughout the period
that SISM was conducting business in South Africa.
....
2.1.16 SISM did not pay taxes in South Africa.’
[23] The letter of assessment concludes as follows after reference to the facts and the applicable
Law:
‘that SISM was effectively managed in South Africa and not in Mauritius where Oceanic Trust (the applicant)
was situated. Therefore it is a resident of South Africa. As such SISM is liable to taxes in South Africa in terms
of the Income Tax Act.’
[49] As to the meaning of the POEM [place of effective management] of an entity, Mr Emslie
[counsel for the taxpayer] cited the recent decision of the England and Wales Court of Appeal in
Commissioner for Her Majesty’s Revenue and Customs v Smallwood [2010] EWCA Civ 778 delivered on 8
July 2010. . . .
[50] The further appeal by the UK revenue authorities to the court of appeal was upheld. The court
by a majority of two to one held that the POEM of the trust had throughout been in the United
Kingdom and not, at the time of the sale, in Mauritius. Lord Justice Patten delivered the minority
judgment and found that at the relevant time the POEM of the trust was in Mauritius. At paragraphs
48 and 49 of his judgment, Patten LJ said:
‘POEM [place of effective management] is not defined in the Double Tax Agreement but was interpreted by
the Special Commissioners as meaning the place which is the centre of top-level management: ie where the
key management and commercial decisions are actually made. This is the test propounded by Professor Dr
Klaus Vogel in his Commentary on the OECD Model Convention and has been adopted in German case law. It
was also taken to be the correct test by the special commissioner (Mr David Shirley) in Wensleydale’s Settlement
Trustees v IRC [1996] STC 241. The Special Commissioners took as their formulation of the test a passage in
the current Commentary on Article 4(3) of the Model Convention which is in these
terms –
“As a result of these considerations, the “place of effective management” has been adopted as the prefer-
ence criterion for persons other than individuals. The place of effective management is the place where
key management and commercial decisions that are necessary for the conduct of the entity’s business are
in substance made. The place of effective management will ordinarily be the place where the most senior
person or group of persons (for example a board of directors) makes its decisions, the place where the
actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and
all relevant facts and circumstances must be examined to determine the place of effective management.
An entity may have more than one place of management, but it can have only one place of effective man-
agement at any one time.”
26 Income Tax in South Africa: Cases and Materials

Mr Prosser (counsel for the taxpayer) accepts that this is the test to be applied and that what has to be identi-
fied is the place where the real top – level management of the trustee qua trustee occurred rather than the
day–to–day administration of the trust.
[53] Mr Emslie submitted that if the test for POEM adopted and applied in the Smallwood case is
applied to the facts of this case, it is clear that the POEM of SISM had always been in Mauritius. The
relevant facts he reiterated, are that SISM had been established and formed in Mauritius, that its
sole trustee was resident and situated in Mauritius, and that there was no one in South Africa who
can be said to have been orchestrating the management of SISM. The management of the sole trus-
tee of SISM had always been in Mauritius and no decision by the applicant, acting as SISM’s trustee
was made in South Africa. Therefore the POEM of the sole trustee of SISM, ie of the trustee as a
continuing body was clearly in Mauritius. There had been no ‘exporting’ and ‘returning’ of SISM
from South Africa. The fact that SISM carried on its business and conducted certain activities in
South Africa pursuant to an agreement between itself and mCubed Life said nothing about the ef-
fective management of SISM. This, he submitted had always taken place in Mauritius.
[54] In my view, the key features of Smallwood relating to the POEM of an entity relevant to this case
are:
1. The POEM is the place where key management and commercial decisions that are necessary
for the conduct of the entities business are in substance made;
2. The POEM will ordinarily be the place where the most senior group of persons (eg a board of
directors) makes its decision, where the actions to be taken by the entity as a whole are deter-
mined;
3. However, no definite rule can be given and all relevant facts and circumstances must be exam-
ined to determine the POEM of an entity;
4. There may be more than one place of management, but only one POEM at anyone time;
5. The decision was based not only on the general test for POEM but also on the specific section
of the UK legislation which provided that the trustees be treated as a single and continuing
body of persons who shall be treated as resident in the UK unless the general administration of
the trusts is ordinarily carried on outside the United Kingdom and the trustees or the majority
of them for the time being are not resident or not ordinarily resident in the United Kingdom;
and
6. The court undertook a painstaking analysis of the facts and the way the scheme was set up and
was implemented in order to come to the conclusion on where the POEM of the trust in that
case was.
[55] The statements of fact set out by the respondent in the letter of assessment form part of the
facts in this application. The respondent alleges not only that on the facts known to it, SISM gener-
ated its entire income from business activities conducted in South Africa, that SISM held its bank
account with Standard Bank in South Africa and that its bank statements show that throughout the
period that SISM was conducting business in South Africa, SISM did not transfer any money to Mau-
ritius from the bank account in South Africa, and vice versa; but also that the instructions on rein-
surance premiums, policies and maturities emanated from mCubed Life and sometimes from
mCubed Holdings Limited in South Africa; that mCubed Life made decisions in accordance with
the re-insurance agreement on how all the premiums were to be handled (ie. invested and disinvest-
ed) by SISM; that all investments of SISM were made in South Africa; that while CMM was appointed
as SISM’s asset manager and investment advisor for its South African investments, CMM regularly
received instructions from mCubed Holdings Limited and its operating division Asset Management
Outsourcing (AMOS) on SISM’s investments and that the respondent has the names of individuals
from mCubed Holdings who were giving such instructions;.
[56] I do not think that on the Smallwood test, the applicant has made out a case for declaratory
relief in this court.
[57] First, in my view, for this court to declare that SISM was not a resident of the Republic, will
require this court to enquire into the facts and to make factual findings, inter alia on the question
where, in South Africa or in Mauritius, SISM’s key management and commercial decisions that are
necessary for the conduct of SISM’s business were in substance made during the years in
 Residence 27

question. All the material facts relating to the management of SISM have not, in my view, been ‘fully
found’, and are not ‘sufficiently clear’ in order to simply pose the question whether the facts are
such as to bring this case within the definition of ‘resident’ properly construed. In my view the ques-
tion whether SISM was a resident of South Africa is not at this stage, simply a question of law. …
[58] Secondly, even if the facts are sufficiently clear to make a decision the place where key man-
agement and commercial decisions that were necessary for the conduct of SISM’s business, were in
substance made, has, in my view not been established to be outside South Africa. It would appear to
me that at least some key management decisions and at the very least, key commercial decisions
necessary for the conduct of SISM’s business were in substance made in South Africa. Therefore,
applying the Smallwood test, the facts to the extent that they have been established, do not, in my
view, establish that the POEM of SISM was in Mauritius, and not in South Africa.

Notes
These proceedings involved an application to the Cape High Court by Oceanic Trust Co Ltd
nomine officii (that is to say, in its capacity as a trustee) for an interdict to bar SARS from
13
enforcing an assessment that it had issued in respect of the trust, that is to say, in respect of
SISM (a Mauritian-based trust) and for a declaratory order that SISM was not a ‘resident’ of
South Africa for purposes of South Africa’s Income Tax Act, inter alia on the grounds that its
place of effective management (‘POEM’) was not located in South Africa.
Since there was no decision of the South African courts (and since the Income Tax Act is
silent in this regard) on the criteria that determine a company’s ‘place of effective manage-
ment’ (which is one of the statutory criteria that establishes the place of residence of a
juristic person for the purposes of the Act) the Cape High Court looked for guidance to the
decision in 2010 of the English Court of Appeal in Commissioner for Her Majesty’s Revenue and
Customs v Smallwood [2010] EWCA Civ 778.
In that case, the English court took cognisance of the OECD Model Convention on Income
14
and Capital which takes a juristic person’s place of effective management as being the
centre of top-level management, that is to say, where the key management and key commer-
cial decisions that are necessary for the conduct of the entity’s business are actually made.
In citing the principles laid down in the Smallwood judgment, the Cape High Court implic-
itly accepted that the decision is only of persuasive value in South Africa, but pointed out
that the judgment was based not only on the general test for the place of effective manage-
ment, but also on a specific section of UK legislation that has no direct counterpart in South
Africa.
The Cape High Court (at para [56]) held that, on the basis of the Smallwood criteria, SISM
(represented by its trustee, Oceanic Trust Co Ltd) had not made out a case for a declaratory
order that it was not resident in South Africa, firstly because such an order would require
the court to make factual findings as to where SISM’s key management and key commercial decisions
had been made during the tax years in question – and those facts had not been sufficiently
established in the present court proceedings. Thus, the issue of whether SISM was, for
income tax purposes, a resident of South Africa was not, at this

________________________

13 In terms of the so-called ‘pay-now-argue-later’ rule, tax becomes payable immediately an assessment is issued. If
a taxpayer disputes the assessment, the general principle is that he must pay the amount of tax assessed and
then follow the requisite processes for objecting to and appealing against the assessment. If the taxpayer is
successful in those proceedings in establishing that he was not liable for the assessed tax, he will be refunded
by SARS.
14 The Convention is an accord reached between member states of the Organisation for Economic Cooperation
and Development (‘OECD’) that serves as a guide for tax agreements between those states.
28 Income Tax in South Africa: Cases and Materials

stage of the judicial proceedings, simply a question of law, but turned on as yet undeter-
mined factual issues which could not be adjudicated by a court in application proceedings.
(In application proceedings, the parties put forward their case by way of affidavits and no
witnesses are called to testify. Application proceedings are thus suited only to decide matters
in which there are no factual disputes, and in which the case turns on issues of law.) Second-
ly, said the court (at para [58]), on the basis of such facts as were sufficiently clear at this juncture,
it seemed that at least some key management decisions and some key commercial decisions
necessary for the conduct of SISM’s business had indeed been made in South Africa. In
terms of the Smallwood criteria, this tended to show that SISM’s place of effective manage-
ment might well be located in South Africa. The court held that it could not, at this point in
the litigation, definitively rule that SISM was not resident in South Africa, and the court there-
fore declined to issue the declaratory order, sought by Oceanic Trust Co Ltd, as trustee, that
the trust was not resident in South Africa. Unless a settlement was reached, the litigation
would therefore have to continue in order to resolve the factual disputes in regard to wheth-
er the effective management of SISM, during the tax years in question, was located in South
Africa.
Significantly, the Cape High Court completely ignored the criteria for determining the
place of effective management laid down by SARS in Interpretation Note 6 (version 1 – since
replaced by version 2). Interpretation Notes do not have the status of law. They are, in
essence, merely SARS’s opinion as to what the law is and, in this instance, the court reached
a conclusion completely at variance with that Interpretation Note.
In a Discussion Paper released in November 2011, SARS acknowledged the criticisms that
had been made of version one of that Interpretation Note and at least implicitly acknowl-
edged the persuasiveness of the Smallwood criteria. The second version of Interpretation
Note 6, which is to replace the much-criticised first version, now incorporates the principles
laid down in the Oceanic Trust decision.
The criteria laid down in the Oceanic Trust judgment are themselves not a model of clarity.
Inter alia, no guidance is given on what distinguishes a ‘key’ decision from other decisions. Is
the touchstone in this regard the magnitude of the financial consequences of the decision?
Is it perhaps the magnitude of the decision in relation to corporate strategy? Moreover, the
distinction between key management decisions and other important decisions affecting the
company was not explained. A key management decision, arguably, relates to issues of policy
and strategy, whereas a key commercial decision arguably relates primarily to financial matters
that do not have a strategic or policy dimension.
The draft Interpretation Note 6 (issue 2), discussed below, addresses and puts forward
views on some of these issues. An Interpretation Note does not have the status of law, and
merely sets out SARS’s view on what the law is or should be. The principles in this regard will
become law only if and when the Income Tax Act is amended to include a statement of
those principles, or when such principles are laid down in a judgment of the Superior
Courts.

[16]
Draft Interpretation Note 6 (issue 2): “place of effective management”
SOUTH AFRICAN REVENUE SERVICE
DRAFT INTERPRETATION NOTE NO. 6 (issue 2)
DATE OF RELEASE: 31 July 2015
EFFECTIVE DATE: not yet announced
INCOME TAX ACT, 58 of 1962 (“the Act”)
SECTION: SECTION 1
SUBJECT: RESIDENT: PLACE OF EFFECTIVE MANAGEMENT (COMPANIES)
[The following is the text of the draft Interpretation Note, lightly edited and with footnotes
omitted. Editor.]
 Residence 29

1. Purpose
This Note provides guidance on the interpretation and application of the term “place of effective
management” in determining the tax residence of a company.
2. Background
The concept of residency is critical in determining a person’s South African tax obligations. In gen-
eral, a resident is liable to income tax on gross income derived within and outside the Republic
while a non-resident is only liable to income tax on gross income from a source within the Republic.
A person other than a natural person is a “resident” as defined in section 1(1) if such person –
• is incorporated, established or formed in the Republic; or
• has its place of effective management in the Republic.
The definition excludes any person that is deemed to be exclusively a resident of another country
for purposes of the application of any tax treaty. In addition, special considerations apply to a “for-
eign investment holding company” as defined in the Act. The term “place of effective management”
is not defined in the Act and must be ascribed its ordinary meaning, taking into account interna-
tional precedent and interpretation. It does, however, not have a universally accepted meaning and
various countries, including members of the OECD, continue to attach different meanings to it. The
purpose of this Note is to discuss the principles and guidelines that will be applied for purposes of
considering the definition of “resident” in section 1(1). These principles and guidelines are con-
sistent with the determination of the place of effective management when that term is used as a tie-
breaker rule in a tax treaty that adheres to paragraph 32 of Article 4 of the condensed version of the
OECD Model Tax Convention as at 15 July 2014 and its accompanying Commentary. Although this
Note deals with effective management in the context of companies, the underlying principles will
generally apply to other entities and bodies of persons that are not natural persons. For example, in
the case of a trust, the structures involved and terminology used may require some adaptation but
the determination of the place of effective management would take into account the same consider-
ations as those discussed in the Note. Depending on the facts applicable there may be additional
considerations that need to be taken into account. Many countries have introduced legislation creat-
ing a variety of hybrid entities that combine traditional features of partnerships and companies. A
number of countries have also enacted legislation creating new types of trusts. These new business
vehicles may present unique issues that are not specifically addressed in this Note. The place of ef-
fective management must be supported by the facts. A company bears the onus of proof on the issue
of place of effective management and should retain the necessary evidence to support the view tak-
en.
3. The law
[The definition of “resident” in s 1 of the Income Tax Act 58 of 1962 reads as follows:]
‘ “resident” means any –
(a) …
(b) person (other than a natural person) which is incorporated, established or formed in the Republic or
which has its place of effective management in the Republic, but does not include any person who is
deemed to be exclusively a resident of another country for purposes of the application of any agreement
entered into between the governments of the Republic and that other country for the avoidance of dou-
ble taxation: Provided that where any person that is a resident ceases to be a resident during a year of as-
sessment, that person must be regarded as not being a resident from the day on which that person ceases
to be a resident: Provided further that in determining whether a person that is a foreign investment entity
has its place of effective management in the Republic, no regard must be had to any activity that –
(a) constitutes –
(i) a financial service as defined in section 1 of the Financial Advisory and Intermediary Services Act,
2002 (Act No. 37 of 2002); or
(ii) any service that is incidental to a financial service contemplated in subparagraph (i) where the
incidental service is in respect of a financial product that is exempted from the provisions of that
Act, as contemplated in section 1(2) of that Act; and
(b) is carried on by a financial service provider as defined in section 1 of the Financial Advisory and Interme-
diary Services Act, 2002 (Act No. 37 of 2002), in terms of a licence issued to that financial service provider
under section 8 of that Act;’
30 Income Tax in South Africa: Cases and Materials

4. Application of the law

4.1 General principle – the meaning of place of effective management
A company’s place of effective management is the place where key management and commercial
decisions that are necessary for the conduct of its business as a whole are in substance made. This
approach is consistent with the OECD’s commentary on the term “place of effective management”.
The place of effective management is used in paragraph 3 of Article 4 of the OECD’s Model Tax
Convention on Income and on Capital as a tie-breaker when a person other than an individual is consid-
ered, before the application of the tie-breaker, to be a resident of both of the Contracting States to
the tax treaty. The application of the tie-breaker 3 results in the person being deemed to be a resi-
dent only of the State where its place of effective management is located. In Oceanic Trust Co Ltd NO
v C:SARS Louw J held that the taxpayer had not made out a case for declaratory relief declaring that
it was not a resident of South Africa because the facts were not “fully found”. However, applying the
approach adopted in Smallwood (which is consistent with that set out in the preceding paragraph),
Louw J noted that to the extent the facts were established, they did not establish that the place of
effective management was in Mauritius and not South Africa. Overseas court cases in the context of
tax treaty interpretation have provided useful interpretations on the meaning of the place of effec-
tive management. For example, in Wensleydale’s Settlement Trustees v Inland Revenue Commissioners,
Special Commissioner David Shirley made the following comment on the ordinary meaning of place
of effective management:
“I emphasise the adjective ‘effective’. In my opinion it is not sufficient that some sort of management was car-
ried on in the Republic of Ireland such as operating a bank account in the name of the trustees. ‘Effective’
implies realistic, positive management. The place of effective management is where the shots are called, to
adopt a vivid transatlantic colloquialism.” (Emphasis added.)

In Smallwood the court held that determining the place of effective management required the court
to determine where, based on the facts presented, the real top level of management or realistic,
positive management of the taxpayer, a trust, was exercised. Although this case dealt with the de-
termination of the place of effective management in the context of a trust, the court’s decision is
considered useful because the principles and the type of facts that were considered are equally rele-
vant in the context of companies. The court found that there was a distinction between the scheme
of management (which constituted the key management and commercial decisions) and day-to-day
management exercised by the trustees from time to time with the former determining the place of
effective management. A company may have more than one place of management but it can only
have one place of effective management at any one time. If a company’s key management and
commercial decisions affecting its business as a whole are made at a single location, that location will
be its place of effective management. However, if those decisions are made at more than one loca-
tion, the company’s place of effective management will be the location where those decisions are
primarily or predominantly made. Experience has shown that the application of these principles
does not present serious problems in the majority of cases. For example, it is relatively easy to de-
termine a company’s place of effective management if that company operates in several countries
through branches with local managers, but has its head office in South Africa where most of its sen-
ior management are located and where most, if not all, of its board meetings take place. In contrast,
the determination in the case of a company that is part of a global group that operates on a division-
al as opposed to a separate legal entity basis with senior management teams that are responsible for
different aspects of the business being based in different locations, and whose senior management
teams travel frequently, would be more complicated. This complexity can be compounded when
overlaid with modern technology such as videoconferencing and electronic mail. Notwithstanding
the potential levels of complexity, the determination of the place of effective management still in-
volves an application of the same core principles.

4.2 Key facts and circumstances

There are normally multiple facts that need to be taken into account, often involving multiple loca-
tions, and from those facts and locations it is necessary, as noted above, to determine a single domi-
nant place where effective management is located. The determination looks at where the key
management and commercial decisions are regularly and predominantly made. It is not a snapshot
requiring an assessment at a particular moment in time. Although the determination of the place of
effective management is not based on a snapshot at a particular moment in time,
 Residence 31

when a company changes its place of effective management the change in residence (ignoring for
the moment its place of incorporation, establishment or formation) occurs on a particular date and
is not in relation to a year of assessment.
Example 1 – Time period
Facts: Company A is a listed South African-incorporated multinational company with branches
operating in Africa, Europe and America. Its head office is based in South Africa and the quar-
terly board meetings are generally all held in Cape Town. During the 2015 year of assessment
Company A held the 3rd of its quarterly meetings in London to coincide with its secondary list-
ing on the London Stock Exchange and the related interactions with financial advisors and
media.
Result: One meeting of the board of directors in London will not result in the effective man-
agement of the company temporarily moving to the United Kingdom. The senior management
team and the board of directors regularly and predominantly make the key management and
commercial decisions in South Africa and South Africa is accordingly Company A’s place of ef-
fective management. Definitive rules cannot be laid down in determining the place of effective
management and all relevant facts and circumstances must be examined on a case-by-case basis.
Although it is not possible to provide a detailed list of all the factors that must be considered,
some of the key facts and circumstances that must be examined in determining a company’s
place of effective management are discussed below. This list is not intended to be exhaustive
but serves merely as a guideline.
The place of effective management test is one of substance over form. It therefore requires the iden-
tification of those persons in a company who actually ‘call the shots’ and exercise ‘realistic positive
management’. Otherwise stated, a company’s place of effective management must be determined by
ascertaining who makes the key management and commercial decisions for the conduct of the
company’s business as a whole. Once this determination has been made, it is necessary to determine
where those decisions are in substance actually made.
4.2.1 Head office
The location of a company’s head office, being the place where a company’s senior management
and their support staff are predominantly located, is generally a major factor in the determination of
a company’s place of effective management because it often represents the place where key compa-
ny decisions are made. For example, in the case of an operating company whose board only meets
once a year, it is probably likely that key management and commercial decisions will be made more
frequently than once a year and that the place of effective management will not be where the board
meeting is held. Similarly, board meetings could be held more frequently but key management and
commercial decisions may nevertheless be made outside of those board meetings. All the facts and
circumstances must be considered. The following points apply in relation to head offices:
• A company’s head office is easy to determine when all the company’s senior management and
their support staff are based in a single location and that location is held out to the public as the
company’s principal place of business or headquarters.
• A company may be more decentralised. For example, various members of senior management
may operate, from time to time, at offices located in the various countries where the company
operates. In these situations, the company’s head office would be the location where those senior
managers are primarily or predominantly based or where they normally return to following travel
to other locations or meet when formulating or deciding key strategies and policies for the com-
pany as a whole.
• Members of senior management may operate from different locations on a more or less perma-
nent basis. In these situations, the members may participate in meetings via telephone or video
conferencing rather than being physically present at meetings in a principal location. In these
situations, the head office would normally be the location, if any, where the highest level of man-
agement (for example, the Managing Director and Financial Director) and their direct support
staff are located.
• Finally, there may be some situations in which senior management is so decentralised that deter-
mining the company’s head office with a reasonable degree of certainty is not possible. Conse-
quently, in these situations, the location of a company’s head office would be of less relevance in
determining that company’s place of effective management.
32 Income Tax in South Africa: Cases and Materials

4.2.2 Delegations of authority

A company’s board may delegate some or all of its authority to one or more committees, for exam-
ple, an executive committee consisting of key members of senior management. In these situations,
the location where the members of the executive committee are based and where that committee
develops and formulates the key strategies and policies for formal approval by the full board will
often be considered the company’s place of effective management. The delegation of authority may
be either de jure (by means of a formal resolution or Shareholder Agreement) or de facto (based up-
on the actual conduct of the board and the executive committee). Again, the goal is to determine
where the key management and commercial decisions for the company as a whole are in substance
made and not where those decisions are merely formally approved. This determination applies irre-
spective of whether the delegation is formal or informal, enforceable or not. It is critically important
to consider what the executive committee does in assessing whether its functions amount to making
key management and commercial decisions.

4.2.3 Board

The location where a company’s board regularly meets and makes decisions may often be the com-
pany’s place of effective management provided the board retains and exercises its authority to gov-
ern the company and does, in substance, make the key management and commercial decisions
necessary for the conduct of the company’s business as a whole. This situation often prevails when
the board meetings are held in the same country as the country where the company’s head office is
located and all the directors participating in the board meetings are physically present at the meet-
ings. The impact on the place of effective management arising from the holding of board meetings
in different locations is another aspect that requires consideration if applicable. There is, however,
no assumption that a company’s place of effective management must be where its board meets. For
example, if a board has de facto delegated the authority to make the key management and commer-
cial decisions for the company to the senior managers and does nothing more than routinely ratify
decisions that have been made, the company’s place of effective management will ordinarily be the
place where those senior managers make those decisions. This situation would often apply, for ex-
ample, when the formal board meetings are held in a location that bears no relationship to the
company’s activities or the primary location from where the senior managers perform their duties.
Management structures, reporting lines and responsibilities vary from company to company and no
hard and fast rules exist. In considering whether a board is making the decisions or, alternatively, is
limited to formally approving or rubber-stamping the decisions made by someone else, one must
take into consideration a variety of factors. These include, for example, whether the directors have
sufficient knowledge and information at hand, whether the directors are suitably qualified and ex-
perienced generally and in relation to the particular company, and whether the directors had rea-
sonable time to assess the information and make the decision. Again, one has to look at all the
relevant facts and circumstances of a particular case. Similarly, when considering the role of differ-
ent directors, it must be established whether the particular director is involved in the decision-
making or is perhaps merely ratifying a decision made by other directors or people. For example, it
is possible for a director to be appointed with a governance-focused role or as a shareholder repre-
sentative and custodian as opposed to being actively involved in making decisions on behalf of the
company. In Laerstate v The Commissioner for Her Majesty’s Revenue & Customs [Corporation Tax] the
court was required to first, consider where the company was managed and controlled for United
Kingdom tax purposes and, secondly, consider where its place of effective management was for tax
treaty purposes. In so doing, the court was required to consider whether a director acted on another
person’s wishes or instructions without truly considering the merit of those wishes or instructions or
whether the director considered the wishes or instructions but still made the decision while in pos-
session of the minimum information required to make a decision. It is not possible to succinctly
summarise the detailed facts of the particular case, which were critical to the court’s judgment, in
this Note. Accordingly, readers who would like to obtain a deeper understanding of the particular
case should refer to the judgment. See also Wood & another v Holden (HMIT) and Commissioner for Her
Majesty’s Revenue and Customs v Smallwood & Another. In some cases taxpayers have a pre-meeting
which, as the name suggests, precedes a board meeting. In these circumstances consideration must
be given to what happens in the pre-meeting, who participates, where the meeting takes place and
what, if any, decisions are made since this could impact on the place of effective management.
 Residence 33

4.2.4 Modernisation and global travel

Changes in telecommunications, information technology, global travel and modern business prac-
tices can impact on the place of effective management. These factors have meant that physical meet-
ings of the board are often no longer required or implemented or, alternatively, that even when
physical board meetings are held in a particular location some, possibly a majority, of the directors
or the key directors with overriding decision-making powers, are not in the same location as the
physical meeting. Consequently, what initially appears to be the location where the decisions are
made, that is, the physical location of the board meeting, may not be where the key management
and commercial decisions are in substance being made. The use of round robin voting is also some-
thing that must be considered from the perspective of the frequency with which it is used, the type
of decisions made in that manner and where the parties involved in those decisions are located.
Accordingly, it is important not to place an undue focus on the location where board meetings take
place without considering the surrounding facts and circumstances of a particular case.

4.2.5 Shareholders

Company law or a company’s rules or by-laws often reserve the making of certain fundamental deci-
sions for the shareholders of the company. For example, such decisions may include the sale of all
or substantially all of the company’s assets, the dissolution, liquidation or deregistration of the com-
pany, the modification of the rights attaching to various classes of shares or the issue of a new class
of shares. Fundamental decisions such as these typically affect the existence of the company itself or
the rights of the shareholders as shareholders, rather than the conduct of the company’s business
from a management or commercial perspective. Accordingly, such decisions are generally not rele-
vant to the determination of a company’s place of effective management. However, shareholder
involvement can cross the line into that of effective management. For example, a shareholder may
effectively usurp the powers of the directors of the company. This situation typically (but not neces-
sarily) arises when the company is wholly owned by a single person (whether a company, other juris-
tic person or individual) or there are multiple shareholders but those shareholders are either
connected persons in relation to each other or are acting in concert. This issue is of particular con-
cern in connection with passive holding companies located in low tax jurisdictions. There is a dis-
tinction between shareholder guidance or influence and usurpation. Influence does not constitute
effective management but undue influence may. For example, if the board considers what the
shareholder has recommended and independently makes its own decision, this would not constitute
usurpation even if the decision made by the board is in line with the shareholder’s recommenda-
tion. The important point which has to be established is whether the board independently makes its
own decisions or is merely implementing what the shareholder has already decided for the company
and in that way does not actually make decisions. Depending on the facts the line between influ-
ence, and merely approving or rubberstamping may be unclear. Situations in which a shareholder
or another party usurps effective management will probably be the exception rather than the norm.
In Unit Construction v Bullock, the subsidiary companies’ constitutions required that they be managed
by their own boards. The court, however, found that in all matters of real importance affecting cen-
tral management and control, the real management and control was exercised by the board of the
parent company. The House of Lords agreed that although the parent company’s actions were ar-
guably unlawful, it did not override the factual reality of by whom and from where the subsidiary
companies were managed and controlled. Shareholders sometimes limit the authority of, or provide
guidelines for, the board and senior managers of a company. For example, a parent company may
set limitations of authority or guidelines for a subsidiary company. These limitations of authority or
guidelines must, in conjunction with all the other facts and circumstances, be reviewed in detail to
determine whether the effect is that the shareholder is actually making the key decisions or whether
the company, although receiving guidance or some input, is still making them. It is quite common
for a parent entity of a multinational group to set guidelines and policies for the group as a whole in
order to direct, coordinate and monitor activities of the group as a whole. This does not necessarily
mean, and often does not mean, that the subsidiary company is not making its own decisions, but all
the facts must be considered when making this assessment.

Example 2 – Limitation of authority

Facts: Company A concludes long-term contracts with clients which extend over a number of
years. A single contract can have a significant effect on the financial viability of Company A
34 Income Tax in South Africa: Cases and Materials

and as a result Company A’s senior management team signs off on all contracts. The conclu-
sion of sales contracts represents a predominant key commercial decision for Company A. Un-
der a limitation of authority the company’s senior management team may only conclude
contracts not exceeding a contract value of R10 million. For contracts exceeding this value, the
company must submit its recommendation to the parent company and the parent company
makes the decision whether or not the contract may be accepted. The company must imple-
ment the parent company’s decision. 90% of contracts have a value that exceeds R10 million.
Result: Although more detail would be required and all the facts affecting all the key manage-
ment and commercial decisions of the company as a whole would have to be taken into ac-
count, the facts suggest that the effective management of the company may have been usurped
by the parent company. The limitation of authority in this case has effectively removed the
company’s real authority to make decisions and has gone beyond a mere monitoring mecha-
nism or information-reporting requirement. Limitations of authority and guidelines are com-
mon in multi-national groups of companies. The details are critical in assessing who is, in
substance, making the company’s key management and commercial decisions.

4.2.6 Operational management versus broader top level management

Operational management decisions are generally of limited relevance in determining a company’s
place of effective management and must be distinguished from the key management and commer-
cial decisions. Operational management generally concerns the oversight of the day-to-day business
operations and activities of a company. Key management and commercial decisions are concerned
with broader strategic and policy decisions and tend to be made by members of the senior manage-
ment team. For example, a decision to open a major new manufacturing facility or to discontinue a
major product line would be examples of key commercial decisions affecting the company’s business
as a whole. By contrast, decisions by the plant manager appointed by senior management to run that
facility, concerning, for example, repairs and maintenance, the implementation of company-wide
quality controls and human resources policies, would be examples of operational management.
What constitutes a key management or commercial decision as opposed to an operational manage-
ment decision is critical as it is the former that is relevant in the context of establishing the place of
effective management. Again, this is an aspect that can only be determined on a case-by-case basis.
For example, in some businesses the conclusion of each and every contract will be a key commercial
decision whereas in other businesses the setting of standardised pricing will be a key commercial
decision but the conclusion of individual contracts will not be. Depending on the particular case,
the person responsible for operational decisions may be the same as the person responsible for the
key management and commercial decisions. In this situation it is still necessary to distinguish be-
tween the two types of decisions and to assess where the key management and commercial decisions
are made. The location of this decision-making is critical.

4.2.7 Legal factors

Legal factors such as a company’s place of incorporation, formation or establishment, the location
of its registered office and the location of its public officer are generally not relevant in the determi-
nation of a company’s place of effective management.

4.2.8 Economic nexus

The extent of a company’s economic nexus with a country is generally not relevant in the determina-
tion of a company’s place of effective management. However, this factor may be considered circum-
stantial and given some weight in cases where other factors are inconclusive.
Example 3 – Place of effective management
Facts: Bigco is a multinational company, incorporated under the laws of the United Kingdom,
with substantial operations in South Africa, the United Kingdom and the United States. Its
shares have a primary listing on the JSE, a secondary listing on the London Stock Exchange
and are also traded on the New York Stock Exchange through American Depository Receipts.
The company’s head office is located in South Africa and its Managing Director, Financial Direc-
tor and Chief Operating Officer are based in South Africa. The divisional managers who are re-
sponsible for the company’s operations in the United Kingdom and
 Residence 35

the United States are based in those countries, as are several non-executive directors. Bigco’s
board makes the key management and commercial decisions for the conduct of the company’s
business as a whole. It generally holds three meetings each year, one in each of the countries
where Bigco operates. Bigco’s Managing Director, Financial Director and Chief Operating Of-
ficer typically attend all of the company’s board meetings and use the trips to meet with the
company’s operational managers in the United Kingdom and the United States as well as to
meet with investors or investment analysts in those countries. All of the ‘board packs’ are pre-
pared by personnel at Bigco’s head office, which may include information sent to the head of-
fice by the divisional managers. Head office personnel, including the Managing Director,
Financial Director and Chief Operating Officer, and their direct staff, are also responsible for
developing and formulating proposed strategic plans for consideration and action by the
board. The board actively reviews these plans before taking a decision, and from time to time,
either rejects or requires modifications to those proposals.
Result: Under the circumstances, Bigco’s place of effective management is South Africa.
Amongst other things, one of the three board meetings where decisions are made is held in
South Africa with no other location holding a majority of board meetings and its head office
and highest level of senior management are both located in South Africa. The fact that Bigco is
incorporated in the United Kingdom is not relevant. Any circumstantial evidence related to the
company’s economic nexus with any of the countries in question would also be of limited or no
probative value in this instance.

4.2.9 Support functions

It is not uncommon for a multinational company to centralise certain support functions such as data
management, human resources, customer support or accounting, and to locate those services in
countries that offer advantages such as superior infrastructure, lower costs or a highly skilled work-
force. A group of companies may house these services in the group’s ultimate holding company or
in a separate subsidiary which provides the services to all the members of the group. In these situa-
tions, the locations where those services are primarily performed and where the senior managers
responsible for them are based may be different to the location of the company’s head office where
the top senior management and the senior management’s direct support staff are located. Although
such support services may be essential to a company with support service related policies and proce-
dures having a company-wide effect, the managers in charge of those services are often not involved,
or only secondarily involved, in making key management and commercial decisions that affect the
conduct of the company’s business as a whole (outside of the area of the specific support functions
that they are responsible for). Consequently, the location where such support services may be locat-
ed is generally of limited relevance to the determination of a company’s place of effective manage-
ment.

5. Effective date
SARS does not anticipate that the application of this Note, as opposed to its predecessor
(Issue 1 of this Note), will result in many, if any, companies previously held to have their place of
effective management outside South Africa now being held to have it in South Africa, and vice versa.
However, if a company feels it is in this position, SARS would welcome the opportunity to discuss the
facts of the case with the company concerned.

6. Conclusion
A company’s place of effective management is the place where key management and commercial
decisions that are necessary for the conduct of its business as a whole are in substance made. This
approach is consistent with the OECD’s commentary on the term “place of effective management”.
A company may have more than one place of management but it can only have one place of effec-
tive management at any one time. There are normally multiple facts that need to be taken into ac-
count, often involving multiple locations, and from those facts and locations it is therefore necessary
to determine a single dominant place where effective management is located. Definitive rules can-
not be laid down in determining the place of effective management and all relevant facts and cir-
cumstances must be examined on a case-by-case basis. The place of effective management test is one
of substance over form. It therefore requires a determination of those persons in a company who
actually ‘call the shots’ and exercise ‘realistic positive management’.
36 Income Tax in South Africa: Cases and Materials

Notes
In terms of the draft Interpretation Note 6 (Issue 2), the key factor in determining a com-
pany’s place of effective management is the location at which key management and commercial
decisions (as distinct from day-to-day management decisions and as distinct from operational
management decisions) that are necessary for the conduct of the company’s business as a
whole are made. In this regard, a company can have only one place of effective management
at any given time, although that place can change.
If such key decisions are made at a place or by persons other than is required by the com-
pany’s constitution, regard is had to the place where and the persons by whom the decisions
were in fact taken, not where or by whom the decisions ought, in law, to have been taken.
The location of a company’s registered office is generally not relevant in determining the
company’s place of effective management.
Where key decisions are made at more than one location, then the company’s place of
effective management will be where those decisions are primarily or predominantly made.
Where various persons participate in meetings via telephone or video-conferencing, the
company’s place of effective management will be the location of the participants vested with
the highest level of management decision-making.
Substance prevails over form. Thus, regard is had to where the key decisions are actually
made, not where they are merely formally approved, ratified or rubber-stamped.
If shareholders in fact usurp the decision-making powers of the board of directors, then
the fact of usurpation is decisive. Mere influence on decision-making must be distinguished
from usurpation of decision-making power, but undue influence may amount to usurpation.
Where key decision-making authority is delegated, whether de facto (in fact) or de jure (in
law), for example delegation to a committee, regard is had to where the persons with that
delegated authority in fact took the relevant key decisions.
Key management and commercial decisions must be distinguished from operational man-
agement decisions which usually concern mere oversight of the company’s day-to-day busi-
ness operations and activities. Thus, for example, a decision to open a major new
manufacturing facility would be a key commercial decision affecting the company’s business
as a whole, but decisions by a plant manager regarding repairs, maintenance and quality
control – though important – would constitute mere operational management. Similarly,
support services may be essential to a company, but the managers in charge of such services
are not usually involved in making the company’s key management and commercial deci-
sions.
 3
SOURCE

§ Page
1 Introduction ............................................................................................................. 38
2 General principles ................................................................................................... 40
[17] CIR v Lever Bros & Unilever Ltd................................................................... 40
[18] Nathan v FCT ................................................................................................. 41
[19] Essential Sterolin Products (Pty) Ltd v CIR .................................................. 42
[20] M Ltd v COT (SR) .......................................................................................... 45
[21] CIR v Epstein .................................................................................................. 45
3 Composite or multiple sources: apportionment .................................................... 46
[22] CIR v Lever Bros & Unilever Ltd................................................................... 47
[23] COT (SR) v Shein .......................................................................................... 47
[24] ITC 1491 ......................................................................................................... 49
4 Annuities ................................................................................................................... 52
[25] Boyd v CIR ...................................................................................................... 52
[26] ITC 826 ........................................................................................................... 52
[27] COT v R .......................................................................................................... 54
5 Income from services .............................................................................................. 56
[28] CIR v Lever Bros & Unilever Ltd................................................................... 57
[29] COT (SR) v Shein .......................................................................................... 58
[30] CIR v Nell........................................................................................................ 58
[31] COT (SR) v Shein .......................................................................................... 59
6 Directors’ fees .......................................................................................................... 59
[32] ITC 77 ............................................................................................................. 60
[33] ITC 106 ........................................................................................................... 61
[34] ITC 235 ........................................................................................................... 62
[35] ITC 250 ........................................................................................................... 63
[36] ITC 266 ........................................................................................................... 63
7 Sale............................................................................................................................ 64
7.1 General principles ........................................................................................... 64
[37] CIR v Epstein ....................................................................................... 64
[38] Transvaal Associated Hide and Skin Merchants v
Collector of Income Tax, Botswana ................................................... 65
[39] Davis v COT ......................................................................................... 65
7.2 Sale of immovable property ............................................................................ 66
[40] Liquidator, Rhodesia Metals Ltd v COT, Southern Rhodesia .......... 66
[41] Rhodesian Metals Ltd (in liq) v COT, Southern Rhodesia .............. 67
37
38 Income Tax in South Africa: Cases and Materials

§ Page
7.3 Sale of goods.................................................................................................... 68
7.3.1 Purchase of raw materials and sale of finished product .................... 68
[42] Transvaal Associated Hide and Skin Merchants v
Collector of Income Tax, Botswana ........................................ 68
7.3.2 Manufacture of goods followed by sale ............................................... 71
[43] ITC 1103 ................................................................................... 71
7.3.3 Sale of goods: deemed source; s 9(1)(a) (now repealed) ................. 71
[44] Cape Explosives Works Ltd v SA Oil and Fat Industries Ltd . 72
[45] ITC 454 ..................................................................................... 73
7.4 Sale of shares ................................................................................................... 74
[46] Overseas Trust Corp Ltd v CIR ........................................................... 75
[47] CIR v Black .......................................................................................... 76
[48] M Ltd v COT (SR) ............................................................................... 77
8 Rent .......................................................................................................................... 79
[49] ITC 170 ........................................................................................................... 79
[50] CIR v Lever Bros & Unilever Ltd................................................................... 81
[51] COT v British United Shoe Machinery (SA) (Pty) Ltd ................................ 81
9 Partnership ............................................................................................................... 82
[52] CIR v Epstein .................................................................................................. 82
[53] FCT v Everett .................................................................................................. 85
10 Dividends.................................................................................................................. 85
[54] Boyd v CIR ...................................................................................................... 86
[55] Lamb v CIR ..................................................................................................... 87
11 Interest ..................................................................................................................... 89
[56] COT v William Dunn & Co Ltd ..................................................................... 89
[57] CIR v Lever Bros & Unilever Ltd................................................................... 90
[58] ITC 82 ............................................................................................................. 94
[59] ITC 1021 ......................................................................................................... 94
12 Royalties ................................................................................................................... 96
[60] Millin v CIR..................................................................................................... 96

§1 Introduction
The definition of ‘gross income’ was amended, with effect from years of assessment
commencing on or after 1 January 2001, to provide that persons who are resident
(as defined)1 in the Republic are taxed on their total income (that is to say, on all
amounts, received or accrued, other than amounts of a capital nature) irrespective of
their source – in other words, on their world-wide income – whilst non-residents are
taxed in the Republic only on income which has its source in the Republic, or is deemed
to have its source in the Republic. (The deemed source provisions in s 9 of the Act were
thereafter radically amended by the Taxation Laws Amendment Act 24 of 2011 in respect
of amounts received or accrued on or after 1 January 2012; the previous s 9 was repealed
and replaced in its entirety.) With this legislative amendment, the Republic changed
from a source-based to a residence-based tax system.

________________________

1 Section 1 sv ‘resident’.
 Source 39

The system that has been adopted has been described as a ‘residence-minus’ system,
which means that residents will be taxed on their world-wide income, but that certain
categories of income and activities undertaken outside the Republic will be exempt from
tax.
The question of whether income has its source in the Republic thus remains relevant
in determining the tax liability of persons who are not resident in the Republic.
The Act does not define what is meant by a ‘source within the Republic’ and the in-
terpretation has been left to the judiciary. Although it is sometimes said that a person’s
source of income is rent, dividends, interest, etc, this is inaccurate usage. Rent, divi-
dends, interest etc are the income itself and not the source of the income.2 By source is
meant ‘the originating cause’.of the income. Once the originating cause has been de-
termined, the location of that cause must then be established to see whether such loca-
tion is within the Republic.
The generally accepted definition of ‘source’ in our law is that laid down by Watermeyer
CJ in CIR v Lever Bros & Unilever Ltd,3 where he said that
‘the source of receipts, received as income, is not the quarter whence they come but the originating cause
of their being received as income and that this originating cause is the work which the taxpayer does to
earn them, the quid pro quo which he gives in return for which he receives them’.
Such work’’, said Watermeyer CJ, may be a business which the taxpayer carries on or an
activity (mental or physical) in which he engages, or the employment of capital either by
the taxpayer himself or by his lending it to someone else, or it may be a combination of
these.4 Hence, where the source of particular amounts of income is in issue, a two-part
inquiry is necessary. First, to establish the ‘originating cause’; secondly, to establish
whether that originating cause is located within the Republic.5
A major difficulty in determining the source of income occurs when its ‘originating
cause’ is a combination of factors. For example, if a taxpayer earns income from a pur-
chase and resale of property, the ‘originating cause’ may be conceived as the property
itself, the contracts in question, the business of the taxpayer, his skill and ingenuity,
or his activities, and there can be a difference of opinion as to which of these is the
operative ‘originating cause’ – see for example the split decisions in [17] CIR v Lever
Bros and [40] Liquidator Rhodesian Metals Ltd v COT, Southern Rhodesia.
A further difficulty arises where different originating causes are located in different
countries. This may require an apportionment of the amount in question, or the court
may identify a single one as the ‘dominant or main or substantial or real and basic source
of the accrual’6 because of the practical difficulty involved in apportionment.
It was held in [19] Essential Sterolin Products (Pty) Ltd v CIR7 that where there are a
number of causal factors, ‘it is appropriate to weigh these factors in order to determine
the dominant or main or substantial or real and basic cause of the receipt’, and the court
referred in this regard to the decision in [47] CIR v Black.8

________________________

2 Per Schreiner JA in CIR v Lever Bros & Unilever Ltd 1946 AD 441, 14 SATC 1 at 17.
3 Ibid at SATC 8.
4 Ibid at SATC 9-10.
5 CIR v Lever Bros, supra, per Watermeyer CJ.
6 CIR v Black 1957 (3) SA 536 (A), 21 SATC 226 at 235.
7 1993 (4) SA 859 (A).
8 1957 (3) SA 536 (A).
40 Income Tax in South Africa: Cases and Materials

§2 General principles
The source of income is not the quarter whence the receipts came but the originating cause of their
being received as income. Such originating cause is the work the taxpayer does to earn them – the
quid pro quo in return for which he receives them; this may be a business which he carries on, an
enterprise which he undertakes, or an activity in which he engages; it may take the form of personal
exertion, mental or physical, or it may take the form of employment of capital, either by using it to
earn income or by letting its use to someone else. Or it can be a combination of these.

[17]
CIR v Lever Bros & Unilever Ltd
1946 AD 441, 14 SATC 1
For the facts of this case, see extract [57].
Watermeyer CJ: The word ‘source’ has several possible meanings. In this section it is used figur-
atively, and when so used in relation to the receipt of money one possible meaning is the origi-
nating cause of the receipt of the money, another possible meaning is the quarter from which it
is received. A series of decisions of this Court and of the Judicial Committee of the Privy Council
upon our Income Tax Acts and upon similar Acts elsewhere have dealt with the meaning of the
word ‘source’ and the inference, which, I think, should be drawn from those decisions that the
source of receipts, received as income, is not the quarter whence they come, by the originating
cause of their being received as income and that this originating cause is the word which the
taxpayer does to earn them, the quid pro quo which he gives in return for which he receives
them. The work which he does may be a business which he carries on. or an enterprise which he
undertakes, or an activity in which he engages and it may take the form of personal exertion,
mental or physical, or it may take the form of employment of capital either by using it to earn
income or by letting its use to someone else. Often the work is some combination of these.
Schreiner JA: (dissenting) Generally it may be said that a source of income is either (a) some
personal activity of the taxpayer or (b) some property over which he has rights, or (c) a combin-
ation of both. With a few possible exceptions (one thinks of the coiner and the bank-note forger,
who may be said, literally, to make their own money, and the primary producer who in so far as
he produces for his own consumption what is treated as income) the taxpayer obtains his in-
come from other persons (a) because he renders them services, or (b) because they have the use
of his property, or (c) because he carries on in the world of commerce and industry profit-
producing activities involving in various combinations the transfer of the ownership of property
or the grant of its use or the rendering of services. Even in the case of (b), income derived from
the taxpayer’s property, it is no doubt possible to describe the source of the income as the activi-
ty of the taxpayer in entering into the contract under which the other party agreed to pay the
rent, interest, royalty or other recompense for the use of the property. Or it might be said that
the source is the owner’s continued non-interference with the use by the owner of his property.
But neither of these way of putting the matter would accord with ordinary linguistic usage. In
common parlance, by which it is a sound rule to judge definitions, the property itself or, which
for present purposes amounts to the same thing, its use, is treated as the source of the income.
...
Where we are dealing with income which the taxpayer gets because someone is using his proper-
ty and is prepared to pay him for its use, the taxpayer’s activities, whether past or present, are in
practice disregarded in describing the source of his income. We may simply and, as I see
it, without the use of metaphor (if indeed that be a criticism of actual usage) that he derives
his income from land, shares, or loans. If perchance we speak of his deriving his income from
rent, dividends, or interest, we are obviously speaking loosely, for these things are his income
itself and not its source. What is important is that no one would ordinarily speak of the taxpayer
deriving his income from the contract by which he leased the land or bought the shares or
loaned the money . . . Since in ordinary speech we ignore the taxpayer’s activities in describing
the source of these kinds of income, there is, in my view, no good reason for treating such activities
as the source of such income in contemplation of law.
 Source 41

The class of case coming under (c), in which goods are manufactured or bought and thereafter
sold, the taxpayer, deriving a profit in the process, is, of course, extremely common. It normally
involves the making of numerous contracts over a period and the taxpayer who gains his income
in this way is generally said to carry on a business. The frequency of this type of income produc-
tion, coupled perhaps with the long established use of the word ‘business’ in the British Statutes,
has led to the extension of the notion of a ‘business’ over a large part of the income tax field.
The tendency has been to seek the taxpayer’s ‘business’ and to treat it as the source of any in-
come obtained by him in connection therewith . . . The income will, no doubt generally, if not
invariably, be provided in terms of some contract, but the contract must not be treated as the
source of the income by reason merely of the fact that it was a business transaction and was en-
tered into in furtherance of the taxpayer’s business.

Source is not a legal concept but a practical matter of fact.

[18]
Nathan v FCT
(1918) 25 CLR 183
Isaacs J: Source means not a legal concept but something which a practical man would regard as
a real source of income. Legal concepts must, of course enter into the question when we have to
consider to whom a given source belongs. But the ascertainment of the actual source of given
income is a practical hard matter of fact. The Act on examination so treats it.

Notes
This dictum was quoted with approval in Rhodesia Metals Ltd (in liq) v COT;9 Liquidator,
Rhodesian Metals Ltd, v COT, Southern Rhodesia;10 Rhodesian Metals Ltd (in liq) v COT,
Southern Rhodesia;11 CIR v Lever Bros & Unilever Ltd.12 But it has also been criticised. In CIR
v Lever Bros & Unilever Ltd 13 Watermeyer said it was difficult to differentiate the practical
man from the theoretical lawyer; see also the remarks of Schreiner JA to the effect that
the views of an ordinary practical business man do not provide assistance in complicated
and unusual legal transactions.14 In M Ltd v COT (SR) 15 Lewis J said that he shared these
difficulties. See too the remarks of the Full High Court of Australia in COT (NSW) v
Freeman:16 “‘a practical hard matter-of-fact’ – whatever that expression means”. In the
leading case of Lever Bros, Watermeyer CJ conceded that a ‘practical man’ would have
reached a completely different conclusion as to the source of the income in question.17
The courts have, on occasion, used the criterion of the ‘practical man’ to slur over funda-
mental legal distinctions; for example in [18] Nathan v FCT the court ignored the sepa-
rate legal persona of the company and treated a shareholder as if he were a partner in
the activities of the company, deriving his dividends from the same source as the compa-
ny derived its income.18

________________________

9 1938 AD 282, 9 SATC 363 at 379.

10 1938 AD 282, 9 SATC 363 at 379.
11 1940 AD 432, 11 SATC 244 at 249.
12 1946 AD 441, 14 SATC 1 at 13.
13 (1946) 14 SATC 1 at 16.
14 Ibid at 22.
15 1958 (3) SA 18 (SR), 22 SATC 27.
16 (1956) 6 AITR 225.
17 (1946) 14 SATC 1 at 16.
18 See remarks of Watermeyer CJ in CIR v Lever Bros 1946 AD 441, 14 SATC 1 at 13.
42 Income Tax in South Africa: Cases and Materials

[19]
Essential Sterolin Products (Pty) Ltd v CIR
1993 (4) SA 859 (A)
The taxpayer had developed a medicine for a particular medical condition which it
sought to register in West Germany. Certain patents were also registered in West Germa-
ny to protect the use of the active substance in the medicine. The active substance in the
medicine was manufactured in a particular form by the taxpayer in the Republic and
exported to H, a corporation in West Germany, which added fillers, made the compound
into capsule form, packed it, and marketed it under a registered trademark. In 1976 the
taxpayer formed a ‘front company’, the I company, registered in Switzerland, through
which to market the product. Thereafter the taxpayer supplied its product, namely the
active substance, to the I company, which in turn sold it at a profit to the H company. A
wholly-owned subsidiary of the I company was later registered in West Germany for the
purpose of introducing onto the German market a generic medicine containing the
same active substance, which could be sold ‘over the counter’.
The arrangements with H were then put on a more formal basis by means of a written
distribution agreement. In 1977 the taxpayer registered the R company in Netherlands
Antilles in order for it to hold patents registered in the taxpayer’s name. The R company
established a number of subsidiaries in various countries, including one in Switzerland in
order to develop markets outside West Germany.
Later there was a reorganisation of the sale and manufacturing aspects of the taxpay-
er’s business in which H acquired all the shares in I company and a minority sharehold-
ing in R company and its Swiss subsidiary. The reorganisation included an agreement
(‘the inability agreement’) between the taxpayer, the I company, the R company and H,
which provided that if the I company, through the inability of the taxpayer, was not able
to supply the active substance to H, then in such event the taxpayer granted H a sub-
licence to manufacture the active substance exclusively for supply to the I company.
During the 1983 tax year, H paid a consideration to the taxpayer in terms of the inability
agreement, and SARS included that consideration (‘the inability consideration’) in the
taxpayer’s gross income.
The taxpayer objected to the assessment. Its appeal to the Tax Court failed, with the
court holding that the consideration fell within para (g)(iii) of the definition of gross
income, and that it had been derived from a source in the Republic.
In a further appeal to the Appellate Division it was held that the originating cause of
the inability consideration, and hence its source, was not within the Republic of South
Africa. In reaching this conclusion, the court held that it was of fundamental importance
that, at the time when the sale and manufacturing agreement and the inability agree-
ment were entered into, the business operations from which the taxpayer derived its
income were conducted predominantly outside South Africa; the whole foundation of
the taxpayer’s business rested on the rights flowing from registration of the medicine,
the patent and trademark rights and the contractual rights vis-à-vis H, all of which were
acquired and exercised in West Germany. The only South African connection, apart
from the taxpayer’s being located in this country, was that the active substance was
manufactured by the taxpayer in South Africa and exported to West Germany in a cer-
tain form, but that was only part of the process of manufacture of the final product.
It was held, further, that the inability consideration was an ingredient of the reorgan-
isation of the business predominantly conducted in Europe.
It was held that, in all the circumstances, the originating cause of the receipt of the
inability consideration, and therefore the source thereof, was not within the Republic of
South Africa.
 Source 43

Corbett CJ: The Special Court held that the inability consideration fell within para (g)(iii) [of
the definition of gross income] and that it was derived from a source within the Republic. The
Court consequently found it unnecessary to deal with the capital or revenue issue.
In my view the issue as to source is decisive of this appeal and I accordingly turn immediately to
that.
It is not suggested that any of the provisions in the Act relating to deemed source is applicable.
Consequently the limited (but by no means simple) issue is whether or not the inability consid-
eration was received by appellant from a source within the Republic . . .
The only evidence placed before the Court a quo was that of Mr Liebenberg, who was called to
testify on behalf of the appellant . . .
Despite Mr Liebenberg’s evidence, appellant’s counsel assured the Court a quo that the inability
agreement was not ‘a sham’ and must be taken at its face value . . . It seems to me that that is the
only proper approach. One cannot go behind the clear provisions of the contract . . .
The legal principles to be applied in determining whether or not an amount was received from a
source within the Republic have been stated in a number of decisions of this Court, more
particularly in CIR v Lever Bros;19 CIR v Epstein;20 and CIR v Black.21 These authorities point out that
the Legislature, probably aware of the difficulty of doing so, has not attempted to define the
phrase ‘source . . . within the Republic’ and has left it to Courts to decide on the particular facts
of each case whether an amount was or was not received from such a source. As was stated by
Watermeyer CJ in the Lever Bros case supra:
‘. . . the source of receipts, received as income, is not the quarter whence they come, but the originating
cause of their being received as income, and . . . this originating cause is the work which the taxpayer does
to earn them, the quid pro quo which he gives in return for which he receives them. The work which he
does may be a business which he carries on, or an enterprise which he undertakes, or an activity in which
he engages and it may take the form of personal exertion, mental or physical, or it may take the form of
employment of capital either by using it to earn income or by letting its use to someone else. Often the
work is some combination of these.’
In a particular case there may be a number of causal factors relevant to the ascertainment of
source and, here it would seem, it is appropriate to weigh these factors in order to determine the
dominant or main or substantial or real and basic cause of the receipt (Black’s case, supra). In a
number of cases in our Courts, reference has been made (in various forms) to the following
remarks of Isaacs J delivering the judgment of the High Court in Australia in the case of Nathan
v FCT:22
‘The Legislature in using the word “source” meant, not a legal concept, but something which a practical
man would regard as a real source of income . . . [T]he ascertainment of the actual source of a given in-
come is a practical, hard matter of fact.’ . . .
In applying these general principles, the Courts have adopted certain rules and criteria for
locating the source of particular types of accrual or receipt, such as dividends, annuities, direc-
tor’s fees, interest, payment for services, rent, royalties, and so on. None of these would seem to
have relevance to the somewhat unusual character of the inability consideration. In seeking the
originating cause of this amount one must, in my view, have regard to the factual matrix under-
lying and giving rise to the agreement in terms of which it became payable and then apply there-
to the basic principles outlined above.
Of fundamental importance in this case is that, at the time when the sale and manufacturing
agreement and the inability agreement were entered into, the business operations from which
appellant derived its income were conducted predominantly outside South Africa. This was so of
necessity because there was no market whatsoever for appellant’s product in South Africa.
Indeed the only country where it could be sold was West Germany. Moreover, because of the
patents and trade marks registered there, West Germany was the only country where there was,
for the time being, protection against competitors marketing products containing the active
substance for the treatment of prostata hypertrophy and using the trade marks. The distributor for
and part manufacturer of these products was a West German corporation . . . In short, the whole
________________________

19 1946 AD 441.
20 1954 (3) SA 689 (A).
21 1957 (3) SA 536 (A).
22 1918) 25 CLR 183 at 189-90.
44 Income Tax in South Africa: Cases and Materials

foundation of appellant’s business rested upon the rights flowing from registration, the patent
and trade mark rights and the contractual rights vis-à-vis Hoyer, all of which were acquired and
exercised in West Germany.
It is true that the active substance was manufactured by appellant itself in South Africa and
exported to West Germany (via one of appellant’s European subsidiaries) in its monomolecular
form. But that is the only South African connection, apart from appellant itself being located
here. Moreover, that was only part of the process of manufacture. The product could not be
marketed in the form received in West Germany by Hoyer. Hoyer still had to add fillers, put the
compound into capsules and package them before placing the product on the West German
market.
The inability consideration was an ingredient of the reorganisation of the business and the grant
to Hoyer of a substantial interest therein. By that stage the marketing of the products containing
the active substance had become a major segment of Hoyer’s business and, of course, Hoyer was
paying a large sum of money for the acquisition of this interest. The purpose of the inability
agreement was to ensure that Hoyer always had a supply of the active substance, giving it the
right and know-how to manufacture it in the event of the appellant being unable to do so; and
the purpose of the inability consideration was to compensate appellant for this potential depriva-
tion of the exclusive right, as between itself and Hoyer, to manufacture the active substance. This
all arose from the reorganisation of a business predominantly conducted in Europe by European
subsidiaries of the appellant. And, finally, the inability consideration was linked not merely to an
inability to supply the active substance from South Africa, but to an inability to supply it from
anywhere in the world.
In all the circumstances I am of the opinion that the originating cause of the receipt of the ina-
bility consideration, and therefore the source thereof, was not within South Africa.
The appeal is allowed . . .
VAN HEERDEN JA, SMALBERGER JA, GOLDSTONE JA and HOWIE AJA concurred.

Notes
This decision affirms the principle laid down in Lever Bros that –
‘. . . the source of receipts, received as income, is not the quarter whence they come, but the originating
cause of their being received as income, and . . . this originating cause is the work which the taxpayer does
to earn them,
Earlier cases had raised the problem of determining the source of income where several
factors, some located within South Africa and some outside, could be seen as the ‘origi-
nating cause’ of the income. In the present case, the court affirms the principle laid
down in Black that –
‘it is appropriate to weigh these factors in order to determine the dominant or main or substantial or real
and basic cause of the receipt’.
Crucial to the court’s finding in Essential Sterolin that the dominant source of the inability
consideration was located outside South Africa were the factors that –
• ‘the whole foundation of appellant’s business rested upon the rights flowing from
registration, the patent and trademark rights and the contractual rights . . . all of
which were acquired and exercised in West Germany’;
• the only South African connection was that the active substance was manufactured by
the appellant itself in South Africa and exported to West Germany . . . But that is the
only South African connection, apart from the appellant itself being located here’;
• the commercial basis for the inability consideration ‘arose from the reorganisation of
a business predominantly conducted in Europe by European subsidiaries of the ap-
pellant’.
In short, seen in totality, the inability consideration was far more closely linked to the
business operations that occurred outside South Africa; the South African links to the
inability consideration were slight. Hence the dominant factors were located outside
South Africa.
 Source 45

A business consists of anything which occupies the time and attention of a man for the purposes of
profit; and a business is located where the contracts which form the essence of the business are made.
A taxpayer who carries on one business may embark on a separate business or profit-making scheme,
whose income has its own separate source.

[20]
M Ltd v COT (SR)
1958 (3) SA 18 (SR), 22 SATC 27
For the facts of this case, see extract [48].
Murray CJ: The word ‘business’, which probably includes a trade, has a wide meaning varying
with the context and was generally defined by Jessel MR in Smith v Anderson23 as ‘anything which
occupies the time and attention of a man for the purposes of profit’ . . . In the Lever Bros case,
24
supra . . . Watermeyer CJ . . . quoted without disapproval the following passage from Lovell and
Christmas Ltd v COT:25
‘The trade or business in question . . . ordinarily consists in making certain classes of contracts and in car-
rying those contracts into operation with a view to profit; and the rule seems to be that where such con-
tracts, forming as they do the essence of the business or trade, are habitually made, there a trade or
business is carried on within the meaning of the Income Tax Acts.’
If a taxpayer, having capital funds not immediately required for use in his main business, tempor-
arily employs them in a profit-making scheme distinct therefrom, he is carrying on a separate
activity. It may be subordinate or ancillary to his main business in the sense that he intends that
the profit when earned will be added to the capital of the main business, but it has been earned
not by the product of his main business but by the exercise of this separate activity. If this sepa-
rate activity (whether dignified by calling it a business or not) is conducted in its entirety at a
place outside the location of the taxpayer’s main business, or if, as in the present case, the dom-
inating factors in its conduct are so located, the profit earned by it has a local situation of its
own.

Notes
The principle expressed in the last paragraph, quoted above, leaves uncertain the import-
ant question whether the source of business income will be outside the Republic only
where an entirely separate business or scheme of profit-making is conducted outside the
Republic. It is submitted that the answer to this is in the affirmative, but that where the
source of income is the taxpayer’s activities, the source will lie outside the Republic
where those activities were performed outside the Republic. See further [52] CIR v
Epstein, [31] COT (SR) v Shein, [47] CIR v Black and [48] M Ltd v COT (SR).

It is irrelevant where the taxpayer’s general business is carried on, or where his principal place of
business is. What is important and possibly crucial is where he carries on the business from which the
income in question is derived and where the business profits are realised.
[21]
CIR v Epstein
1954 (3) SA 689 (A), 19 SATC 221
For the facts of this case, see extract [52].
Schreiner JA: (dissenting) [O]ur Income Tax Act treats the residence of the taxpayer, for present
purposes, as irrelevant. Equally it is irrelevant where he, generally speaking, carries on business
________________________

23 15 Ch 258.
24 At 452.
25 Lovell and Christmas Ltd v COT [1908] AC 46.
46 Income Tax in South Africa: Cases and Materials

or where his principal place of business is situated. What is very relevant and may be crucial is
where he carries on the business from which the income in question is derived. And since a
business may be carried on through partners or other agents, the place where the taxpayer’s
income originates is not where he personally exerts himself, assuming that he does so, but where
the business profits are realised.

§3 Composite or multiple sources: apportionment

If the ‘originating cause’ of a particular amount of income is located partly in the Republic
and partly in another country, its source may lie partly within the Republic and partly
outside, with the result that only part of the amount falls within the taxpayer’s ‘gross
income’, and only that part will therefore be taxable in the Republic.26 The Act is silent as
to whether apportionment is permissible in these circumstances, and if so on what basis
the apportionment is to be accomplished. The weight of judicial opinion seems to favour
the view that apportionment is, in principle, permissible,27 but that the practical difficul-
ties in assigning income to different sources may compel the assessment to be based only
on the ‘dominant or main or substantial or real and basic source of the accrual’28 and
require sources of lesser importance to be ignored.
Where the taxpayer purchases goods in one country and sells them in another, judicial
opinion seems to favour the view that, as a general but not invariable rule, the entire
profit has its source in the country of sale; see [37] CIR v Epstein but compare [38]
Transvaal Associated Hide and Skin Merchants v Collector of Income Tax, Botswana
where the work done on the raw materials, rather than the resale of the improved product,
was held to be the dominant originating cause. Where the taxpayer manufactures goods
in one country and sells them in another, judicial opinion seems to favour apportion-
ment of the profit; see [43] ITC 1103. Where all the taxpayer’s activities are part of a single
business in the Republic, the source of all the income will be located in the Republic.
There is authority for the proposition that, where the source of income is services ren-
dered by the taxpayer and those services were rendered mainly in one country but a
trivial, incidental and entirely subsidiary part of the services was rendered in a second
country (and particularly if no separate payment was made for the latter services), the
whole amount will be regarded as having its source in the first-named country.29 This
principle has also been applied where the main source of income was the taxpayer’s
personal activities and the use of his property in a foreign country, and a subsidiary
originating cause was his acquisition of intellectual property rights in the Republic.30
If there are discrete amounts of income, some of which have their source within the
Republic and others outside the Republic, in principle only the former ought to be
subject to income tax in the Republic (even if they originate in the same business)31
unless one of the deemed source provisions of the Act is applicable. It is only where a
single amount of income (for example, the selling price of an item of property) has a
composite source, being partly from a source in the Republic and partly from a source
outside, that the issue of apportionment arises.
________________________

26 CIR v Lever Bros & Unilever Ltd 1946 AD 441, 14 SATC 1 at 10.
27 In Transvaal Associated Hide & Skin Merchants v Collector of Income Tax, Botswana, (Court of Appeal,
Botswana) (1967) 29 SATC 97 Schreiner JA seemed to imply that, because the Botswana legislation made
no provision for apportionment in this context (nor does our own Act), it was not permissible. But in CIR
v Epstein 1954 (3) SA 689 (A), 19 SATC 221 he implicitly accepted that apportionment is permissible
although holding that, in the case at hand, there was no justification for attempting to do so.
28 CIR v Black 1957 (3) SA 536 (A), 21 SATC 226.
29 CIR v Shein 1958 (3) SA 14 (Federal Supreme Court), 22 SATC 12.
30 ITC 1491 (1991) 53 SATC 115.
31 In ITC 1491 (1991) 53 SATC 115 at 127 it was accepted that there can be different sources for different
categories of income accruing to one business.
 Source 47

Where the originating cause of a receipt is located partly in one country and partly in another, its
source may similarly be located partly in one country and partly in another.

[22]
CIR v Lever Bros & Unilever Ltd
1946 AD 441, 14 SATC 1
For the facts of this case, see extract [57].
Watermeyer CJ: Turning now to the problem of locating a source of income, it is obvious that a
taxpayer’s activities, which are the originating cause of a particular receipt, need not all occur in
the same place and may even occur in different countries, and consequently, after the activities
which are the source of the particular ‘gross income’ have been identified, the problem of locat-
ing them may present considerable difficulties, and it may be necessary to come to the conclu-
sion that the ‘source’ of a particular receipt is located partly in one country and partly in
another. See the remarks of Lord Atkin in Rhodesia Metals Ltd (in liq) v COT.32 Such a state of
affairs may lead to the conclusion that the whole of a receipt, or part of it, or none of it is taxable
as income from a source within the Union, according to the particular circumstances of the case,
but I am not aware of any decision which has laid down clearly what would be the governing
consideration in such a case.

As a general principle, income is apportioned if it is located partly within and partly outside the
Republic; but where a person has contracted to perform services in a given country and has minor
duties, which are purely incidental and subsidiary, to be performed in another country, no such
apportionment need be made and none of his income is regarded as having its source in the latter
country.
[23]
COT (SR) v Shein
1958 (3) SA 14 (FC), 22 SATC 12
In terms of a contract with S, the taxpayer managed a store owned by S in the Bechuana-
land Protectorate in return for a share of the profits. Previously, the taxpayer had lived at
the store, but in 1945 it was agreed that he could live in Bulawayo provided that he, at his
own expense, employed a full-time storekeeper to run its day to day business. The tax-
payer spent the first four days of each month at the store, supervising the business and
giving directions for the month. While in Bulawayo, he spent a certain amount of time
on the business of the store. At the end of the year, he and S examined the accounts and
agreed on the profits. The Commissioner assessed the taxpayer to tax on one-ninth of his
earnings from the store (after deducting the salary paid to the store-keeper) on the basis
that the taxpayer spent four and a half days each month on the work of the store of
which one half day was spent in Southern Rhodesia. The High Court allowed the taxpay-
er’s appeal. The Commissioner appealed to the Federal Supreme Court.
Issue: whether the source of the taxpayer’s income was Bechuanaland or Southern
Rhodesia.
Held: the work done on the taxpayer’s behalf in Bulawayo, Southern Rhodesia, was
subsidiary to the real work of conducting the business in Bechuanaland. The source was
therefore in Bechuanaland.
Tredgold CJ: The issue in this case depends upon whether the source of the income accruing to
the respondent was Bechuanaland or Southern Rhodesia.
...
________________________

32 1940 AD 432 at 436, 11 SATC 244 at 249.

48 Income Tax in South Africa: Cases and Materials

The learned Judge, who heard the appeal to the High Court, . . . rejected the contention that
the four days’ work a month he did in Bechuanaland could fairly be regarded as representing
the sum total of his other work on behalf of the store. The learned Judge held, in effect, that, in
ascertaining the source of the respondent’s income from the store, the work he did himself must
be equated with the work done by the storekeeper on the spot . . . He held that the work done in
Bulawayo, which on this approach was insignificant in amount, was trivial and incidental and did
not affect the main issue.
...
In my view the Judge was undoubtedly right in holding that the work done on behalf of the
respondent by the storekeeper must be taken into account in deciding the source of his income
from the store . . . The respondent did not, as was suggested, contract to find a manager for the
store. He contracted to manage the store and the fact that he was permitted, by the terms of his
agreement, to delegate portion of his duties in running the store to another, cannot alter this
essential fact . . . A man may render services by accepting responsibility just as much as by manu-
al or other work. When he does he accepts responsibility at the place at which the undertaking
for which he accepts responsibility is being carried on, wherever he may be at the moment.
It may be accepted that, prima facie, the test of the source of a payment for services rendered is
the place where those services are rendered (CIR v Lever Bros;33 CIR v Epstein 34). The learned
Judge in the present case said:
‘It now seems settled law that generally the source of such income is the place where the services for which
the salary is paid are rendered.’
Unless the word ‘generally’ is understood to introduce a considerable qualification the proposi-
tion may perhaps, in this passage, be too boldly stated. The ultimate test of source is the originat-
ing cause (Lever Bros supra).35 Where a person is engaged to perform work in one place and,
purely as a matter of convenience, he does part of the actual work elsewhere, while producing
his final result at the place contracted, difficult questions may arise, But this difficulty does not
present itself in the case under consideration, for here the respondent did the main work for
which he was employed in Bechuanaland, though he did a large part of it through the agency of
another.
Once this is accepted, the proportion of the work he did in Southern Rhodesia becomes incon-
siderable. As has been pointed out, it has been found and indeed it is agreed that it amounted
only to half a day a month. It remains to consider whether his income should be apportioned so
that the small amount attributable to work done in Southern Rhodesia and which the contract
contemplated should be done in Southern Rhodesia be taxed here. It is not questioned that it is
legally correct to apportion income if it is in fact clear that it is derived from more than one
source (CIR v Lever Bros).36 I do not myself feel that the fact that services are casual or regular can
have much bearing on the question of the source of payment for such services. The fact that they
are trivial and incidental may . . .
. . . When a man is engaged to perform a certain work in a given country but has minor duties,
which are purely subsidiary and incidental, that fall to be performed in another country, then I
do not think it is a practical approach to suggest that portion of his income has its source in that
other country. When he is not paid separately for these extraneous duties, it becomes particular-
ly artificial to try to allot portion of his earnings to them.
In the present case the respondent performed the following duties in Bulawayo.
He ascertained the ruling prices of hides and small stock. He handed the invoices and accounts
to the bookkeeper. From time to time he placed orders for goods and performed miscellaneous
duties, as convenience and his other occupations dictated. All these duties could have been done
almost equally well by correspondence from Bechuanaland. Altogether they did not occupy
more than a few hours a month. All were entirely subsidiary to the real work of conducting the

________________________

33 1946 AD 441 at 449.

34 1954 (3) SA 689 (A) at 698.
35 1946 AD 441 at 450.
36 1946 AD 441 at 451, 14 SATC 1.
 Source 49

business there. Indeed, had the Commissioner accepted the fact that the work of the respond-
ent’s manager must be equated with his own in ascertaining the source of his income, I have
little doubt that he would not have attempted to distinguish on a basis of source the earnings
attributable to work done in Bulawayo.
The appeal is dismissed with costs.
LEWEY FJ and CLAYDEN FJ concurred.

Notes
In the High Court it was held that the work done by the store-keeper (the taxpayer’s
employee) at the Bechuanaland store must be attributed to the taxpayer. On appeal,
Tredgold CJ appeared to endorse this approach. It is submitted however that it is only
the actions of an agent, and not a mere servant, which can be imputed to the taxpayer in
this way (cf [39] Davis v COT) or the actions of a servant who performs services outside
the Republic in the course of a business carried on by the taxpayer in the Republic (see
[37] CIR v Epstein).

Where the composite originating cause of income is the taxpayer’s property and the personal activity
of the taxpayer, the location of the source will be the place where the property is situated and where
the taxpayer’s activities occur. Where the taxpayer’s acquisition of the property in question in another
country is a subsidiary originating cause, it will be disregarded. Different categories of income
accruing to a single business can have different sources.
[24]
ITC 1491
(1991) 53 SATC 115
The taxpayer company, based in the Republic, carried on business as the supplier
to various franchise holders of material in kit form, equipment and expertise in the
re-enamelling and reconditioning of household baths and other sanitaryware. The items
sold included the taxpayer’s formulas, details of the re-enamelling and reconditioning
process, its method of marketing and the use of its trade mark. During 1983 the taxpayer
decided to expand its activities by seeking overseas markets, and formed the C company,
a dormant company, in the United Kingdom for the protection of its trade name. The
taxpayer company established an office in London and advertised its presence. Later, the
taxpayer concluded a contract in London with the D company and sold the latter its
franchise rights to operate a business utilising the taxpayer’s name, its processes, formu-
las and equipment. During the tax year the taxpayer received R3 100 in ‘overseas fran-
chise fees’.
Issue: Was the amount of R3 100 in respect of ‘overseas franchise fees’ from a source
within the Republic?
Held: in the negative. On the facts, the taxpayer carried on business in the United
Kingdom, namely the business of granting temporary franchises in return for payment;
the source of the income, namely the property over which the taxpayer had rights and
the taxpayer’s personal activities, were the composite originating cause of the income,
and these were located in the United Kingdom; the taxpayer’s activities in the United
Kingdom were the dominant cause of the accrual of income; the fact that the taxpayer
acquired the ‘know-how’ in South Africa was a subsidiary causal factor. Therefore, the
source of the income in question was not within South Africa.
Kroon J: Under cross-examination A [the taxpayer’s managing director conceded] . . . that the
appellant had not employed any capital in the United Kingdom and had merely granted a fran-
chise right to a British company . . . The training by the appellant of the staff of D for which
provision was made on the agreement was all undertaken in the United Kingdom . . . The visits
50 Income Tax in South Africa: Cases and Materials

made by the appellant to the United Kingdom for the purposes of exercising control over the
work done, for which provision is made in the contract, are normally made once a year . . .
. . . The dispute between the parties concerned the issue whether the income in question was
received from a source within the Republic or from a source outside the Republic.
...
Mr Stevens, in seeking to apply the approach set out above in support of the Commissioner’s
ruling, specifically disavowed any reliance on the decision in Millin v CIR 37 . . . [I]n the present
matter nothing can be ascribed to the appellant which may be equated with the wits and labour
which was the subject of the Millin case. The present matter concerns instead capital, in the form
of what Mr Clegg, who appeared for the appellant, described as ‘intellectual property’ . . .
...
The essence of Mr Stevens’ argument was contained in para 15 of his heads of argument which
read as follows:
‘It is submitted that the licence fees which were received during the year of assessment in question by the
appellant derived from the ownership of the original franchise purchased by the appellant in 1981. The
real source of the licence fees is therefore the business of the appellant which is carried on (located) in
the Republic’.
The further submissions of Mr Stevens were that should the test of the employment of the appel-
lant’s capital from which the income in the form of licence fees was earned, be applied, the
source of those fees would be found to be in the Republic. He argued that the appellant did not
employ any capital in the United Kingdom . . . He sought to dismiss the fact that the agreement
had been signed in the United Kingdom as not importing any difference. He sought further to
distinguish the case of COT v British United Shoe Machinery (SA) (Pty) Ltd 38 . . . on the basis that the
grant of a right of use of a trade mark, process, etc cannot be compared with the letting of mov-
able assets.
...
On a close analysis of the facts seen in the light of the applicable principles we have come to
the conclusion that the submissions of Mr Stevens cannot be upheld. It is, of course, correct,
as Mr Stevens argued, that the appellant’s business consists both of the sale of materials and
the grant of franchise rights. That does not, however, in any way found the submission that
the business of the appellant in the broad sense, and based in Port Elizabeth, is the source of
the income in question. See in this regard the remarks of Schreiner JA in the Lever Bros
case39 . . . :
‘. . . The tendency has been to seek the taxpayer’s ‘business’ and to treat it as the source of any income
obtained by him in connection therewith . . . Care must be taken lest its use in connection with our Act
obscure the latter’s true foundations. In particular, if income is really derived from the use by another of
the taxpayer’s property, clarity will generally be better preserved if the concept of ‘the business of a prop-
erty owner’ is avoided. The income will, no doubt generally, if not invariably, be provided in terms of some
contract, but the contract must not be treated as the source of the income by reason merely of the fact that
it was a business transaction and was entered into in furtherance of the taxpayer’s business.’
Accordingly, although the letting of franchises by the appellant enhances the sale of kits by it,
and vice versa, the determination of the source of the income generated by each activity is not
necessarily the same and the source of franchise royalty or licence income must be determined
with reference to the fact that such income is received for the use of intellectual or incorporeal
property and not on the amorphous basis of its constituting a part of a broadly based business
without regard to the hard practical facts of how that business in its various components is con-
ducted. As Mr Clegg submitted, there is nothing inconsistent or improper in determining differ-
ent sources for different categories of income accruing to one business.
We are of the view, too, that it is not correct to say, as Mr Stevens urged us to do, that the appel-
lant does not carry on business in the United Kingdom. The facts fully justify a finding that it
________________________

37 1928 AD 207, 3 SATC 70.

38 26 SATC 163.
39 14 SATC 1 at 18.
 Source 51

does carry on business there, viz the business of granting temporary franchises against payment
of a sum of money. Nor are we able to accept Mr Stevens’ invitation to draw a distinction between
the present matter and the British United Shoe case referred to earlier. In principle there is no
difference between the letting of movable assets and the grant of the right to use a trade mark
and secret processes. Contrary to Mr Stevens’ submission, the latter in fact constitutes the utilisa-
tion of capital in the form of incorporeal property . . . In coming to this conclusion we have not
lost sight of the fact, the importance of which is not to be understated, that the appellant had
acquired the incorporeal property in South Africa and the further facts that its business is based
in Port Elizabeth and that the major portion of its research is done there.
The circumstances we consider to be of importance in the present matter are the following:
(a) The appellant proceeded to the United Kingdom for the purposes of making contacts for
the expansion of its business into that country, which contacts were made.
(b) The appellant established offices in London and advertised its presence in advertisements
in the United Kingdom with a local address in Worcestershire.
(c) The contact with, and negotiations for the contract concluded with D, took place in the
United Kingdom.
(d) The contract itself, drawn up by London solicitors, was concluded in the United Kingdom.
(e) The contracts between D and its sub-franchisees were concluded in the United Kingdom.
(f) The rights accorded to D and its sub-franchisees in terms of the above contracts were made
available to them and utilised by them in the United Kingdom. In other words the appel-
lant’s capital property was utilised in the United Kingdom.
(g) The obligations of the appellant to train staff of D, stipulated in the contract, were dis-
charged in the United Kingdom. The same applies to the other obligations of the appellant
in terms of the contract to provide assistance in various forms to D.
(h) The appellant exercises a measure of control over the activities of D and the sub-
franchisees, as set out earlier in this judgment, such control being exercised in the United
Kingdom.
On a conspectus of their entire context, these circumstances constitute the originating cause
of the income in question and clearly this composite originating cause is in the United King-
dom. On the test expounded by Schreiner JA in the Lever Bros case, supra, the source of
the income, being the property over which the appellant has rights and the personal activity of
the appellant, or a combination of the two, is situate in the United Kingdom. On the test ex-
pounded by the author of the article in the Income Tax Reporter the fact that the ‘know-how’ in
question was acquired by the appellant in South Africa is clearly a subsidiary causal factor, the
dominant cause of the accrual of the income being the imparting thereof in the United King-
dom, coupled with use thereof occurring in that country. The activities of the appellant in the
United Kingdom are the ‘dominant or main or substantial or real and basic cause’ of the accrual
of the income. (Cf Transvaal Associated Hide and Skin Merchants v Collector of Income Tax,
Botswana.)
In the result the conclusion of this court is that the appellant has discharged the onus resting
on it, viz of establishing that the income at issue did not accrue to it from a source within the
Republic of South Africa.

Notes
In this case the taxpayer had acquired the intellectual property rights by purchase.
The decision is therefore distinguishable from [60] Millin v CIR where the originating
cause of the income was the taxpayer’s wits and energy. Nevertheless, in the instant case
the court did not regard the contract by which the rights were acquired as the originating
cause of the resultant income, but held that the property and the personal activities of the
taxpayer constituted the ‘composite originating cause’ which was located in the United
Kingdom. On multiple sources of income for services rendered, see also [23] COT (SR) v
Shein.
52 Income Tax in South Africa: Cases and Materials

§4 Annuities
An ‘annuity’ (a term not defined in the Act) is expressly included in a taxpayer’s ‘gross
income’ under para (a) of the definition of ‘gross income’ in s 1. However, an annuity
will form part of the taxpayer’s gross income only if it is from a source within or deemed
to be within the Republic.
The source of a contractual annuity is the place where the contract was made.

[25]
Boyd v CIR
1951 (3) SA 525 (A), 17 SATC 366
For the facts of this case, see extract [54].
Centlivres CJ: If a resident of the Union whose sole source of income is South West Africa pays
in terms of a contract made in the Union an annuity to another person, it seems to me that the
source of that other person’s annuity is in the Union. It might be said that the ultimate source of
the annuity is in South West Africa, but I do not think that on a proper interpretation of ‘gross
income’ one is required to go back to the remote source.
SCHREINER JA and HOEXTER JA concurred.

As regards source, no distinction exists between a contractual annuity and a testamentary annuity.
In the case of a contractual annuity, if the contract was made in the Republic, its source is within
the Republic; in the case of a testamentary annuity, the source of the annuity is the trust created by
the will.

[26]
ITC 826
(1956) 21 SATC 189
The taxpayer, a widow, was entitled to an annuity from the income or the capital of a
testamentary trust created by her late husband. The trust assets were situated in the
Union of South Africa, Swaziland and Rhodesia. The taxpayer was resident in the Union,
as her late husband had been. The will had been executed in the Union and the trust
was administered in the Union.
Issue: was the annuity from a source within the Union of South Africa?
Held: in the affirmative. The fons et origo of the testamentary annuity was the execution
of the will and, since it was executed in the Union, its source was within the Union.
Kuper J: The appellant claimed that the payment to her was a charge against all the assets of the
estate and was therefore derived from three sources, namely the Union, Swaziland and Rhode-
sia. Consequently, so the argument ran, the payment should be divided between the three coun-
tries in proportion to the total income earned from each and that the portions derived from the
Swaziland and Rhodesian sources were from sources outside the Union. The commissioner re-
jected this contention and included in her income for the purposes of normal and super tax the
whole of the sum of £1 700 being the amount of the annuity received by her during the year,
and he issued assessments accordingly. It is against these assessments that this appeal has been
brought.
In his argument on behalf of the appellant, Mr Festenstein did not contend that the payment
made to the appellant was not an annuity . . . Mr Festenstein pointed out, however, that it is not
every annuity that is included within the gross income of a taxpayer in terms of s 7; the annuity
must come from a source within the Union or deemed to be within the Union. It was common
cause that the terms of s 9 did not apply in the present case and that therefore no ‘deeming’
 Source 53

could arise. The issue therefore is whether in determining the source of an annuity arising from
the terms of the will the situation of the funds from which the annuity is derived is the determin-
ing factor.
...
In the case of an annuity flowing from the terms of a contract no difficulty arises in determining
the source of that annuity – the source is the place where the contract is made. [The judge here
cited and quoted from [25] Boyd v CIR.]
...
Mr Festenstein sought to distinguish the case of an annuity flowing from a contract from that of
one resulting from a testamentary disposition, for if the same principle were applied it would
follow from the fact that the last will was drawn in Johannesburg and that the administrators of
the trust are resident in the Union where the trust is generally administered, that the source of
the annuity is within the Union. He argued that the administrators in the instant case were
merely ‘administrative pegs’ and that they received the whole income only for the purpose of
dealing with it as provided in the will, and that therefore the source of the income of the benefi-
ciaries under the trust was the same as the source of the income of the trust.
...
In terms of s 7 every annuity from a source within the Union falls within the gross income of the
recipient. The only exemptions are those set out in s 10 and although under paragraphs (h) and
(k) interest derived from a particular source and dividends are exempt in the ordinary way, the
exemptions do not apply in the case of an annuity (see provisio III to s 10(1)). Consequently even
though dividends received or accrued from any company would be exempt from tax in the
hands of the administrators they would not be exempt once they formed portion of an annuity,
and therefore the character of the income does in fact change for the purposes of income tax.
Mr Festenstein relied strongly on the case of Armstrong v CIR.40 This case was decided before the
proviso III was introduced into s 10(1).
...
It will be seen that the Court was greatly influenced by the scheme of the Act as it then obtained.
It seems to me, however, that by the introduction of the provision eliminating the exemption in
the case of an annuity, the scheme of the Act was changed. It was deliberately intended that in-
come derived from companies should be taxed twice, namely at its source in the hands of the
company and again in the hands of the recipient if the recipient was an annuitant. In other
words the emphasis is in such a case no longer upon the derivation of the income but upon the
receipt . . .
If the source of the annuity is within the Union the fact that the administrator is an ‘adminis-
trative peg’ can no longer assist a taxpayer, and the question to be determined is simply whether
the source of the annuity in the present case is within the Union. On that aspect it seems to me
that no distinction can be drawn between a contractual annuity and a testamentary annuity. In
both cases the source is the same. In the case of contractual annuity the source would be within
the Union where the contract is made within the Union, and where, as was pointed out in Boyd’s
case, before the amount is paid, the debtor is a persona resident in the Union, the debtors are
separate personae distinct from the persona who is the creditor and the fons et origo of the debt is
a formal act performed in the Union. In the case of a testamentary annuity the source would be
within the Union where before the amount is paid the debtor is a persona resident in the Union
(and the administrators of the trust created in the present case and the trust are personae resident
in the Union) the debtors are separate personae from the persona who is a creditor (and this is
true in the present case) and the fons et origo of the debt is a formal act performed in the Union
(the formal act being the execution of the last will within the Union). If the appellant had occa-
sion to sue for her annuity, her cause of action would be brought against the administrators, all
resident in the Union, and would be based upon the terms of the last will executed in the Un-
ion. Mr Festenstein contended that this view could not be correct. He referred to a case of a per-
son resident in England coming to the Union on holiday, and executing his last will in this

________________________

40 1938 AD 343, 10 SATC 1.

54 Income Tax in South Africa: Cases and Materials

country and creating an annuity to be paid out of the assets of his estate in England. In the ex-
ample given by him it is apparent that the debtor would not be resident within the Union nor
would any action to enforce the annuity be brought within the Union. In my view therefore, the
example he has given does not destroy the validity of the view I have expressed.
The Court has therefore come to the conclusion that the source of the annuity in the present
case is within the Union and that on the proper interpretation of the word ‘source’ in the definition
of ‘gross income’ it is not requisite to go back to the remote source. This conclusion renders it
unnecessary to consider Mr Kirkup’s alternative argument based upon the fact that the annuity
was paid out of the income derived from Union sources.
The appeal is dismissed and the assessment is confirmed.

Notes
The source of an annuity payable from a trust is the trust and not the underlying invest-
ments; [27] COT v R.

Where an annuity is payable in terms of a trust, the source of the annuity is the trust, and is located
where the trust was created; the source of the annuity is not the investments which produce the
income from which the annuity is paid.

[27]
COT v R
1966 (2) SA 342 (RAD), 28 SATC 115
In his will a testator had created a trust in Rhodesia. The income of the trust was derived
from dividends on shares held in companies incorporated in South Africa and the Unit-
ed Kingdom. The taxpayer (the testator’s widow) was entitled to be paid, from the in-
come of the trust, the sum of £700 per annum for life.
Issue: was the source of the annuity located in Rhodesia?
Held: in the affirmative. An annuity has a single source. The source of an annuity paya-
ble under a trust is the trust itself, and that source is located at the locus of the trust, that
is to say, where the trust was created, in this case, Rhodesia.
Beadle CJ: The trustees derived the income of the trust from dividends from shares in compa-
nies incorporated in South Africa and the United Kingdom. It was common cause that the
source of the dividends was outside Rhodesia. The respondent contended in the Special Court
that the source of the bequest was the source of the dividends, and that thus the bequest did not
accrue to her from a source within Rhodesia and was not subject to tax. The Commissioner of
Taxes contended that the source of the bequest was the trust from which it is paid, that the loca-
tion of the trust was Rhodesia and that the bequest was accordingly subject to tax . . .
The case was argued in the Special Court and in this Court on the basis that this bequest is an
‘annuity’ within the meaning of the Income Tax Act . . .
...
The issue in this case, therefore, is the source of an ‘annuity’ paid in terms of a trust created by
last will.
No general legal test can be formulated for determining the source of income.
...
I approach this case, therefore, by considering what a practical man would regard as the real
‘originating cause’ of this annuity. Is it the trust created by the testator’s last will, or is it the
source from which that trust may at any particular time happen to derive its income?
 Source 55
41
Here the words of Murray J, as he then was, in Moore v CIR are, I think, of particular signifi-
cance. Murray J is reported there as having said:
‘If the Income Tax Act has regard to the taxpayer’s source of income, this implies the consideration of an
immediate and not an ultimate source, which is not a source quoad the taxpayer’ (The italics are my own).
...
The trustees in terms of the trust can invest the capital of the trust wherever they think fit, either
inside or outside Rhodesia, and they may vary the investments from time to time. The locus of
the investments which provide the income of the trust may thus change from year to year and
different investments might be made at the same time in many different countries. If the ‘origi-
nating cause’ of the annuity was the locus of the investments then the ‘originating cause’ of the
annuity could change from year to year with the change in the locus of the investments and the
‘originating cause’ could be in many different places at one and the same time.
Where an annuity is payable under a trust created in terms of a last will and its amount is fixed
permanently once and for all in terms of that will, it seems to me that a practical man would be
somewhat surprised at the suggestion that the ‘originating cause’ of the annuity was not the trust
created by the will but the ultimate source from which the trust derived its income. I should
think that the practical man would consider that such an annuity could have only one ‘originat-
ing cause’ and that once that had been determined, that was the end of the matter. He would
not, I think, consider that the ‘originating cause’ could vary from year to year. The word ‘origi-
nating’ in this context connotes ‘the beginning’ and in this sense it connotes finality as a thing
can begin only once. The practical man would, I consider, also think that an annuity such as this
could have only a single ‘originating cause’ as it is a single annuity. If the respondent’s conten-
tions are correct, and if the trustees invested the capital of the trust in a dozen different coun-
tries, as they are permitted to do, then this single annuity would have a dozen different
‘originating causes’. It is, of course, possible for any particular income to be derived from more
than one source (see the case of CIR v Lever Bros)42 but it seems to me that the whole concept of
an annuity is that it is a payment derived from a single source. If it were a receipt derived from a
large number of different sources it would, I think, hardly be considered by a practical man as
one annuity, but as several separate annuities derived from several separate sources.
In my opinion, therefore, the contention of the Commissioner of Taxes is correct and the source
of this annuity is the locus of the trust which is Rhodesia.
It will be seen that in coming to this conclusion I agree with the views expressed by Kuper J in
ITC 82643 . . .
There are certainly dicta of Stratford CJ in Armstrong’s case44 which . . . support the view that, in
cases such as this, the trust is a mere conduit pipe and that the source of the income is not the
trust, but the source from which the trust itself derives its income. These dicta must, however, be
examined in the light of the facts of Armstong’s case and the issue which then fell to be decided.
Armstrong’s case was not in any way concerned with the ‘source’ of income. This was not in issue,
for the source of the dividends was South Africa. Armstrong’s case was concerned with whether or
not monies which a beneficiary received and which were derived from dividends should be taxed
in view of the fact that the dividends themselves had already been taxed in the hands of the
company and that the clear policy of the Act, as it existed at that time, was that dividends should
not be taxed twice. The Court decided that these receipts were not subject to tax and, as the Act
read at that time, this decision can hardly be criticised.
But since Armstrong’s case the South African Act of 1941 was amended by the addition of
proviso (iii) to s 10(1) and the Rhodesian Act has followed suit by the inclusion of a new s 12(3).
If Armstrong’s case was decided to-day, either in South Africa or in Rhodesia, the monies received
by the beneficiary would clearly be subject to tax. If, therefore, the bequest in this case is an an-
nuity, as I have held it to be, Armstrong’s case is no authority for exempting it from tax and the
ratio decidendi in Armstrong’s case has no application because of the amendment to the Act. The
instant case is concerned entirely with source, a consideration which was totally absent from
Armstrong’s case.
________________________

41 1938 TPD 369 at 377.

42 1946 AD 441 at 451.
43 (1956) 21 SATC 190.
44 CIR v Armstrong 1938 AD 343.
56 Income Tax in South Africa: Cases and Materials

It is true that Stratford CJ did use the words that a trustee ‘ is a mere conduit pipe’. But he used
these words in relation to the issue to be determined which was whether the receipts should be
taxed twice . . .
In this respect, I think the case of Boyd v CIR,45 relied on by Kuper J, in ITC 826, supra, is much
more in point as it specifically dealt with the question of source and not with whether a particular
dividend should be subject to double taxation as did Armstrong’s case. In that case Centlivres CJ 46
pointed out that, if an annuity was paid as the result of a contract, and if the contractor derived
the money from which to pay the annuity from dividends from shares in a company, the source
of the annuity was the place where the contract was made and not the place from which the
money was received. The ‘source’ was the location of the obligation to pay.
The provisions in the last will of the testator and the creation of the trust as a result clearly
created the obligation to pay the annuity and, just as the place where the contract was made was,
in Boyd’s case, supra, regarded as the source of the annuity, so in this case the place where the
trust was created and is located should, I think, be regarded as the source of the annuity paid
under the trust.
In the result, therefore, I consider that the appeal should be allowed . . .
MACDONALD JA concurred.

Notes
47
Meyerowitz and Spiro consider this decision to be incorrect because it does not give effect
to the principle that a trust is a mere ‘conduit pipe’ and are of the view that the source of
a beneficiary’s income from a trust is the investments which produce that income. As
appears from the judgment in COT v R, this argument was considered by the court, but
rejected.

§5 Income from services

Where income from services is concerned, it is necessary to consider whether the real
source lies within the Republic and also whether the source is deemed to be within the
Republic in terms of s 9(2). The discussion under the present heading is concerned only
with the real or actual source of income from services.
There is strong authority for the principle that the originating cause of income
from services is the services themselves and not, for example, the contract in terms of
which they are rendered. This principle underlies the decisions in [17] CIR v Lever
Bros, [60] Millin v CIR, [52] CIR v Epstein and [31] COT (SR) v Shein. In terms of
this principle it is irrelevant who the payer was or where payment was made. But deter-
mining the location of the originating cause can be difficult, as appears from [32]
ITC 77.
There are a number of Special Court decisions which have elaborated on this princi-
ple, by asking whether or not there was a contractual obligation to render services out-
side the Republic.48 Such a consideration was also mentioned in [31] COT (SR) v Shein.49
________________________

451951 (3) SA 525 (A).

46At 535.
47At para 271.
48See for example [25] ITC 77 (1927) 3 SATC 72 at 73 where the judge said that ‘the contract of employ-
ment would always be of importance for the purposes of determining where exactly the services were
located’. See also dicta in ITC 445 (1939) 11 SATC 86. In [25] ITC 77, the decision that the chairman’s
directors’ fees were from a source in the Republic was based on the fact that the remuneration voted by
the shareholders of the company was not in respect of the taxpayer’s services outside the Republic.
49 See Tredgold CJ’s dicta at 15: ‘When a person is engaged to perform work in one place . . .’ and at 16:
‘When a man is engaged to perform a certain work in a given country . . .’
 Source 57

Where a person is remunerated qua director or receives a share of profits qua partner,
the source of such moneys is, on some authorities, determined by considerations other
than the place where services were rendered; see below.
Services can be rendered in many different capacities, inter alia, employee, independ-
ent contractor, agent, professional adviser. However, the same principle seems to apply
to all, namely that their source is the ‘activities’ of the taxpayer. For discussion of the
Commissioner’s practice in regard to professional services rendered outside the Repub-
lic, see Silke §5.27.
The unarticulated and hitherto unresolved problem which underlies many of the incon-
sistencies in our case law on the source of income from services appears to be this: is the
source to be determined as ‘practical hard matter of fact’, as a ‘practical business
man’50 would perceive it (the implication is presumably that such a person takes no
account of esoteric legal niceties) or must the inquiry take account of technical
legal distinctions? On the former approach, the source of services rendered in any
capacity would presumably be located where the services themselves were performed.
According to the latter approach, account would for example be taken of the fact that a
non-executive director is elected to his position; he is not an employee, usually has
no contract with his company, and has no obligation to render services as such. The
source of his entitlement to a director’s fee, on this more technical approach, is his
occupation of the office of director and not the rendering of services. Similarly (in
Australia) a partner’s entitlement to a share of the profits is regarded as a right derived
from the partnership agreement, not from the services which he renders; see [53] FCT v
Everett.51
In the case of directors’ fees, the courts have ignored the practical matter of where the
director actually performed services and have declared the source of his directors’ fees to
be located at the place where the company’s ‘central management and control’ is exer-
cised;52 see for example [35] ITC 250.

The source of income means the originating cause of its being received by the taxpayer as income.

[28]
CIR v Lever Bros & Unilever Ltd
1946 AD 441, 14 SATC 1
For the facts of this case, see extract [57].
Watermeyer CJ: A series of decisions of this Court and of the Judicial Committee of the Privy
Council upon our Income Tax Acts and upon similar Acts elsewhere have dealt with the mean-
ing of the word ‘source’ and the inference which, I think, should be drawn from those decisions
is that the source of receipts, received as income, is . . . the originating cause of their being re-
ceived as income and this originating cause is the work which the taxpayer does to earn them,
the quid pro quo which he gives in return for which he receives them. The work which he does
may be a business which he carries on, or an enterprise which he undertakes, or an activity in
which he engages and it may take the form of personal exertion, mental or physical, or it may
take the form of employment of capital either by using it to earn income or by letting its use to
someone else. Often the work is a combination of these.

________________________

50 The expression used by Schreiner JA in CIR v Lever Bros & Unilever Ltd 1946 AD 441, 14 SATC 1.
51 (1980) ATR 608 (High Court).
52 This normally means the head office where the board of directors meets; De Beers Consolidated Mines Ltd v
Howe 1906 AC 435.
58 Income Tax in South Africa: Cases and Materials

The source of income from services is the services themselves, and the source is located where those
services were rendered.53
[29]
COT (SR) v Shein
1958 (3) SA 14 (FC), 22 SATC 12
For the facts of this case, see extract [23].
Tredgold CJ: It may be accepted that, prima facie, the test of the source of a payment for services
rendered is the place where those services are rendered.

[30]
CIR v Nell
1961 (3) SA 774 (A), 24 SATC 261
The taxpayer practised in Johannesburg as a consulting electrical and mechanical engi-
neer. During the year of assessment he had made certain visits to Southern Rhodesia to
render professional services to clients resident there. The purpose of these visits was to
ascertain his clients’ precise requirements and to advise them. From notes compiled by the
taxpayer in Rhodesia, draft plans were prepared in his Johannesburg office where he
maintained a technical and clerical staff.
Issue: whether the income derived by the taxpayer from his clients in Rhodesia were
from a source in the Union of South Africa.
Held: in the negative. The factual finding of the Special Court that the taxpayer’s work
of establishing his clients’ requirements in Rhodesia was an essential and basic part of his
work, could not be overturned on appeal. It was irrelevant whether or not the appeal
court agreed with the decision of the Special Court.
Hoexter JA: [The judge noted that the Special Court had held that the source of the income
derived by the taxpayer from services rendered by him in Southern Rhodesia was not located in
the [then] Union of South Africa and that such income could not be deemed, in terms of [the
now-repealed] s 9(1)(b))54 to be from a source within the Union. The taxpayer’s work for clients
consisted of (a) preliminary discussions; (b) preparation of tender documents; (c) supervision of
work and preparation of final account. In the present case the taxpayer had spent considerable
time in Rhodesia in order to ascertain their requirements precisely in order to be able to advise
them to best advantage. The judgment proceeds:]
Counsel for the Commissioner also attempted to persuade us that the services rendered by the
taxpayer in Southern Rhodesia were . . . merely incidental and subsidiary to the services ren-
dered in the Union. I need only refer to the following statement of fact in the stated case:
‘(c) The work of “establishing the clients’ requirements” . . . is an essential and basic part of the respond-
ent’s work. It is the part of the work which most requires skill and experience, and is usually attended to by
the respondent himself. The formulation of the draft plans from the respondent’s notes and sketches is
routine work entrusted to a comparatively junior assistant’.
It is impossible, therefore for this Court to interfere55 with the finding of the Special Court that a
portion of the income of the taxpayer was from a source outside the Union.
...
In my judgment the appeal should be dismissed with costs.
BOTHA JA, HOLMES JA, VAN WINSEN AJA and DE VILLIERS AJA concurred.
________________________

53 See also CIR v Lever Bros & Unilever Ltd, supra; CIR v Epstein, supra.
54 Later (but since-repealed) s 9(1)(d).
55 See now s 86A which provides for a full right of appeal to the Supreme Court, on both law and fact.
 Source 59

Notes
The judge went on to consider whether the income in question could be deemed to have
its source in the Union in terms of (the now-repealed) s 9(1)(b) of the Income Tax Act,
1941. On this question, see [30] CIR v Nell, below.

[31]
COT (SR) v Shein
1958 (3) SA 14 (FC), 22 SATC 12
For the facts of this case, see extract [23].
Tredgold CJ: It may be accepted that, prima facie, the test of the source of a payment for services
rendered is the place where those services are rendered (CIR v Lever Bros;56 CIR v Epstein 57). The
learned Judge in the present case said:
‘It now seems settled law that generally the source of such income is the place where the services for which
the salary is paid are rendered.’
Unless the word ‘generally’ is understood to introduce a considerable qualification the proposition
may perhaps, in this passage, be too boldly stated. The ultimate test of source is the originating
58
cause (Lever Bros supra). Where a person is engaged to perform work in one place and, purely as a
matter of convenience, he does part of the actual work elsewhere, while producing his final result
at the place contracted, difficult questions may arise, But this difficulty does not present itself in the
case under consideration, for here the respondent did the main work for which he was employed
in Bechuanaland, though he did a large part of it through the agency of another.

§6 Directors’ fees
A director, qua director, is not an employee of the company, nor does he have a contract
with the company; he holds his office by virtue of having been elected by the company in
general meeting. A director may however, enter into a contract of service with a compa-
ny. In that event he is, qua director, usually entitled to directors’ fees; qua employee, he is
usually paid a salary. Different principles apply in determining the source of each of
these two categories of remuneration. Therefore, where the source of a particular
amount is in issue, and the taxpayer in question was both a director and an employee, it
must be determined in which capacity he was paid that amount.
The general principle is that the source of a director’s fees is his office as director, and
such amounts are regarded as having been earned at the head office of the company
where the directors normally meet to transact its business; see [34] ITC 235. By contrast,
the source of a director’s remuneration under a contract of service or for services specifi-
cally contracted for is the services themselves, and the source is located where the ser-
vices were performed; see [36] ITC 266.
Thus, where a company’s head office where the board of directors normally transacts
its business is in the Republic, the source of all directors’ fees is in the Republic, regard-
less of where the director resides or where he performs his directorial duties. Conversely,
if a director resides in the Republic, but the company’s head office where the directors
normally meet to transact its business is outside the Republic, the source of his directors’
fees is located outside the Republic.

Generally, the duties of a director are to dictate the policy of and to control the management of a
company. The source of a director’s fees is where he performs the services for which he is paid. If he
________________________

56 1946 AD 441 at 449.

57 1954 (3) SA 689 (A) at 698.
58 1946 AD 441 at 450.
60 Income Tax in South Africa: Cases and Materials

renders additional services, over and above his ordinary directorial duties, the source of such addi-
tional remuneration will be where those services were performed, provided that the company had
agreed to pay him for those extra services.

[32]
ITC 77
(1927) 3 SATC 72
The taxpayer had, during the year of assessment and for some years previously, resided
in the United Kingdom. He had for some years been the chairman of the board of
directors of a company which was registered and carried on business in the Union of
South Africa. Each year the taxpayer spent two months in the Union where he chaired
the shareholders’ annual general meeting and any meetings of directors that might be
held during that period, and he inspected the company’s branches in the Union. For the
rest of the year he resided in the United Kingdom where, once a month, he visited the
company’s buying office in London and advised on matters which were submitted for his
consideration. The shareholders of the company voted him remuneration as chairman.
During the post-war depression, he did a great deal of special work for the company in
the United Kingdom. For these services, the shareholders voted him additional remun-
eration, and the relevant resolution expressed it to be ‘for special services rendered to
the company outside his ordinary duties as chairman of the company’. The Commission-
er included in his taxable income both his fees as chairman and the additional remuner-
ation. The taxpayer argued that his fees as chairman ought to be apportioned on the
basis of the time which he spent in the Union and that his additional remuneration was
from a source outside the Union.
Issue: was the source of any part of his director’s fees located in the Union of South
Africa?
Held: the fees paid to the taxpayer as chairman of the board of directors were paid in
respect of services rendered in that capacity at meetings of directors and shareholders in
the Union, and the source of such fees was therefore located in the Union; the special
remuneration paid to the taxpayer for services rendered outside the Union was derived
from a source outside the Union.
G J Maritz . . . said that the Commissioner sought to tax both these sums as being derived from a
source within the Union . . .
Menzies Murray, Income Tax Act Annotated 59 said that ‘the source of any income may be said gen-
erally to be the location of the business, capital or service which produces the income. If this
income-producer is located in the Union then the particular income has been earned from a
source within the Union.’ The Chief Justice in quoting these remarks with approval in Overseas
Trust Corporation Ltd v CIR 60 said, ‘That fairly expresses the result of the decisions, bearing in
mind that “source” denotes origin, not location.’ The word ‘service’ was qualified by the words
‘which produces the income’, so the contract of employment would always be of importance for
the purpose of determining where exactly the services were located which produced the income,
for unless the services were remunerated services their locality was immaterial and unimportant
for income tax purposes. The following examples would illustrate this statement:
1. An attorney who practised in the Free State employed a clerk at a salary of £500: the source
of the clerk’s income of £500 would be the Union, for his service were located there.
2. An attorney who practised both in the Free State and in Basutoland, employed a clerk to
work in both businesses at a salary of £500: the locality of the services which earned the £500
would be partly in the Free State and partly in Basutoland. An allocation would have to be
________________________

59 At 35.
60 2 SATC 61.
 Source 61

made, probably on a time basis, of the £500, partly to a Union source, and partly to a Basuto-
land source . . .
3. An attorney who practised in the Free State near the Basutoland border, employed a clerk at
£500 per annum to serve him in his Free State business. The clerk, however, occasionally
crossed the border to perform casual work for his employer in Basutoland. The locality of
the services which earned the £500 would be the Free State, because the contract stated that
the services for which he is paid £500 was in the Free State. The acts, of service performed by
the clerk in Basutoland were casual and accidental in their nature, and were not remunerat-
ed as such. If, however, the attorney remunerated him specially for the acts of service he per-
formed in Basutoland, then the locality of the service which produced that special remun-
eration would be Basutoland, and the source of the special remuneration would be
Basutoland . . .
Now the evidence in the appeal had not satisfied the Court that any portion of the amount re-
ceived by the appellant as Chairman’s fees had been awarded for services rendered in London
or elsewhere abroad. Generally speaking, the duties of directors were to dictate the policy, and
to control the affairs and management of a company. Gore Brown, Handbook on Joint Stock Com-
panies61 said, ‘The ordinary business of the company is transacted by the directors. The company
exercises its control and does such acts as are reserved to it by the votes of the majority at general
meetings.’ Those duties were performed in this case at the meetings of directors held at the
head office at Johannesburg. It could not be inferred from the evidence that there was any in-
tention on the part of the company to allocate any portion of the payment to services rendered
outside the Union. The same rate of payment had been originally received solely as chairman’s
fees, and the evidence had not satisfied the Court that the company intended appellant to per-
form additional services abroad for the same remuneration, or that it had been resolved that he
should perform these additional services for an inclusive fee. The evidence made no attempt to
disclose an agreement, if such indeed existed, between the company and the appellant, whereby
the latter undertook to perform these outside services, and whereby he was to be remunerated
for such services . . . It was possible that he performed these services rather through mere acci-
dent of his choice of residence. There was therefore no chain of cause and effect linking up the
amount received as chairman’s fees with the services rendered abroad. The services which
earned the amount were therefore located in the Union, and that sum must be held to have
been received from a source within the Union . . . These services were all performed outside the
Union. The services, therefore, which earned the second payment were clearly located outside
the union, and that sum must be held to have been received from a source outside the Union,
and as such was not subject to Union income tax.

[33]
ITC 106
(1927) 3 SATC 336
The taxpayer resided in the Union of South Africa and held office as a director of a
company which was registered in England and had its head office in London. The com-
pany worked certain mining properties in the Union. To facilitate the operations of the
company, a local board of directors was formed in the Union. The taxpayer was one of
the directors on this board. The conditions under which the local board were established
provided that a member of the local board who was a director of the company and had
appointed an alternate director in London should be paid for his special services as a
member of such local board. The taxpayer had not appointed an alternate director in
London. During and prior to the year of assessment, the taxpayer had, whilst resident in
the Union, rendered certain services to the company. During the same year he had spent
some eight months in England, mainly on holiday, and had attended meetings of the
board of directors in London. In the other four months of the year he had attended
meetings of the local board in Johannesburg. During the year of assessment in question,
he was paid the ordinary fee payable to a director under the articles of association.
________________________

61 34 ed at 335.
62 Income Tax in South Africa: Cases and Materials

GJ Maritz (President): . . . said that Menzies Murray in Income Tax Act Annotated 62 had remarked
that ‘The source of any income may be said generally to be the location of the business, capital or
service which produces the income . . .’ The next point for decision, therefore, in the present case
was: – Where were the services located which had produced the income assessed? And that ques-
tion must be determined from the facts as set out, interpreted in the light of the relevant portions
of the articles of association. It seemed clear that the payment had no reference to the special ser-
vices rendered by the appellant to the company between the promotion of the company and the
establishment of the local board. There was nothing in the evidence to show that he had contract-
ed to do that work, or that he was to be paid for it, or that it was work for which he had received an
inclusive fee. Now, according to the articles the management of the business and the control of the
company were vested in the directors. The directors held their meetings in London. So it was clear
that the company was managed and controlled from London. The ordinary services that a director
would render in pursuance of his general duties to the company would be to attend the meeting of
directors in London, and for those services he would receive the ordinary remunerations of a di-
rector. If the case rested there it would admit of no doubt that the amount in question was received
by the appellant from a source outside the Union, as the services for which he had received the
sum were located outside the Union.
It remained to consider, however, whether the appellant, in accepting nomination on the local
board, did not undertake, in addition to his ordinary duties, to serve the company on the local
board for an inclusive fee . . . Now clause 13 of the constitution of the board made it clear that
the appellant would only become entitled to remuneration, provided that he had appointed a
person to act as his alternate director at the meetings held in London . . . He had not appointed
an alternate director, and although the directors had imposed upon him, of course with his
consent, additional services which had to be performed within the Union, it was clear from the
facts of the case that he performed such additional services without reward. There was therefore
no link connecting up the services rendered by the appellant on the local board with the sum
received by him from the company. There remained, therefore, only the services which the
appellant rendered when he attended some of the meetings of the Board of Directors in London
which could be linked up with the sum he had received from the company. That remuneration
was the ordinary remuneration received for his ordinary services as director. In the opinion of
the Court, therefore, the locality of the services which earned the sum was in London.

The source of a director’s fees is the office of director and such fees are regarded as having been
earned where the company’s central management and control are exercised.

[34]
ITC 235
(1932) 6 SATC 262
During the year of assessment the taxpayer, who was managing director of a company
which was registered and had its head office in the Union of South Africa, resided in
England as the company’s representative, in accordance with a decision of the board of
directors. The directors had also resolved that he was to be paid his usual salary plus
travelling expenses. The taxpayer claimed that his directors’ fees and his salary while he
was in England were derived from sources outside the Union.
Dr Manfred Nathan KC: It is quite clear that the director’s fees are derived from the fact that
the appellant is a director of the company, and therefore must be assumed to have earned the
fees at the headquarters of the company. It is there only that he can make his voice heard as a
director.

________________________

62 At 35.
 Source 63

[35]
ITC 250
(1932) 7 SATC 46
The taxpayer company, which was registered and had its head office in London,
appointed a director to the board of a subsidiary company which was registered and had
its head office in the Union of South Africa. This director was a person resident in
London. During the year of assessment the subsidiary company paid this director a
substantial amount in respect of directors’ fees, which the director then handed over to
the taxpayer company. The Commissioner assessed the taxpayer company to tax on these
fees on the grounds that they were from a source within the Union.
Dr Manfred Nathan KC: In the case of De Beers Consolidated Mines Ltd v Howe 63 the House of
Lords decided that a company is resident where its seat of government and central board of
management and control are situated, regardless of the actual business undertaking and the
country of the company’s incorporation (that is, registration as a company). In the present case
the head office of the company, that is, its seat of government and the centre of its activities is
Johannesburg . . . In these circumstances it seems to us that the salary of the appellant must be
regarded as having its source within the Union, viz at Johannesburg.

Where a director is paid for special services, as opposed to being paid for performing his directorial
duties, the source of such payment for services is located where the services are performed.

[36]
ITC 266
(1932) 7 SATC 151
The taxpayer carried on business as a general agent. He was also a shareholder and
director of a company which carried on business in the Union of South Africa in a prod-
uct obtained from a foreign country. The company had experienced difficulties in that
country with the supply of the product. The taxpayer had previously visited that country
and had established contacts with representatives of its government. Under these cir-
cumstances, the company requested the taxpayer to travel to the foreign country and
attempt to negotiate for the removal of the difficulties which were impeding its business.
For doing so, the taxpayer was paid a fee, his expenses, and an entertainment allowance.
The Commissioner assessed him to tax on this fee.
Dr Manfred Nathan: It has been a matter of doubt with us whether the appellant was engaged in
his capacity as director of the company, but the appellant has stated that he would have been
engaged in any event, even if he had not been a director, on account of his special knowledge of
the circumstances and of the mode in which the foreign government should be approached . . .
It might also be said also that the appellant was engaged in connection with his business as a
general agent, but it appears, on a consideration of all the facts, that he was engaged not so
much because he was an agent as by reason of the special knowledge to which I have referred . . .
[F]rom his point of view, he was performing services not so much as a director as in the role of a
special negotiator specially engaged.
Now, the question which has been raised before this Court is whether the sum which he earned
in that capacity is to be deemed to have been earned from a source within the Union . . .
...
[T]aking a broad view of the facts, we have come to the conclusion that the appellant was not
engaged in his capacity as a director of this particular company. He was engaged by reason of his
special knowledge and for the purpose of negotiating with the foreign government . . .
________________________

63 [1906] AC 435.
64 Income Tax in South Africa: Cases and Materials

The case which seems to us to be most nearly applicable to the principle to be applied in the
present case is Income Tax Case No 100.64 There Mr Justice Maritz, the then President, said:
‘It seems to the Court that it was necessary to look at the matter from an ordinary common sense point of
view, and “source”, after all, in relation to ordinary business matters, was a question of fact and common
sense. Appellant was employed to render certain services for his principal, and it had been held that the
source of payment under a contract of service was where the services were to be performed.’
According to another authority, Menzies Murray on the Income Tax Act, at p 38, it is said that the
place where the services are rendered is the place to be regarded as the source of the income,
and he proceeds:
‘That is the only test to be applied, the place of payment and the place of the employer’s residence are
immaterial. The source is in the Union if the service is rendered or the work or labour done in the carry-
ing on in the Union of any trade.’
No authority is quoted for that statement, and speaking for myself, I would hesitate to say that
that is a principle of invariable application. That authority agrees with the decision of the Court
to which I have referred, that the primary thing to be looked at is the place where the services
are rendered. Without deciding that that is the only test to be applied I think we are bound to
follow this decision as a decision of this Court, and as having application to the main test which
is to be applied.
Now, in this case it seems clear to us that the services were for all practical purposes rendered
entirely in the foreign country. It is true that the company here may have derived the benefit of
the services, but in any event, where a company employs a person to perform services outside a
particular country where the headquarters of the company are situate, the services presumably
result in benefit to the company as such. Therefore, the seat of the company’s office is not a
decisive factor in such cases. The main point to be looked to as a rule is the place where the
services are rendered. That being the case, and the Court being of opinion that these services
were rendered in the foreign country, we come to the conclusion that the source of these ser-
vices was outside the Union.
Under these circumstances the appellant is not taxable on this amount.

§7 Sale
There is no single rule which determines the source of income from the sale of property.
The established general principles must be applied to the facts of each case. These
may lead to the conclusion that source was a contract, the property itself, payment by
the purchaser, the business of the seller, the capital employed by the taxpayer, or his
activities.

§7.1 General principles

Where the taxpayer’s profit is derived from buying and reselling goods, the source of the profit is
generally located in the country where the sales took place.

[37]
CIR v Epstein
1954 (3) SA 689 (A), 19 SATC 221
For the facts of this case, see extract [52].
Schreiner JA: As between two countries, in one of which goods are bought and in the other of
which they are sold, the combined transactions resulting in a profit, such authority as exists is
strongly if not uniformly in favour of the view that it is the country in which the goods are sold
that is the country of origin of the profits.
________________________

64 3 SATC 250.
 Source 65

[38]
Transvaal Associated Hide and Skin Merchants v Collector of Income Tax,
Botswana
(1967) 29 SATC 97 (Court of Appeal, Botswana)
For the facts of this case, see extract [42].
Schreiner JA: When all the activities giving rise to the income consist of buying and selling, the
country where the sales were made is generally held to be the source of the trading profit. But one
can imagine cases where there is an unlimited market for the goods at a fixed price and the only
business problem is to find sellers of the goods. In such a case the country where the goods were
bought, if it was different from that in which they were sold, might properly be held to have been
the source of the profit.
Where the taxpayer derives income from acquiring and re-selling property at a profit, the source of the
income is where his capital was employed in acquiring good property cheaply and enhancing its
value; but if his profit were solely due to clever salesmanship, the source may be located where the sale
took place.

[39]
Davis v COT
1938 AD 301, 9 SATC 380
The taxpayer resided in London and was experienced in the flotation and management
of companies and the production and marketing of base metals. He employed an agent
in Southern Rhodesia to peg and register certain tungsten claims in that country for the
purpose of selling them at a profit. The taxpayer expended money on development work
and later sold the claims at a profit to a company formed by him for the purpose of
acquiring them.
Issue: was the taxpayer’s profit derived from a source in Rhodesia?
Held: in the affirmative; his profit was due to the employment of his money in Rhodesia,
and that was the source of the income.
Stratford CJ: We are concerned . . . only with the question of the source of the income.
The appellant resides in London: whether he is a merchant or financier does not seem to mat-
ter; he has large experience in the flotation and management of companies and knowledge of
the production and marketing of base metals. He had an agent in Southern Rhodesia named
Bayliss whom he employed during the months February – October 1935 to peg and register cer-
tain tungsten claims in that Colony. The cost of acquisition, licence moneys etc was £425 and
subsequent to acquisition the appellant expended £9 429 on development work for the purpose
of proving the value of these claims. They were subsequently sold for £27 500 to the St Swithin’s
Ores and Metals Ltd, a company formed by the appellant for their acquisition. It is admitted that
the original pegging of the claims and the work done upon them were acts done on appellant’s
behalf in Rhodesia with the object of reselling the claims at a profit. But it is said that the source
of the income was London, because that is where the appellant carried on his business and that
is where the profit accrued on the contract of sale to the St Swithin’s Company. The contention
for appellant in the heads of argument is the following: ‘The inference to be drawn from all the
facts is that the source from which the income was received was the business of promoting a
company which would acquire and work tungsten claims, and of selling claims to that company.’
This argument on examination will be seen to be that the profit was not due to a clever agent
pegging good claims, nor to good fortune in acquiring them cheap nor indeed to any enhance-
ment of their value, but solely to the cleverness of the appellant in selling at so large a profit to
the St Swithin’s Company. But in justice to the appellant it must be said that his own evidence
does not support this way of regarding the matter. What we must assume, as in the previous case
of Rhodesia Metals, is that the claims were sold in an honest transaction at a fair value to the St
Swithin’s Company and that the price obtained over cost was due to the enhancement in value
66 Income Tax in South Africa: Cases and Materials

of the thing into which the appellant had put his money and his work. This, in my judgment, is a
very clear case where the profit was due to a fortunate and skilful employment of the appellant’s
money in Southern Rhodesia and that was the source of the income.
In my opinion, therefore, the judgment of Hudson J was right and the appeal must be dismissed
with costs.
DE VILLIERS JA, DE WET JA, TINDALL JA and FEETHAM AJA concurred.

§7.2 Sale of immovable property

Where the sale of immovable property is concerned, the courts have tended to find the
source of any profit to be located where the property is situated, in other words, where
the taxpayer’s capital was employed, rather than where the sale was concluded or where
any expertise involved in the sale was exercised. For example in [40] Liquidator, Rhodesian
Metals Ltd v COT, Southern Rhodesia the liquidator of the taxpayer company, which was
incorporated in England, had profitably sold certain mining claims situated in Southern
Rhodesia. A majority judgment of the Appellate Division decided (and was upheld in the
Privy Council)65 that the source of the profit was the employment of the company’s
capital in Rhodesia. In a dissenting judgment, de Villiers JA held that ‘the whole affair
was a London financial transaction’, that the capital played a minor, background role,
and that the place where the sale took place was the most important factor in determin-
ing the source of the profit.
On somewhat similar facts in [39] Davis v COT, the Appellate Division rejected the
argument that the profit on the sale of mining claims had its source in clever salesman-
ship in London, and held that the source of the profits was the employment of the
taxpayer’s money in Southern Rhodesia in buying good property cheaply and enhancing
its value.
Since immovable property is not ‘goods’, the deemed source provisions of [the now
repealed] s 9(1)(a) do not apply.

[40]
Liquidator, Rhodesian Metals Ltd v COT, Southern Rhodesia
1938 AD 282, 9 SATC 363
The taxpayer company, incorporated in England on 30 November 1935, acquired certain
mining claims in Southern Rhodesia the following month, and a month thereafter was
placed in voluntary liquidation. In London, the liquidator sold the whole undertaking of
the company, including the mining claims, to a second company.
Issue: was the source of the profit from the sale of the mining company’s business
located in Southern Rhodesia, where the company’s mining claims and hence its capital
were located, or was the source of the profit located in London where ‘the company’s
brains’ were employed and the sale was concluded?
Held: the factor that was instrumental in producing the profits in issue was the produc-
tive employment of the company’s capital in Rhodesia.
Stratford CJ: In the present case we have to determine whether the profit was due to the produc-
tive employment of the company’s capital in Rhodesia or on the other hand to its organisation
and connections or to its special aptitude or equipment or the special intelligence of its board –
all of these being in the place where the company resided, which was London. I accept unhesi-
tatingly as a premise that in this case the capital of the company was employed in Rhodesia. Of
its total capital of £10 000, five thousand were spent in the acquisition of the claims and two
________________________

65 Rhodesian Metals Ltd (in liq) v COT, Southern Rhodesia 1940 AD 432, 11 SATC 244.
 Source 67

thousand odd in work done on them. The claims were in Rhodesia. Therefore, the risk of de-
preciation or the hope of appreciation was attached to the Rhodesian acquisition . . . One must
concede, I think, that the employment of capital may not be the dominant cause of the profit.
What was instrumental in producing the profit in this case? Put shortly was it the capital em-
ployed or was it the brains of the company – under which latter term I include its special apti-
tude and equipment? . . . The plain truth is that Rhodesia Metals made an extremely fortunate
purchase in Rhodesia by employing its capital there. It makes no difference, in my judgment,
whether its good fortune resulted from pure chance or from the goodwill of another . . . In the
circumstances of the present case I regard the fact that the companies were resident in London
and that the contracts were made there as having very little, if any bearing on this question of
the source of the income.
The conclusion to which I come, therefore, is that the profit was made by the productive employ-
ment of the company’s capital in Rhodesia; that this profit was income liable to tax and that it
was derived from a source in Rhodesia.
The appeal is dismissed with costs.

[41]
Rhodesian Metals Ltd (in liq) v COT, Southern Rhodesia
1940 AD 432, 11 SATC 244 (Privy Council)
For the facts of this case see the decision in the Appellate Division, reported as [40]
Liquidator, Rhodesian Metals Ltd v COT, Southern Rhodesia.
Issue: Was the source of the profit in question located where the company was man-
aged and where the contracts of purchase and sale were entered into, namely England,
or was the source of the profit located in Rhodesia where the mining claim in question
was located?
Held: The sole business operation of the taxpayer company was the purchase of im-
movable property in Southern Rhodesia and its development in that territory for sale at a
profit. As ‘a hard matter of fact’ the profit was from a source in Rhodesia, namely the
mining claim which was acquired and developed there for the purpose of earning this
profit.
Lord Atkin: This is an appeal from the Appellate Division of the Supreme Court of the Union of
South Africa who affirmed a decision of Hudson J in the High Court of Southern Rhodesia.
Two questions arose on the appeal:
1. Was the amount assessed in respect of a receipt proved by the taxpayer to be of a capital
nature?
2. Was it an amount received from any source within the territory?
The first question was decided against the appellant by all the Judges in South Africa . . . There
appears to be ample evidence upon which the learned Judges in South Africa could come to the
conclusion they reached on this issue, and on this point the appeal must fail.
It was, however, strenuously urged throughout the appeal here, as in South Africa, that the price
received was not a receipt from a source in Southern Rhodesia. The respondent, it was said, was
faced with a dilemma. The contention is that this was a capital sum; if so the tax is clearly not
exigible. But if it was not a capital sum it was only because it was the result of a business opera-
tion: if so the only source is the business: and the place where the business is carried on is the
source of the profit made by the business; and as there can only be one source for one business
profit you have only to see where the business was carried on which earned that profit: and that
place is England where the head seat and directing power was situate and where both the con-
tracts of purchase and sale were made and where the consideration for the sale was in fact re-
ceived. In support of the contention, numerous cases founded on the various Income Tax Acts,
English, Australian, New Zealand and South African, were cited, chiefly as to business in buying
and selling commodities . . .
68 Income Tax in South Africa: Cases and Materials

Their Lordships have no criticisms to make of any of those decisions, but they desire to point out
that decisions on the words of one Statute are seldom of value in deciding on different words in
another Statute: and that different business operations may give rise to different taxing results
. . . In the present case their Lordships do not find it necessary to formulate a definition which
will afford a universal test of when an amount is ‘received from a source within the territory’. A
doubt may be expressed whether the words borrowed by Stratford CJ from Innes CJ in the Over-
seas Trust Case (supra) ‘productive employment of capital’ really help to define the situation. Is
capital productively employed in the place where it purchases stock which is profitably sold else-
where: or in the place where the stock which now represents the capital is sold: or for purposes
of the test must both purchases and sales occur in the same place: or is it sufficient that the place
of the direction of the employment of the capital in purchasing of selling should denote where
the capital is productively employed? Perhaps in other words it may be said does it mean more
than carrying on business in a place? . . .
At any rate, in the present case whatever may be the right view of the source of receipts derived
from trading in commodities, their Lordships find themselves dealing with a case where the sole
business operation of an English company is the purchase of immovable property in Southern
Rhodesia and its development in that territory for purposes of transfer in that territory at a prof-
itable price. The company never adventured any part of its capital except on that or those im-
movables. As a hard matter of fact the only proper conclusion appears to be that the company
received the sum in question from a source within the Territory, viz the mining claim which they
had acquired and developed there for the very purpose of obtaining the particular receipt.
Their Lordships will therefore humbly advise His Majesty that this appeal should be dismissed.

§7.3 Sale of goods

The deemed source provisions of (the now-repealed) s 9(1)(a) which applied to a ‘con-
tract made . . . within the Republic for the sale of goods’ are wider in scope than the
principles relating to actual source. Consequently, many of the reported cases on the
source of income from the sale of goods focus on whether these deeming provisions are
applicable, rather than on the actual source of the income. The following cases concern
the actual source of income from the sale of goods.
§7.3.1 Purchase of raw materials and sale of finished product
Where the taxpayer purchases goods and sells them, but the ‘highest essentiality’ of the earning of the
income is the work done on the raw product rather than the marketing and sale of it, that work
rather than the expertise involved in the sale will be the originating cause of the income.

[42]
Transvaal Associated Hide and Skin Merchants v Collector of Income Tax,
Botswana
(1967) 29 SATC 97 (Court of Appeal, Botswana)
The taxpayer company was incorporated in the Republic and had its head office in
Johannesburg. It carried on the business of buying and selling hides and skins. These
products were purchased at the abattoirs where the animals were slaughtered, but the
sales were effected from the taxpayer’s offices in Johannesburg and Pretoria. One of the
abattoirs from which the taxpayer made purchases was that at Lobatsi in Botswana (pre-
viously Bechuanaland). The taxpayer purchased the ‘green’ (ie uncured) hides but,
before they could be transported to purchasers, they had to be cured so as to prevent
putrefaction. This was done by washing and salting them, then stacking them for a
number of days. The process of curing did not change the essential character of the
hides, and in fact a purchaser who was a leather manufacture would immediately soak
the hides to remove the salt and rehydrate them so as to restore them, as far as possible,
to the condition of ‘green’ hides.
Issue: was the taxpayer’s income from a source in the Republic?
 Source 69

Held: (Roper P dissenting) in the negative: the processes carried out at Lobatsi, were
the dominant factors in the accrual of the income, and the source of the income was
therefore in Botswana.
Roper P: (dissenting) In my view therefore the task of this Court in the present case is to ascertain
what was the dominant factor or real and basic cause responsible for the profits with which we
are concerned.
Before discussing that question, however, I should refer to another matter which arises from the
judgment of Watermeyer CJ. The difficulty in locating the source of the income may arise from
the fact that the activities which have produced the income have occurred in different countries,
so that the source is located partly in one country and partly in another. This possibility was re-
ferred to by Lord Atkin in the Privy Council in the appeal in Rhodesian Metals v COT 66 and it is
also discussed by Schreiner JA in CIR v Epstein . . .
...
[A]s apportionment is not an issue in the present case it need not be further considered.
Let me turn now to the question, what, if anything, can be said to be the dominant factor or the
real and basic cause, in the making of the profit in this case . . .
...
Where the taxpayer’s profit-earning activities have been carried on partly in one place and partly
in another it is necessary to consider the whole of the activities and to decide whether those
carried out at the one place or those in the other played the greater or more important part in
the earning of the profit . . . One of the most important elements in the inquiry would be, in my
view, the nature of the respective functions of the personnel employed in the two places, and the
degree of skill required of and exercised by them . . .
In the Angliss67 case, which has certain affinities with this case, in a dissenting judgment Evatt J
suggested the following as questions to be considered in determining the source of profits:
‘Where are the persons who are in general control of the business operations? Where are those who are
exercising any particular control? What is the importance and skill attachable in a business sense to things
done in Australia and overseas respectively? What costs and outgoings were incurred here?’
These questions, and particularly the first and third, appear to me to be very pertinent to the
present case.
...
To return to the present case, the learned Chief Justice took the view that by the curing of the
hides at Lobatsi the taxpayer converted a raw material into a merchantable commodity; the
essence of the operation was the production from a raw material of a marketable commodity; it
was by the curing alone that he endowed the hides with any value at all, for were he not to do so
the hides would be putrefied and valueless. The other work done by the company, including the
initial arrangements for the purchase of the hides and the subsequent profitable marketing
thereof was brushed aside as being no more than contributory factors in the earning of the prof-
it.
It is not correct to say that it was only by the curing that the hides were given any value at all. The
green hides had a value, and of course the curing increased their value. But in the search for the
dominant factor, or the real and basic cause, added value is not decisive . . . It is true that the
curing was a sine qua non of the whole business operation; but the same can be said of other steps
in the process from purchase to sale of the hides, so that this is unimportant . . .
The work done at Lobatsi consisted of washing the hides, shovelling salt on to them, stacking
them, leaving them in stacks for a period of from 11 to 21 days, and then de- stacking them,
sorting them, and packing them into bundles. This was a series of simple operations for which
no great skill would be required, and in fact it was all done by a not very considerable number of
daily paid native labourers . . . It is not a process of manufacture, and it amounts to not much
more than the preparation, preservation and packaging of stock-in trade . . .
________________________

66 1940 AD 432 at 436, 11 SATC 244.

67 Angliss & Co Ltd v FCT 46 CLR 417.
70 Income Tax in South Africa: Cases and Materials

These activities must be compared with those carried out at the company’s head office in South
Africa. At the hearing in the High Court the managing director of the company was called as a
witness to describe the process of curing and also the subsequent selling of the hides by the
company. On the latter aspect he said that skill was required in selling the hides; that one had to
know the market, that different tanners needed different types of hides; that one had to know
how to grade them for the purposes of the tanners; that there was a tremendous amount of
competition in overseas selling; that a lot of hides were sent all over the world; that to be success-
ful one must have business acumen of the highest order; and that a large number of hide and
skin merchants had ‘gone down the drain’ and had gone into liquidation. No evidence was led
to controvert these statements; in fact the witness was not even cross-examined upon them by
counsel for the Collector.
Knowledge of the market would of course be a vital element in the operations of the company,
engaged as it was in a scheme of profit-making by the purchase of skins, their preparation for the
market, and their sale on a market which according to the evidence was by no means easy or safe
...
Apart from the very slight degree of expert knowledge required of the native labourers who
washed, salted and stacked the skins, the whole of the expert knowledge required for the process
from their purchase to ultimate sale was that of the company’s officials at the head office in
South Africa. The financing of the operations was done from the head office, which supplied the
skilled direction and control of the whole of the business . . . That being so, in my view the
source of the revenue was in South Africa and not in Botswana.
Schreiner JA: I have read the judgments of my brethren, and agree with the conclusion and
reasons of my brother Maisels . . .
...
No doubt selling the cured hides is necessary to bring an income to hand, so that it might be
said of the sales, as much as of the curing, that they are a causa sine qua non of the accrual of the
income. But the place where a causa sine qua non exists cannot be decisive of the place of origin
of the income, for there may be a number of causa sine qua non. One must look for something
more – something like the dominance or basicality used in the abovementioned list of expres-
sions; or like what I venture to call the highest, or higher, degree of essentiality.
When all the activities giving rise to the income consist of buying and selling, the country where
the sales were made is generally held to be the source of the trading profit. But one can imagine
cases where there is an unlimited market for the goods at a fixed price and the only business
problem is to find sellers of the goods. In such cases the country where the goods were bought, if
it was different from that in which they were sold, might properly be held to have been the
source of the profit. But the present case is not a simple one of purchase and sale.
...
In the present case the green hides in the abattoir are like unmined or untreated ore or the raw
material of the manufacturer. Cured hides are like mined and treated ore or manufactured
goods. It is true that curing is a relatively simple process and that before the tanner uses the wet
salted hides he restores them, as far as possible, to their former green condition. But this does
not go to the root of the matter. Curing is quite different from such steps as storing or transport-
ing which, though sometimes required by custom or contract, are not in general essential to the
buying and selling of goods. Whether, as in the Republic of South Africa, you must be a regis-
tered curer before you may buy green hides, or whether, as in Botswana, or anywhere else, you
must, from the self-destructive nature of the green hides, have available the means to cure them
before in practice you can buy them (save, of course for future delivery, giving time to provide
the means), it seems clear that curing is the really vital element in the hide and skin dealer’s
business.
In such a business there is no need to have elaborate selling offices – a room, and a telephone
would suffice – nor need the offices be situated in any particular place. But sufficient curing
facilities there must be; and they must be situated at the site of the abattoirs.
Expertness in studying markets and knowing when and where to sell is no doubt important . . .
But the dealer in hides and skins need no be an expert marketer. He has brought a merchanta-
ble article into existence and can make an income by selling it, though a smaller one if he is an
 Source 71

inexpert marketer than if he were expert. But it is clear that he could not gain a cent of profit
unless he possessed and used the means for curing the green hides that he bought.
The characteristic feature of a hide and skin merchant’s business is not that he buys and sells
goods but that he cures hides and skins which he is thus enabled to sell . . .
It seems to me that the curing of the green hides is more truly essential to the gaining of profit
then the sale of the wet salted hides. Once the green hides have been cured they are there to be
dealt with commercially – to be sold, given in pledge or otherwise turned to account. But if they
have not been cured they immediately disappear from the world of commerce like snow on the
desert’s face.
In my view, the curing is dominant over the selling. It is more basic, or more truly the main or
substantial or real and basic cause of the accrual of the income.
The appeal must be dismissed with costs.

Notes
In his judgment, Maisels JA said that there was much to be said for an apportionment,
but the Act made no provision for apportionment and the taxpayer, in his objection to
the assessment, had not claimed apportionment. Therefore, nothing needed to be said
on apportionment.
Roper, dissenting, held that the dominant originating cause of the taxpayer’s income
was the skill and business acumen involved in selling the cured hides. All of this high-
level skill and expert knowledge was located in the taxpayer’s head office in Johannes-
burg. Hence, the source of the taxpayer’s income was located in the Republic.
Schreiner and Maisels JJA, by contrast, held that the curing of the green hides was the
dominant factor. Since this took place in Botswana, that was the source of the taxpayer’s
income. Schreiner JA made the important point that the search was not merely for a
causa sine qua non, for there might be several, but for ‘something more’ – something like
dominance or basicality, or ‘the highest degree of essentiality’. It was true, said Schreiner
JA, that expertise in marketing was important; but without it the taxpayer would still have
derived an income, though a lower income, but he would not make a cent unless he had
the means for curing the green hides he had bought.
§7.3.2 Manufacture of goods followed by sale
[43]
ITC 1103
(1967) 29 SATC 35
Macaulay QC: [T]he cases already referred to, particularly the Privy Council decision in Kirk’s68
case, point to the conclusion that some profit at least, if not the whole, derived from the sale of
goods manufactured in one country and sold by the same taxpayer in another country, accrues
from sources in the country of manufacture. See the dicta of Griffiths CJ in COT (NSW) v Meeks.69

§7.3.3 Sale of goods: deemed source; s 9(1)(a) (now repealed)

In terms of (the now-repealed) s 9(1)(a) an amount was deemed to have its source
within the Republic if it is received by or accrues to any person
‘by virtue of any contract made by him in the Republic for the sale of goods, whether such goods
have been delivered or are to be delivered in or out of the Republic.’
The Act does not define ‘goods’. Clearly, it denotes movable and not immovable proper-
ty. It probably does not include incorporeal property such as shares.
________________________

68 COT v Kirk [1900] AC 588.

69 19 CLR 568 at 579.
72 Income Tax in South Africa: Cases and Materials

Where the requirements of the section are met, in other words where a contract for
the sale of goods is made in the Republic, then any amount which is received or accrues
to a person (eg the payment of the purchase price to the seller) is treated, for the pur-
poses of the Act, as though its source is within the Republic. All other considerations,
such as the place where capital was employed, where a business was carried on, and
where the taxpayer’s activities were carried out are irrelevant. Thus, for example, if two
international travellers in transit through South Africa happened to conclude a contract
for the sale of goods in South America whilst they were sitting in the airport lounge in
Johannesburg, the purchase price which accrued to the seller would be deemed to have
its source in the Republic.
Presumably the section means that, where it applies, the amount is deemed to have its
only source in the Republic, and that there is never any apportionment.
The general principle is that a contract is concluded (‘made’) at the time when and at
the place where acceptance of his offer is communicated to the offeror. But this princi-
ple is subject to the important qualification that, in certain circumstances, a contract is
made at the time when and at the place where the offeree posts his letter of acceptance.70

A contract entered into through the medium of the post is, unless the offeror stipulates otherwise,
concluded at the time when and at the place where the letter of acceptance is posted.

[44]
Cape Explosives Works Ltd v South African Oil and Fat Industries Ltd
1921 CPD 244
Issue: where a contract is made by letters of offer and acceptance sent through the post,
when and where does the contract come into existence?
Held: in the absence of a contrary stipulation by the offeror, the contract comes into
existence at the time when and at the place where the letter of acceptance was posted.
Kotzé JP: The first ground of objection concerns the question, when is a contract, made by let-
ters through the post, considered to have been completed? . . . There are no less than four dis-
tinct theories in regard to this question entertained by the jurists . . . [After a detailed discussion
of these theories, the judge continued:] A careful consideration of the matter has led me to the
conclusion . . . that, while each of the four theories may be open to objection, we should inquire
which of these theories is, in the long run, the most satisfactory and convenient. It will then de-
pend not so much on the strict juristical and philosophical view, that there can be no contract
until the two agreeing minds have become conscious of the mutuality of consent and are aware
of each other’s intention, but rather on the practical question, what is best in the interest of
commerce and the activities of men in their dealings and intercourse with one another . . . The
practice of law, as a living system, is based rather on human necessities and experience of the
actual affairs of men, than on notions of a purely philosophical kind . . . I think that, as those of
our Roman-Dutch jurists who have written on the subject, differ in opinion, we should now lay
down that, where in the ordinary course the Post Office is used as the channel of communi-
cation, and a written offer is made, the offer becomes a contract on the posting of the letter of
acceptance.

Notes
The general principle of contract law is that a contract comes into existence when the
acceptance of the offer is communicated to the offeror. The decision in Cape Explosive
Works lays down an exception to that general principle, namely: where an offer is made
________________________

70 Kerguelen Sealing & Whaling Co Ltd v CIR 1939 AD 487, 10 SATC 363.
 Source 73

through the post then, unless the offeror has stipulated otherwise (for example where he
has stipulated that he will not be bound until he receives or reads the letter of ac-
ceptance) the contract comes into existence at the time when and at the place where the
letter of acceptance is posted. This is usually called the expedition theory. For this rule to
apply, the letter of acceptance must have been correctly addressed, but a valid contract
will come into existence even if it went astray and was not delivered. The offeree must of
course prove that he did in fact post a letter of acceptance.
In Kerguelen Sealing & Whaling Co Ltd v CIR 71 the Appellate Division affirmed the cor-
rectness of this principle. Stratford CJ, giving the judgment of the court, said that the
decision in Cape Explosives ‘set at rest a purely theoretical controversy’.
The expedition theory applies to acceptance by telegram, but not to acceptance by
telephone.

[45]
ITC 454
(1939) 11 SATC 165
The taxpayer company, which had its registered office in the Union of South Africa was
engaged in the production of certain goods in British Bechuanaland. The finished prod-
ucts were forwarded by the taxpayer to one of the ports of the Union for export and were
held there in bond pending shipment. None of the finished products were sold for
consumption in the Union.
During the year of assessment in question, the taxpayer received certain profits from
the sale of its products which had been shipped to the government of a foreign country
under contracts entered into in the foreign country by the taxpayer’s parent company.
The contracts were entered into with the foreign governments by the parent company in
its own name
Issue: were the profits arising from the company’s operations in British Bechuanaland
derived from a source within the Union?
Held: the profits from the sales of goods produced in British Bechuanaland and sold in
England where the taxpayer’s capital was employed were from a source outside the Union.
But as regards the profits on shipments to the foreign government, the taxpayer had failed
to discharge the onus of proving that these shipments were sold under a contract made by
it outside the Union; the evidence indicated that the profits on these shipments was the
result of a sale by the taxpayer to the parent company under a contract entered into in the
Union.
Dr Manfred Nathan KC: Shortly stated, the ground of appeal . . . was that the profits arising from
the company’s operations in Bechuanaland did not arise from a source within the Union in that
either they did not fall within the terms of s 7(1) of Act 40 of 1925 as being derived from a
source within the Union or deemed to be within the Union, or within the terms of [the now-
repealed] s 9(1)(a) of Act 40 of 1925, in that they were not derived from a contract made within
the Union for the sale of goods to be delivered out of the Union. In other words, the appellant
says that all these profits arose from a source outside the Union by reason of realisations outside
the Union, and accordingly are not assessable to tax.
As regards the sales of its products to a foreign government the appellant to succeed must estab-
lish that the parent company entered into the contract with the foreign government as agent for
the appellant . . .

________________________

71 1939 AD 487, 10 SATC 363.

74 Income Tax in South Africa: Cases and Materials

The contention of the appellant is that the profits on these shipments were earned by it as the
result of a sale made by it to the foreign government by virtue of a contract made outside the
Union in which, in effect, the parent company was the appellant’s agent (although not so stated)
and that the parent company was, as it were a del credere agent for the appellant.
As previously stated, the facts clearly point to a sale by the appellant to the parent company and
a resale by the parent company of the products to the foreign government. The facts thus in-
dicate that the profits were derived from a sale within the Union or deemed to be within the
Union, or alternatively from a contract by the appellant with the parent company to sell goods to
the parent company for deliver outside the Union.
In any event, the burden of proof is upon the appellant in terms of sec 57 of Act No 40 of 1925,
and the appellant clearly has not discharged this burden of proof . . .
With regard to the sales of its products in England, it is clear that these were sales of goods pro-
duced outside the Union, namely in Bechuanaland, where the capital of the appellant was em-
ployed, the contracts of sale being effected outside the Union, in England. It is clear, therefore,
that the profit on these transactions was earned from a source outside the Union.

Notes
On the facts of this case, there were two possibilities. The first was that the contracts
for the sale of goods were made by the parent company as the taxpayer’s agent; in this
event, it was clear that the contracts would be concluded outside the Union and the
source of the profits would be outside the Union. The second possibility was that the
taxpayer sold the goods to the parent company under a contract entered into in the
Union, and the parent company then resold them to the foreign government. In the
latter event, the contract of sale from the taxpayer to the parent company would take
place inside the Union and the source of the taxpayer’s profit would therefore be located
in the Union.
Under the deemed source provisions of the now-repealed s 9(1)(a), if a contract ‘for
the sale of goods is made . . . within the Republic’, then by virtue of that fact alone, the
source of any profits derived by virtue of that contract is deemed to be within the Repub-
lic. It is irrelevant that the goods were produced outside the Republic or are to be deliv-
ered or re-sold outside the Republic.

§7.4 Sale of shares

There are no special principles which determine the source of income derived from the
sale of shares. Shares are not ‘goods’, therefore the deemed source provisions in the
now-repealed s 9(1)(a) do not apply.
If the taxpayer carries on the business of dealing in shares, the source of any income
derived from the purchase and resale of particular shares which falls within the scope of
that business, is the business itself; see ‘T’ Co Ltd v COT.72 But if the taxpayer carries on a
business in the Republic but he derived income from selling shares in the course of a
separate business, located outside the Republic, the source will be located outside the
Republic; see [48] M Ltd v COT and [47] CIR v Black. If the taxpayer does not carry on a
business of selling shares in the Republic, or if the transaction falls outside of that busi-
ness, the source of the income is likely to be where the taxpayer’s capital was employed
in the transaction in question; see [46] Overseas Trust Corp Ltd v CIR.

Where shares in companies which have ceased to operate are sold outside the Republic, but the
taxpayer’s capital which was employed in acquiring the shares was situated in the Republic, then the
profit derived by the taxpayer from those shares is from a source within the Republic.
________________________

72 1966 (2) SA 16 (R), 28 SATC 67.

 Source 75

[46]
Overseas Trust Corp Ltd v CIR
1926 AD 444, 2 SATC 71
L formed the taxpayer company (and held 97% of its shares) and registered it in South
Africa and in Windhoek, so that it could take over certain of L’s business interests in the
South-West Africa Protectorate. These interests consisted mainly of shares and deben-
tures in mining companies in the Protectorate, but included small shareholdings in
South African companies. At the time the taxpayer purchased L’s shares, the mining
companies in question had already gone into liquidation and the share capital had been
repaid. But there were further undistributed dividends due to the shareholders which
were in the hands of the Custodian of Enemy Property. At the time the taxpayer compa-
ny was formed, each share in the companies in liquidation entitled the holder to an
ascertainable sum in the hands of the Custodian. The taxpayer took over L’s interests at
less than half their market value. The taxpayer received from the shares of the compa-
nies in liquidation £32 628 more than it had paid for the shares. The taxpayer made a
further profit of £4 354 from the sale of shares effected in Germany.
Issue: was the source of the profits of £32 628 and £4 354, which were derived from
shares in companies in South-West Africa, located in the Union of South Africa?
Held: in the affirmative. The companies in question had gone into liquidation before
the taxpayer acquired shares in them, and the accumulated profits had accrued before
the taxpayer acquired the shares. Therefore the originating cause of the taxpayer’s in-
come was the capital which he expended in purchasing the shares. The source of the
taxpayer’s income was located where this capital was employed, namely in the Union of
South Africa.
Innes CJ: The profits of [the] transaction are not of the nature of capital. They are plainly
income. It remains to localise the source of this income. This is an enquiry in some cases of
considerable difficulty. This court, in COT v Dunn & Co73 looked to the place where the capital
was employed to earn the income in determining the source of that income. And that seems
to have been the general rule of the Australian Courts in construing an Act very similar on
this point to our own. Now had these companies been going concerns engaged in mining oper-
ations in South-West Africa there would be much to be said for the view that the shareholders
drew their dividends from the same source as the companies; and that that source was outside
the Union where their business was being carried on and their capital being employed. But that
is not the position. The companies in question had ceased operations before the appellant
acquired their shares, and those shares were merely instruments entitling the holder to certain
monies which had been previously paid to, and were being held by, the custodian. The appellant
took over those instruments in order to obtain the money to which they related. And the result-
ing profit sprang neither from business nor service, but from the employment within the Union
of the capital expended in the acquisition of the share or instruments referred to. That being so,
it cannot be said to have accrued from an extra- Union source.
Solomon JA: And that brings me to consider the further question whether this amount was
received from a source within the Union or not. In the case of William Dunn v COT 74 the test
applied to determine what is the source of income was that regard should be had to the place
where the capital was employed by which the income was earned. It was contended on behalf
of the appellant company that the source of the income was South-West Africa, as the accumu-
lated profits in the hands of the Custodian of Enemy Property was acquired from companies
carrying on mining operations in that territory. It is important, however, to bear in mind
that these companies had gone into liquidation before the shares were acquired by the appellant

________________________

73 1918 AD 607.
74 1918 AD 614.
76 Income Tax in South Africa: Cases and Materials

company, and that the accumulated profits had accrued prior to their acquisition. The com-
panies in question had ceased to carry on business, and were no longer employing capital
in South-West Africa for the purpose of earning profits. If we apply the test laid down in
Dunn’s case, it seems clear that the capital employed to earn the sum of money in question
was what was spent in the purchase of the shares, which carried with them the right to parti-
cipate in the fund in the hands of the Custodian. The purchase of the shares took place in
Cape Town, and that is where the capital was employed for the purpose of earning this profit.
I agree with the court below, therefore, that the profit was received from a source within the
Union.

DE VILLIERS JA, WESSELS JA, and DE VILLIERS AJA concurred.

Notes
For criticism of the principle that source is determined by inquiring where the ‘produc-
tive employment of capital’ occurred, see the remarks of Lord Atkin in [41] Rhodesian
Metals Ltd (in liq) v COT, Southern Rhodesia.
Where a taxpayer who carries on business in the Republic as a share-dealer, buys and sells shares
outside the Republic, the question is whether these transactions were part of his business in the
Republic, or a separate business located outside the Republic. If the former, the source of the income is
the business in the Republic; if the latter, the source is outside the Republic. The source of income
means the dominant or main or substantial or real and basic cause of the accrual of income.

[47]
CIR v Black
1957 (3) SA 536 (A), 21 SATC 226
The taxpayer resided in Johannesburg where he carried on business as a stockbroker in
partnership with others. The taxpayer also carried on a separate business, for his own
account, of speculating in shares on the Johannesburg stock exchange. The taxpayer had
an arrangement with a firm of London brokers, whereby the latter purchased and sold
shares on his behalf on the London stock market, for the purpose of profit making by
sale. The deals were financed with funds remitted by the taxpayer to the London firm
and by moneys advanced on interest by the London firm. The shares were purchased
and sold by the London firm in London, where they were paid for, held and delivered
and the proceeds were received.
Issue: on the facts, was the source of the taxpayer’s profit located in South Africa?
Held: the source was where the ‘dominant, or main or substantial or real and basic
cause of the accrual of income’ was located. In this case, the transactions in London were
not part of a single business carried on by the taxpayer in Johannesburg, but were a
separate business of buying and selling shares in London. The source of the income was
the employment of the taxpayer’s capital and the carrying on of a business’; both of
these elements were located in London, therefore the source was not in South Africa.
Schreiner ACJ: The Commissioner having included the sum of £1 694 in the respondent’s
income and assessed him for income tax and super tax, the respondent objected and, on the
objection being overruled, appealed to the Special Income Tax Court. The grounds of objection
and appeal that were persisted in were:
1. That the business giving rise to the income was carried on wholly in London, and that conse-
quently the source of the income was outside the Union, so that it did not form part of the
respondent’s taxable income.
2. . . .
 Source 77

The Special Court upheld the first of these two objections, holding that the income was derived
from a source outside the Union . . . The question before this Court is whether the decision of
the Special Court was erroneous in law, in terms of section 81 . . .
...
There is no definition of ‘source’ in the Act and Special Court is correct in stating that in no
case, certainly in this Court, has such a definition been attempted. But the decisions do give
some indication of the kinds of tests, factors or considerations that should, according to the
circumstances, be used when deciding where the source of the income was. The present case was
one in which a profit was gained, on balance, by a series of transactions of purchase and sale.
Together they constituted a business in which all parts of the productive transactions were car-
ried on and all the respondent’s capital, cash and credit, was used in London though the final
control was with the respondent in Johannesburg. It was unquestionably right to inquire, as the
Special Court did, where the business was carried on that brought in the profit. Here everything
was done in London, except the authorization or confirmation of the transactions, which was in
each case given to the respondent in Johannesburg, speaking over the telephone to the London
firm in London . . .
But the Commissioner would be entitled to succeed in this appeal if he could show that the only
true and reasonable conclusion on the facts found was that the dominant, or main or substantial or
real and basic cause of the accrual of income was to be found in Johannesburg. Now one can imagine
circumstances in which, although at first sight it might seem that a distinct business of buying
and selling shares in London was being carried on, the transactions there were really only part
of a Johannesburg business. But the facts found in this case do not show that this conclusion
was the only right one. At least another reasonable conclusion which could not be said to be
untrue was that the main, the real, the dominant, the substantial source of the income was the
use of the respondent’s capital in London and the making and executing of the contracts in
London.
. . . The appeal is dismissed with costs.
STEYN JA, REYNOLDS JA, MALAN JA and PRICE AJA concurred.

Notes
In [48] M Ltd v COT Murray CJ said that the ratio decidendi in [47] CIR v Black was
that the taxpayer, who was a sharedealer in South Africa, ‘in effect set up a separate
branch’ of that same business in London, and the source of the profits made on the
share-dealing transactions in London was therefore located in London. It is submitted
that this is a misinterpretation of the decision; the taxpayer escaped tax because he had
set up an entirely separate and distinct business in London, and not merely a separate
branch of the business. For this principle, see [21] CIR v Epstein and see also [20] M Ltd
v COT).

[48]
M Ltd v COT (SR)
1958 (3) SA 18 (SR), 22 SATC 27
The taxpayer company had its head office in the Federation of the Rhodesias and Nyasa-
land where its central management and control was located. Its main business was the
mining, smelting and refining of copper. All contracts for the sale of copper were decid-
ed on and entered into in the Federation but were carried out by sales agents in London,
to whom the purchase price was paid, and these sums were paid to the credit of the
company in London. The company maintained substantial sums in London to pay for
the purchase of machinery and stores, the payment of dividends, and the redemption of
debentures. During the years of assessment under review the company used these credit
balances to purchase short-term securities, which it realised from time to time as funds
were required for other purposes. On these realisations, the company made a profit in
78 Income Tax in South Africa: Cases and Materials

the years under review. The Commissioner of Taxes included these profits in the taxpay-
er’s taxable income as having been derived from a source within the Federation.
Issue: was the source of the profits on the purchase and sale of shares located in the
Federation of the Rhodesias and Nyasaland?
Held: in the negative. Since the taxpayer, in purchasing the shares, had used capital
lying idle in London, and since the taxpayer had entered into the contracts in London,
and received in London the profits on resale, the source of those profits was located in
London.
Murray CJ: This is an appeal to the High Court . . . against the disallowance by the Com-
missioner of the appellant’s objection to the inclusion in its taxable income for the fiscal years
ending 31 March 1954 and 31 March 1955 respectively, of two sums of £2 113 and £4 176. As
will appear infra the sole question before the Court is whether these sums were received
by or accrued to the appellant ‘from a source within the Federation’ in terms of s 8 of the
Act.
The present problem appears to be whether the source of the present profits is attributable to
the deliberations and decisions made in the Federation to carry on in London through agents in
London certain forms of business activity, rather than to the actual carrying into effect of those
decisions in London in the particular circumstances of this case . . .
As I see the position the essential facts in the present case (as stressed by the appellant compa-
ny’s counsel) are that the company (1) having idle capital in London, (2) there employed it to
purchase United Kingdom securities with the object of profit on resale, (3) effected the actual
contracts of purchase and of resale in London, and (4) there received its profit on resale. It does
not appear relevant that the capital in question had previously come into its possession in the
form of income earned from a Federation source, nor that it had not been sent to London for
the special purpose of employment in the present scheme of profit-making; nor, again, that after
the profit had been realized, it went into the appellant company’s general pool and was there-
after employed – at any rate in part – in discharging obligations connected with the appellant
company’s dominant business of mining. The cardinal facts lead me to the conclusion that the
causa causans of the earning of the profits now in question must be located in London, where
the activities there conducted are properly characterized as ‘the originating cause of the receipt
(ie the particular activity of the taxpayer which earns the money)’ to use the words of Watermey-
er CJ in Lever Bros’ case, supra.75 . . .
The word ‘business’, which probably includes a trade, has a wide meaning varying with the con-
76
text and was generally defined by Jessel MR in Smith v Anderson as ‘anything which occupies the
time and attention of a man for the purpose of profit’. If a taxpayer, having capital funds not
immediately required for use in his main business, temporarily employs them in a profit-making
scheme distinct therefrom, he is carrying on a separate activity. It may be subordinate or ancil-
lary to his main business in the sense that he intends that the profit when earned will be added
to the capital of the main business, but it has been earned not by the conduct of his main busi-
ness but by the exercise of this separate activity. If this separate activity (whether dignified by
calling it a business or not) is conducted in its entirety at a place outside the location of the tax-
payer’s main business, or if, as in the present case, the dominating factors in its conduct are so
located, the profit earned by it has a local situation of its own.
The case of CIR v Black77 was discussed in argument before this Court: the actual decision was
sought on the Commissioner’s behalf to be distinguished on the ground that the special Court
having there made a finding of fact in the taxpayer’s favour, such finding could be reversed on
appeal only on proof that the only true and reasonable conclusion was one in favour of the
Commissioner, viz that the ‘dominant or main or substantial or real and basic cause’ of the
accrual of income was to be found in Johannesburg. That case was concerned with a situation

________________________

75 At 453.
76 15 Ch 258.
77 1957 (3) SA 536 (A), 21 SATC 226.
 Source 79

where the taxpayer who carried on business as a stockbroker in Johannesburg sent capital to
a London firm of stockbrokers with which to deal on his behalf with shares on the London
Stock Exchange, sometimes on his instructions, sometimes at the London firm’s own discretion.
While holding that it was a reasonable view for the Special Court to hold this to constitute a sep-
arate London business, with profits not taxable as coming from a Union source, the learned
Acting Chief Justice (Schreiner ACJ) indicated the possibility that in somewhat different circum-
stances it might well be that the London transaction might be really one part of the Johannes-
burg business.
‘The purchases and sales in London might, I apprehend, be so linked up with similar transactions in
Johannesburg as to lead to the view that there was only one business located where the taxpayer was per-
sonally controlling operations.’
In the instant case, however, it seems to me fundamental that the taxpayer does not conduct any
business in the Federation concerned with the purchase and resale of securities as a profit-
making scheme. Its London transactions of share buying and selling are an independent matter,
an activity for the profitable use in London of what is capital, which it could have employed, but
for a limited period did not wish to employ, in its business of mining. They were not linked up
with similar transactions in the Federation.
If (despite the doubt expressed of its entire correctness by Atkin LJ in the Rhodesia Metals78 case,
supra) the statement of Innes CJ in the Overseas Trust Company Ltd, case, supra, that the place of
employment of the capital used to make a profit is, according to Dunn’s79 case, the source of the
income, this would answer the present question in favour of the appellant company. Had the
appellant company, instead of pursuing the present activity, put its capital out in London merely
to earn interest, the above statement would indicate that the source of the interest income was in
London and I find it difficult to see that the position is in any way different because the appel-
lant company, instead of earning interest, bought and sold securities with the object of making a
profit on resale.
In addition, there is the further factor in its favour that the contracts of purchase and sale were
all entered into in London.
I have come to the conclusion that the appellant company is correct in its contention that these
profits were received or accrued from a source outside the Federation.
MORTON J concurred.

§8 Rent
There is no definitive principle which determines the source of rental income. The
source will usually be either the rented property itself, the contracts in question, or the
business of the taxpayer.

If contracts form the essence of the taxpayer’s business, then the source of the income from the busi-
ness is located where the contracts are made.
[49]
ITC 170
(1930) 5 SATC 164
The taxpayer company carried on business in the Union as boring contractors and manu-
facturers and suppliers of drills. Its head office was in the Transvaal, and all its directors
resided there. The company regularly undertook boring contracts in Rhodesia and
________________________

78 Rhodesian Metals Ltd (in liq) v COT, Southern Rhodesia 1940 AD 432 at 436, 11 SATC 244.
79 COT v William Dunn & Co Ltd 1918 AD 607.
80 Income Tax in South Africa: Cases and Materials

maintained a resident field supervisor in Northern Rhodesia, who had power to nego-
tiate and conclude drilling contracts on behalf of the taxpayer. During the tax year, a
contract was negotiated by the field supervisor and concluded by the taxpayer’s manag-
ing director who paid a special visit from the Union for the purpose, and was later signed
in Northern Rhodesia. From the time the contract was negotiated, the taxpayer main-
tained its own store and office in Northern Rhodesia where its stores and equipment
were kept.
Issue: was the rent from the drills leased under the contract derived, or deemed to be
derived from a source in the Union of South Africa?
Held: in the negative. The contract was entered into in Northern Rhodesia and the
capital assets which produced the income were employed in that territory. Therefore the
source of the income was in Northern Rhodesia.
Davis KC: It was contended on behalf of the Commissioner that the source of the income was in
the Union because the business which the company carried on in earning this rent was a busi-
ness established in the Union where the Company had its head office and directorate; that the
temporary physical site of the machines did not affect the question where the capital of the
Company was employed and that the capital was really employed in the Union. The source of
the gain, it was contended, was the employment of Union capital in a Union venture. On this
point the case of COT v William Dunn Ltd 80 was quoted. But that case is clearly distinguishable
from the present case. There an English company employed its own capital in carrying on its
own business in England where the profits were earned. In the present case the appellant em-
ployed its capital in Rhodesia to earn the profits which it is sought to tax. As is pointed out by
Innes CJ,81 ‘In order to ascertain where the capital was employed to earn the profits sought to be
taxed, we must have regard to the source from which they were derived.’ Here the profits were
derived from the use of appellant’s capital in Rhodesia under contracts made in Rhodesia. The
source of the income is therefore Rhodesia.
82
[The judge referred to the decision in Overseas Trust Corp Ltd v CIR where Innes CJ said:] . . .
‘Now had these companies been going concerns engaged in mining operations in South-West
Africa there would be much to be said for the view that the shareholders drew their dividends
from the same source as the companies; and that that source was outside the Union where their
business was being carried on and their capital employed,’ which is the position here, the capital
being located in Rhodesia and the income originating in Rhodesia as a result of the appellant’s
capital being employed there.
The case of Millin v CIR 83 which was also referred to in argument, was a case in which the royal-
ties paid to a South African authoress in respect of her books published in England were sought
84
to be taxed. Solomon CJ points out that, ‘It was the exercise of her wits and labour that pro-
duced the royalties. They were employed in the Union, and it matters not, on the analogy of the
Overseas Trust case, that the grant to her publishers of the right to publish her book was con-
tained in a contract made in England. Her faculties were employed in the Union both in writing
the book and in dealing with her publishers, and, therefore, on the test applied in the cases
cited, the source of the whole of her income would in the Union.’ But nothing done in the
Union by the appellant earned the production of the income in this case. Moreover here the
contract formed the essence of the business. Under the contract the drilling machines were
hired at a monthly rental. The machines may or may not have been made use of, but the full
rental was still payable under the contract, and as was pointed out by Starke J in Mount Morgan
GM Co v CIT 85 ‘if contracts form the ‘essence of the business’ (Lovell’s case), then, for the

________________________

80 1918 AD 607.
81 At 615.
82 1926 AD 444 at 453.
83 1928 AD 207.
84 At 218.
85 33 CLR 76.
 Source 81

purpose of determining the locality from which income is derived, you look no further than the
place where the contracts are made.’
The appeal is therefore allowed.

Where the taxpayer derives income through allowing another to use his property, the source of the
income is the property itself.

[50]
CIR v Lever Bros & Unilever Ltd
1946 AD 441, 14 SATC 1
For the facts of this case, see extract [57].
Schreiner JA: (dissenting) When we are dealing with income which the taxpayer gets because
someone is using his property and is prepared to pay him for his use, the taxpayer’s activities,
whether past or present, are in practice disregarded in describing the source of his income. We
say simply . . . that he derives his income from land, shares or loans. If perchance we speak of his
deriving his income from rent, dividends, or interest, we are obviously speaking loosely, for those
things are his income itself and not its source. What is important is that no-one would ordinarily
speak of the taxpayer’s deriving his income from the contract by which he leased the land or
bought the shares or loaned the money.
Where income is derived from property such as large machinery under leases of such long duration
that the emphasis is on the property and not on the business of the lessor, the source of the income
derived from the property is located at the place where the property is used.86

[51]
COT v British United Shoe Machinery (SA) (Pty) Ltd
1964 (3) SA 193 (FC), 26 SATC 163
The taxpayer company was registered, managed and controlled in the Republic of South
Africa where its head office was situated. It carried on the business of a dealer in machin-
ery used in the manufacture of footwear. It either sold or leased such machinery, and the
rentals constituted 59 per cent of its income. Leases for the machines, after being signed
by the lessees, were signed on behalf of the taxpayer in Port Elizabeth. In terms of the
leases, the lessees undertook to pay a premium, transport charges from Port Elizabeth,
and a monthly rental. The contract specified the place where the machinery was to be
used. The taxpayer had no branch office in Rhodesia and did not canvass for business in
that country. During the years of assessment in issue, the taxpayer derived income from
leases entered into by manufacturers in Southern Rhodesia. The High Court of Southern
Rhodesian held that the source of the income was not within the Federation. The Com-
missioner appealed to the Federal Supreme Court.
Issue: was the source of the taxpayer’s rental income located in the Federation?
Held: in the affirmative. Where income is derived from the use of movable property in
a particular place, the source of that income is located where the machinery is used.
Clayden CJ: The definition of ‘gross income’ in the Federal Income Tax Act, 16 of 1954, pro-
vides that what is included must be ‘from any source within the Federation’. If the income in
issue was from such a source it is taxable; if it was not it is not.
...

________________________

86 In ITC 1491 (1991) 53 SATC 115 at 127 it was held that this principle also applies to income derived from
the grant of a right to use a trade mark and secret processes.
82 Income Tax in South Africa: Cases and Materials

Looked at from a practical point of view it is, I consider, the machines and not the capital which
was invested in the machines, which, by being let out to use, produce the income. The source of
the income is because someone is using the machines, the property of the respondent. With the
hire of smaller things for a more limited period, for example motor- cars, it is rather the business
of the lessor than the property leased which is the source. Such cases would fall under the
example (c) set out by Schreiner JA [in CIR v Lever Bros & Unilever Ltd. And the location of the
source would probably be the location of the profit-producing activities, and the occasional use
of property in another country would probably be ignored. This case I think clearly falls under
the example (b). The respondent obtains income because persons have the use of his property.
And here one has two conflicting guides to the location of that source. If the contract under
which use is granted is looked to, the source must be in South Africa. If the place where the
income-producing asset does produce the income is looked to, the source must be in Rhodesia.
Neither guide is conclusive, as appears from the cases to which I have referred . . .
I consider that it is clear that with property of this nature, and leases of so long duration so that
the emphasis is on the property and not on the business of the lessor, the source of income de-
rived from the property is where the property is used.
I consider that the appeal should be allowed . . .
QUENET FJ and FORBES FJ concurred.

§9 Partnership
A partnership is not a legal persona, and is not a taxpayer in its own right. Each partner
shares, in the proportions laid down in the partnership agreement, in the income of the
partnership. It was held in [52] CIR v Epstein that the source of a partner’s income is the
activities of the partner which produce the partnership’s income. In CIR v Lever Bros87
Schreiner JA (dissenting) observed that, ‘no one would speak of . . . the partnership
agreement as the source of the income of a partner’ (the same approach is implicit in
Centlivres CJ’s judgment88 in [52] CIR v Epstein). Contrast this approach with the Aus-
tralian case of [53] FCT v Everett where it was held that a partner’s share of the partner-
ship’s income is not derived from his personal exertion but flows from his entitlement
under the partnership agreement to a proportionate share of the profits, regardless of
how much or how little work he does.

Where all the activities of the taxpayer are carried on in the Republic and his income is the result of
those activities, then the source of the income is in the Republic.

[52]
CIR v Epstein
1954 (3) SA 689 (A), 19 SATC 221
The taxpayer carried on business in Johannesburg as an agent for foreign firms. In
addition, he had entered into an agreement with a firm in Argentina, called Hendrikse
and Co, to purchase asbestos in the Union of South Africa and sell it in Argentina. The
Argentine partnership would find purchasers of asbestos in Argentina and then notify
the taxpayer of the quantity and quality of asbestos required, the price, and the producer
who should be approached to supply it. The taxpayer would then approach the producer
and obtain information of what was available, and cable this information to the partner-
ship. The partnership would then conclude a sale in its own name with the purchaser,
________________________

87 1946 AD 441, 14 SATC 1 at 17.

88 In Epstein Centlivres CJ said that even if it were assumed that the taxpayer in that case was in partnership,
the source of the profits was his activities.
 Source 83

and the taxpayer would purchase, in his own name, from the producer. The partnership
then arranged for the taxpayer’s bank in the Union to be credited with the purchase
price and the cost of freight and insurance. The taxpayer then arranged in his own name
for the shipment of the asbestos to the Argentine purchasers, and paid all the expenses.
The balance of the credit which remained after payment to the producer and the costs of
shipment was divided equally between the taxpayer and the partnership; any loss was
similarly shared.
Issue: was the source of the taxpayer’s income located in the Union of South Africa?
Held: (Schreiner JA dissenting) the amounts received by the taxpayer were for work
and services rendered by him in the Union and were thus from a source within the
Union.
Centlivres CJ: The question in issue in the present case is whether the gross profits which ac-
crued to the respondent out of his transactions with Hendrickse and Company constituted ‘gross
income’ as defined by s 7 of Act 31 of 1941. The answer to this question depends on whether
those gross profits accrued ‘from any source within the Union’. It was not contended on behalf
of the Commissioner that the source was one ‘deemed to be within the Union’.
...
The most recent cases in this Court on the question are CIR v Lever Bros & Unilever Ltd 89 and
90 91
Boyd v CIR. In the former case Watermeyer CJ reviewed a large number of cases and indicated
that it was probably an impossible task to formulate a definition which would furnish a universal
test for determining when an amount ‘is received from a source within the Union’ . . . Conse-
quently, it is for the Courts to decide on the particular facts of each case whether ‘gross income’
has or has not been received from a source within the Union. Watermeyer CJ said92 that the in-
ference which he thought should be drawn from the decided cases
‘is that the source of receipts, received as income, is not the quarter whence they come, but the originat-
ing cause of their being received as income and that the originating cause is the work which the taxpayer
does to earn them, the quid pro quo which he gives in return for which he receives them.’
93
The views of Watermeyer CJ find support in what Solomon CJ said in the case of Millin v CIR. In
that case Mrs Millin wrote books in the Union and granted to her publishers in England the
right of printing and publishing her novels in Great Britain and elsewhere, they undertaking to
pay her a percentage of the price of the books as royalties. It was held that the source of the
whole of her income was the Union. Solomon CJ said:94
‘It was the exercise of her wits and labour that produced the royalties. They were employed in the Union,
and it matters not, on the analogy of the Overseas Trust case, that the grant to her publishers of the right to
publisher her book was contained in a contract made in England. Her faculties were employed in the Un-
ion both in writing the book and in dealing with her publishers, and, therefore, on the test applied in the
cases cited, the source of the whole of her income would be in the Union.’
Applying what Solomon CJ said in Millin’s case . . . to the facts of the present case there can, in my
opinion, be no doubt that the respondent’s profits in connection with his dealings in asbestos were
received from a source within the Union. He carries on business in Johannesburg. He renders no
services and spends no money outside the Union in connection with his association with Hendrickse
and Company and he uses his own banking account for the purpose of financing the transactions in
respect of asbestos. All of the activities of the respondent were carried on in the Union and it was as a
result of these activities that he earned the profits which the Commissioner now seeks to tax. It there-
fore follows that those profits were received from a source within the Union.
It was debated at the Bar whether the association of the respondent with Hendrickse and Com-
pany was that of a partnership. It is unnecessary to decide what their legal relationship was. I
________________________

89 1946 AD 441.
90 1951 (3) SA 525 (A).
91 At 454.
92 At 450.
93 1928 AD 207.
94 At 216.
84 Income Tax in South Africa: Cases and Materials

shall assume that they were associated as partners. Under the Income Tax Act 1941, a partner-
ship, unlike a legal persona such as an incorporated or registered company, is not regarded as a
legal entity for the purposes of assessment. Section 67(7) provides that separate assessments shall
be made upon partners. Even on the assumption I have made, the source of the respondent’s
profits derived from his association with Hendrickse and Company was within the Union, what-
ever the source of the profits accruing to Hendrickse and Company may have been. In taxing
the respondent the Legislature looks at his activities and ascertains whether those activities were
exercised within the Union; if they were, then he is taxable in respect of any profits resulting
from such activities. It may be said that when there is a partnership the members of which carry
on their business activities in two different countries, the income of the partnership is derived
from two sources and that when one of the partners carries on his business activities in the Un-
ion, his income from the partnership is derived from a source within the Union while the in-
come of the other partner is derived from a source in a foreign country. For the income which
the partner, who carries on his business activities in the Union, receives is the quid pro quo for the
services he renders in the Union to the partnership.
For these reasons I am of opinion that the appeal should be allowed with costs in this Court.
VAN DEN HEEVER JA, HOEXTER JA and FAGAN JA concurred in the judgment of CENTLI-
VRES CJ.
Schreiner JA: As between two countries in one of which goods are bought and in the other of
which they are sold, the combined transactions resulting in a profit, such authority as exists is
strongly if not uniformly in favour of the view that it is the country in which the goods are sold
that is the country of origin of the profit. It is true that there is no case in this Court that has so
decided and there are at least two from which by drawing an analogy a different basis can be
supported. The first of these is Millin v CIR. That was not a case of buying and selling goods.
Although as was pointed out, the income was derived not only from writing books but also from
selling the copyright in return for royalties, the latter was merely a method of gaining recom-
pense for the skill and industry of the author. The other case is Rhodesian Metals Ltd v COT 95
96
which was confirmed for somewhat different reasons, by the Privy Council.
...
Dowling J in the present case was impressed by the reasoning in COT, Western Australia v Murray
Limited.97 It is unnecessary to examine in detail the facts or the legislative provisions there in
question. The taxpayer was a company buying soft goods in London and selling them in Western
Australia, tax being payable on ‘all profits made in Western Australia’. In deciding that certain
sums were included in such profits the High Court of Australia said, in the passage quoted by
Dowling J:
‘In our opinion the place where the whole profit of such a business is made is where the goods are sold. It
is, of course, true that buying the goods is a necessary part of a business of this kind, which derives its prof-
its from selling them. It is also true that skill and judgment in buying are or may be essential to the success-
ful and profitable conduct of the business. But it does not follow that in order to determine where the
profits were made it is proper to inquire into all the causes, which, in combination or in succession, oper-
ated to produce them. If it were possible to discover and discriminate among the innumerable factors
which contributed to a profitable exercise of a trade an to assign locality to each of them, still no light
would be thrown upon the place where the profits were made. To attempt to appraise the relative efficacy
or potency of these contributory factors, when and if ascertained, and to distribute the profit accordingly
among the localities to which the factors have been assigned, is to lose sight of the true nature of the ques-
tion, which is not why, but where, the profits were earned. The case is not one in which operations in one
place have produced a merchantable commodity, or have given or added value to things marketed in an-
other. In such cases value or wealth has been produced or increased and is contained in disposable assets.
In other words, unrealized profits exist in the territory whence they are transported for purpose of sale.’
. . . I agree with Dowling J in finding the above statement a clear and convincing exposition of
principles which seem to rest in good sense and, in the absence of statutory provision to the

________________________

95 1938 AD 282, 9 SATC 363.

96 1940 AD 432.
97 42 CLR 332.
 Source 85

contrary, to be applicable wherever the question is where profits are made or, to use again the
language of Watermeyer CJ, where is to be found the originating cause of the profits being re-
ceived as income.
. . . The contention was advanced that, whatever may be the usual position, the profits in this
case were made not by selling goods at a profit but by buying them at a discount. But I do not
think that this difference in practice goes to the root of the matter. Essentially the profit in all
such cases is the surplus of money that comes from the sale at a higher figure than the purchase
price. Various factors of convenience might decide whether firm contracts should be made first
at one end of the profit-making transactions or at the other, but the fundamentals would in
either case be the same.
I would dismiss the appeal with costs.

[53]
FCT v Everett
(1980) 10 ATR 608 (High Court of Australia)
The taxpayer, a partner in a firm of solicitors, purported to assign to his wife, who was
not a partner in the firm, half of his share in the partnership, including the right to
receive a share of the profits.
Barwick CJ, Stephen, Mason and Wilson JJ: The income of the respondent from the partnership
was not income from personal exertion . . . [That expression] has been usually employed to
signify income by way of wages or salary under a contract of employment . . . It would also apply
to the income earned by a sole trader who operates a business and a professional man who prac-
tices on his own account. In this context it is correct to say that the taxpayer’s remuneration is
the product of his personal exertion . . . But this is not true of partners in general or of the re-
spondent as a partner in this case. The respondent’s entitlement under the partnership agree-
ment was to a proportionate share of the partnership profits as disclosed by the partnership accounts.
The relevant proportion of the partnership profits was payable to the respondent because he was a
partner and the owner of a share in the partnership. The respondent was entitled . . . to his propor-
tionate share of the partnership profits however much or however little energy he devoted to the
practice, so long as the partnership remained on foot. Accordingly, it is a misnomer to speak of the
respondent’s share of the income as having been gained by his personal exertion.

Notes
Although the point at issue was not the source of income, this Australian decision goes
counter to the approach of our Appellate Division in [52] CIR v Epstein which held that
the source of a partner’s income is the activities of the partner which produce the part-
nership’s income. In CIR v Lever Bros98 Schreiner JA (dissenting) observed that, ‘no one
would speak of . . . the partnership agreement as the source of the income of a partner’.
In [52] CIR v Epstein Centlivres CJ held that, assuming that the taxpayer in that case was
in partnership, his income was nonetheless derived from his activities.

§10 Dividends
A dividend is a distribution of a company’s profits to its members. As a ‘practical hard
matter of fact’ it might therefore be argued that the source of a dividend is located
where the company’s profits were earned. The courts have however adopted the princi-
ple that the source of a dividend is the taxpayer’s shareholding in the company and that
a share is situated in the country where the shares are registered, in other words, where
the shares can be effectively dealt with. Hence, there is an absolute rule that the source
of a dividend is located where the company’s register of members is maintained and this
________________________

98 1946 AD 441, 14 SATC 1 at 17.

86 Income Tax in South Africa: Cases and Materials

factor is the sole determinant of the source of the dividend. The decision in Moore v CIR 99
that shares are situated where the central management and control of a company is
located has not been followed.
All companies registered under our Companies Act 1973100 are required to keep their
register of shareholders in the Republic; it follows that the source of all dividends from
shares in such companies is necessarily located in the Republic.
In terms of para (k) of the definition of ‘gross income’ in s 1, all dividends from
sources outside the Republic derived by a person (other than a company) who is ordinar-
ily resident in the Republic or are derived by a company which is registered, managed
and controlled in the Republic are deemed to be from a source in the Republic.
Most dividends are no longer subject to normal tax, and their source is not usually ma-
terial.

The source of a dividend is located where the company’s register of members is maintained or is
deemed to be maintained.

[54]
Boyd v CIR
1951 (3) SA 525 (A), 17 SATC 366
The taxpayer, a resident of the Union of South Africa, received dividends from a compa-
ny which was incorporated in the Union. The company’s registered office was in the
Union where the principal register of its shareholders was kept. Its head office, where its
central management and control was exercised, was also in the Union. During the year
of assessment in question, the company had derived 90% of its income from South West
Africa, and 10% from within South Africa. The Commissioner included the whole
amount of the dividend in the taxpayer’s gross income. The taxpayer objected on the
grounds that only 10% of the dividend was from a source in the Union of South Africa.
Issue: where a company, which is incorporated in South Africa, declares a dividend
from profits which it has made in South West Africa, what is the source of the dividend?
Held: a dividend is derived from property, namely shares. That property is located in
the Union of South Africa (and the source of the dividend is therefore located in South
Africa) if the register of shareholders is kept or is deemed to be kept in South Africa.
Centlivres CJ: Section 7 of the Act defines ‘gross income’ as meaning:
‘the total amount . . . received by or accrued to . . . any person . . . from any source within the Union . . .
and includes -
(g)(bis) any amount so received or accrued by way of dividends’.
“Dividend” is defined in s 1 as meaning ‘all amounts distributed by a company . . . to its shareholders
. . .’
The evidence of title to the shares from which the appellant derives his dividend is either the
register of shareholders which is the Union or the branch register in London which is deemed
by s 35 of Act 46 of 1926 to be part of the register in the Union. The shares are therefore located
in the Union . . . The dividend is derived therefore from property which is within the Union:
consequently the source of the dividend is in the Union.
Gunn,101 after referring to a number of cases in the House of Lords and the Privy Council, seems
to me to sum up the law correctly . . . as follows:

________________________

99 1938 TPD 369, 10 SATC 20.

100 Act 61 of 1973.
101 Gunn’s Commonwealth Income Tax Law and Practice.
 Source 87

‘It is clear . . . that (a) the immediate source of a dividend is the shareholding and (b) a share is situated in
the country where the shares are registered, ie where the share can be effectively dealt with . . .’
...
There is perhaps another ground on which it may be held that the source of the dividend in this
case is in the Union. A shareholder is not entitled to claim his aliquot share of the profits made
by a company unless a dividend is declared. Upon the declaration of the dividend, the sums due
for dividend become debts due from the company to the shareholders and the shareholders can
sue the company for the dividend . . .
In the present case, therefore, it seems to me that as soon as the dividend had been declared
which was eventually received by the appellant, there was owing by the company to him the sum
due in respect of the dividend. The company is a legal persona resident in the Union, where its
central management and control abides. See Estate Kootcher v CIR.102 The source of the dividend
paid to the appellant was thus a debt owed by a persona resident in the Union.
. . . [I]n my view the source of the appellant’s dividend was in the Union as he became entitled
to it as the result of a formal act performed by the Company in the Union.
...
The appeal is dismissed with costs.
SCHREINER JA and HOEXTER JA concurred.

Notes
103
In Nathan v FCT, an Australian decision, it was held that the source of a dividend
was located in the place that the company derived the profits from which it paid the
dividend. In Boyd, the Appellate Division said that the decision in Nathan was based on
specific provisions of the Australian tax legislation, which differed from the South African
legislation, and that the case was therefore ‘a very unsafe guide’ for interpreting the
South African Income Tax Act.104
The essence of the decision in Boyd is as follows. A company is a separate persona from
its shareholders; therefore the source of the company’s profits and the source of a div-
idend received by a shareholder are not necessarily the same. A dividend is derived from
property, namely a share. A share is incorporeal and has no physical location. Since the
evidence of a shareholder’s title to his shares is the share register, the place where the
share register is kept is in law regarded as the place where the share itself is located. The
share will therefore be regarded, in law, as located in South Africa when the share regis-
ter is (or is deemed in terms of the Companies Act) to be kept in South Africa.

[55]
Lamb v CIR
1955 (1) SA 270 (A), 20 SATC 1
The taxpayer carried on business in Johannesburg. During the tax year he received a
dividend of £1 575 from certain shares held by him in NC Copper Mines Ltd, a company
incorporated in England. The company’s registered office was in London, and its prin-
cipal register of members was kept there. The company derived no income from sources
in the Union of South Africa. The company had its principal register of members in
London and a dominion register in Johannesburg. The taxpayer’s shares were registered
in the dominion register in Johannesburg.

________________________

102 1941 AD 256, 11 SATC 298.

103 (1918) 25 CLR 183.
104 1951 (3) SA 525 (A) at 532.
88 Income Tax in South Africa: Cases and Materials

Issue: was the source of the dividend which accrued to the taxpayer, located in the
Union of South Africa?
Held: in the negative. Because the taxpayer’s shares were registered in the dominion
register, they were deemed, in terms of the English Companies Act to be part of the
Company’s principal register in London. Consequently, the taxpayer’s shares were
located, not in the Union of South Africa, but in England and the dividend was derived
from property which was in England. Consequently, the source of the dividend was not
within the Union.
Centlivres CJ: In Boyd v CIR 105 this Court said:
‘The evidence of title to the shares from which the appellant derives his dividend is either the register of
shareholders which is in the Union or the branch register in London which is deemed by s 35 of Act 46 of
1926 to be part of the register in the Union. The shares are therefore located in the Union . . . The divi-
dend is derived therefore from property which is within the Union: consequently the source of the divi-
dend is in the Union.’
...
. . . It was . . . incorrectly (as I shall show) assumed by appellant’s counsel and by the Special
Court that the ratio decidendi in Boyd’s case was fatal to the success of appellant’s appeal.
Boyd’s case is no authority for the proposition that dividends paid by a company to a shareholder
whose name appears on a branch register of the company constitute income derived from a
source in the country where that branch register is kept.
...
It was common cause that the relevant provisions of the English Companies Act 1948, which
were set out in the case stated to this Court, must govern the decision in this case . . . [I]t is clear
that the interpretation placed by this Court in Boyd’s case on s 35 of our Companies Act applies
with equal force to s 120(1) of the English Act.
...
The Company in the present case had during the year of assessment its principal register in
London and a dominion register in Johannesburg. The appellant’s stock was registered in the
dominion register but that register is, in terms of s 120(1) of the English Act, deemed to be part
of the Company’s principal register in London. The appellant’s stock was therefore located not
in the Union but in England and the dividend received by the appellant was derived from prop-
erty which was in England. Consequently the source of the appellant’s dividend was not within
the Union within the meaning of the definition of ‘gross income’ in s. 7 of the Income Tax Act
and the dividend was not liable to taxation.
...
For the reasons I have given, the dividend received by the appellant was not received from a
source within the Union and the appeal must therefore be allowed with costs . . .
GREENBERG JA and VAN DEN HEEVER JA concurred.
Schreiner JA: I agree that the appeal should be allowed, but I arrive at this conclusion for
reasons that differ somewhat from the reasons given by the Chief Justice in his judgment.
...
I am . . . impressed by the disadvantages that must follow, certainly for the purposes of a taxing
Act like our Income Tax Act, if the locality of shares can be changed by transferring them back
and forth between one branch register and another or between a branch register and the prin-
cipal register. But where the Legislature has made taxability depend on the source of income
and where the source is a fruit-bearing thing like a share, it seems to me that some degree of
permanence in the situation of the thing must have been intended. There must be imputed to
the Legislature an intention to have regard to what one might call the domicile of the thing
rather than its impermanent presence at a particular place at a particular time. Different consid-
erations may well apply to legislation dealing with death duties.
________________________

105 1951 (3) SA 525 at 533.

 Source 89

The source of the dividend in the present case is undoubtedly the stock and in order to discover
the situation of the stock one must investigate where, according to the relevant company law ie
the English Act of 1948, the register or registers of members are to be kept. But if, as I have
suggested, one is seeking that situation which embodies the greatest measure of permanence or
stability it is undoubtedly to be found, under the company law with which we are dealing, in the
place where the principal register is kept. In other words, for the purposes of our Income Tax
Act the locality of the source of the dividend is not where the particular shares happen to have
been registered at a particular date, but where the shares of the company are generally speaking
registrable, and that, where there is more than one register, is the locality of the principal register.
HOEXTER JA concurred.

§11 Interest
Interest is inherently in the nature of ‘income’, rather than capital. For reasons of policy
however, the Act contains a number of provisions which exempt interest from income
tax to varying extents. Non-residents’ tax on interest was abolished with effect from
17 March 1988. However, even after such abolition, interest remained taxable if it was
from a source within the Republic until the enactment of s 10(1)(hA) which provides an
exemption for interest received by or accrued to a person (other than a company) who is
ordinarily resident106 outside the Republic or a company which is managed and con-
trolled outside the Republic, subject to three provisos.
The Act contains a number of provisions which deem interest in various circumstances
to be from a source within the Republic; for a comprehensive table of the statutory
deeming provisions, see Silke §5.16.
Where interest is payable, not in respect of a loan, but in return for the employment of the taxpayer’s
own capital, the originating cause is the taxpayer’s business in which such capital was employed.

[56]
COT v William Dunn & Co Ltd
1918 AD 301, 9 SATC 380
The taxpayer company was registered in England and carried on business in London. It
had partnership agreements with three firms carrying on business in the Union of South
Africa. The partnership agreements included a buying agreement. The effect of the
buying agreements was that the taxpayer company was the agent of the South African
firms, to buy goods on commission for them. The procedure was that each South African
firm gave the taxpayer a list of the goods it required. The taxpayer then bought these
goods in its own name, paid the purchase price, then invoiced and shipped the goods to
the South African firms, charging them cost, freight and insurance plus interest on
balances due to it. The South African firms paid the taxpayer amounts from time to time,
which the taxpayer credited to them in its accounts. The South African firms always owed
considerable sums to the taxpayer, and during the year of assessment in issue the taxpay-
er company debited the South African firms with interest totalling £14 658 on these
outstanding amounts. The Commissioner assessed the taxpayer to tax on this interest as
having been derived from a source within the Union.
Issue: was the interest, which had accrued to the taxpayer on moneys owing by the
South African firms, from a source within the Union of South Africa?
Held: in the negative. The source of the interest was the taxpayer’s English business, in
which it employed its own capital and by doing so, earned the interest in question.
________________________

106 For the meaning of ‘ordinarily resident’, see CIR v Kuttel 1992 (3) SA 242 (A), 54 SATC 298.
90 Income Tax in South Africa: Cases and Materials

Innes CJ: The Attorney-General argued that regard should be had to the place where the capital
was employed which produced the profits sought to be taxed. I agree. That undoubtedly is the
test in this case . . .
[T]aking the facts reflected in the stated case, the relationship constituted between the parties
under that agreement was the relationship of principal and agent. The company was the agent
buying on commission for the South African firms. It had undertaken to purchase, invoice and
ship the goods, and to pay the purchase price as well as insurance and freight. In using capital
for that purpose it was employing it in its own business, not lending it to the South African firms.
That proposition is almost self-evident. If authority were needed for it, Reid’s Brewery Co v Male,107
quoted by Mr Mackeurtan, is much in point . . .
Here the relationship of lender and borrower never came into existence. In devoting its own
capital to the payment of the purchase price of goods ordered, the company was only carrying
out its obligations under the buying agreement . . . In order to ascertain where the capital was
employed to earn the profits sought to be taxed, we must have regard to the source from which
they were derived. And that source, in the present case, was the company’s English business. It
employed its own capital in carrying on its own business in England, and by so doing it earned
the interest which it is now desired to assess. It was not contended by the Attorney-General that
the mere fact that the debtor was in South Africa affected the matter; and he was right in refrain-
ing from so contending. In my opinion the interest in question was not received from any source
within the Union . . .
The appeal must be dismissed with costs.

Notes
The court focused on the fact that the taxpayer purchased the goods in its own name,
using its own capital. It held that the source of the interest was therefore located where
the taxpayer’s capital was employed. If the facts had been that the taxpayer had pur-
chased the goods in the name of the South African firms, it would have been lending
them the money, in which event the source of the interest would have been the place
where the taxpayer made credit available to the taxpayer; and it seems that credit is made
available in the place where the debtor resides; see [57] Lever Bros,108 below, and the
notes following that extract. On this criterion too, the source of the interest would have
been located in South Africa.

The originating cause of interest paid on a loan of money is not the debt but the service which the
lender performs for the borrower, namely the supplying of credit in return for which the borrower pays
interest. This source is located at the place where the credit is supplied.

[57]
CIR v Lever Bros & Unilever Ltd
1946 AD 441, 14 SATC 1
The taxpayer company (Levers) carried on business in England, and did not carry on any
business or own any capital in the Union of South Africa. In 1937 the taxpayer sold assets
to a Dutch company (Mavibel) on credit for £11 million, on which it agreed to pay
interest. As security for the due payment of this amount, a ‘trust agreement’ was entered
into whereby Mavibel deposited certain shares held by it in other companies with a
trustee in England. To safeguard the parties’ interests in case Holland came under
German occupation, a company (Overseas Holdings) was formed in South Africa in
1939. Overseas Holdings bought the shares owned by Mavibel, which that company had
________________________

107 [1891] 2 QB 1.
108 1946 AD 441, 14 SATC 1 at 15, 21.
 Source 91

pledged as security for its debt to the taxpayer, and Overseas Holdings took over Ma-
vibel’s rights and obligations under the trust agreement. By agreement, the place of
payment was shifted from Holland to England. None of these agreements were made in
South Africa, but it was agreed that Overseas Holdings would not pay any of the capital
or interest in respect of the debt out of assets in South Africa. During the tax years in
question, Overseas Holdings paid interest to the taxpayer out of dividends which accrued
to Overseas Holdings in the United States on shares held by it in other companies.
Issue: whether the interest paid to the taxpayer by Overseas Holdings was from a
source located in the Union of South Africa.
Held: (by Watermeyer CJ and Davis AJA) in the negative; the source of the interest was
the provision of credit by the taxpayer to Mavibel, which took place in England. Schrein-
er JA (dissenting) held that the source of the interest was the debt itself, and the source
of the interest was located where the debtor resided, namely South Africa.
Watermeyer CJ: According to the definition contained in s 7 of Act 31 of 1941 ‘gross income’
means the total amount which has been received by or which has accrued to a taxpayer from a
source which is within the Union or which is deemed to be within the Union other than receipts
and accruals of a capital nature. The Commissioner claims that this interest was not a receipt of a
capital nature and was received from a source which was within the union, because it was interest
on a loan of money made to a company incorporated in South Africa. His contention in support
of that claim is as follows: the ‘source’ of interest paid on a loan of money is the principal debt;
the debt is regarded in law as located where the debtor resides; in this case the debtor was a
South African Company, therefore the debt was located in South Africa, therefore the interest
was received from a source in South Africa . . .
...
A debt is a legal obligation, something having no corporeal existence; consequently it can have
no real and actual situation in the material world. Metaphorically, however, by legal fiction it
may have a situation in a place, determined by accepted legal rules. Furthermore the word
‘source,’ when used as it is in this Act in order to symbolise the origin of ‘gross income’ received
by a taxpayer, is also a metaphorical expression and the sense in which it is used in the Act must
be determined.
When the question has to be decided whether or not money received by a taxpayer is ‘gross
income’ within the meaning of the definition referred to above, two problems arise which have
not always been differentiated from one another in decided cases. The first problem is to deter-
mine what is the source from which it has been received and when that has been determined,
the second problem is to locate it in order to decide whether it is or is not within the Union.
The word ‘source’ has several possible meanings. In this section it is used figuratively, and when
so used in relation to the receipt of money one possible meaning is the originating cause of the
receipt of the money, another possible meaning is the quarter from which it is received. A series
of decisions of this Court and of the Judicial Committee of the Privy Council upon our Income
Tax Acts and upon similar Acts elsewhere have dealt with the meaning of the word ‘source’ and
the inference, which, I think, should be drawn from those decisions that the source of receipts,
received as income, is not the quarter whence they come, but the originating cause of their
being received as income and that this originating cause is the work which the taxpayer does to
earn them, the quid pro quo which he gives in return for which he receives them. The work
which he does may be a business which he carries on. or an enterprise which he undertakes, or
an activity in which he engages and it may take the form of personal exertion, mental or physi-
cal, or it may take the form of employment of capital either by using it to earn income or by
letting its use to someone else. Often the work is some combination of these . . .
In the case of a loan of money the lender gives the money to the borrower, who in return incurs
an obligation to repay the same amount of money at some future time and, if the loan is one
which bears interest, he also incurs an obligation to pay that interest .. . As a rule the lender
either gives credit to the borrower or transfers to him certain rights of obtaining credit which
previously belonged to the lender, and this supply of credit is the service which the lender
92 Income Tax in South Africa: Cases and Materials

performs for the borrower. Consequently this provision of credit is the originating cause or
source of the interest received by the lender . . .
Turning now to the problem of locating a source of income, it is obvious that a taxpayer’s activi-
ties, which are the originating cause of a particular receipt, need not all occur in the same place
and may even occur in different countries, and consequently, after the activities which are the
source of the particular ‘gross income’ have been identified the problem of locating them may
present considerable difficulties, and it may be necessary to come to the conclusion that the
‘source’ of a particular receipt is located partly in one country and partly in another. See re-
marks of Lord Atkin in Rhodesia Metals Ltd (in liq) v COT.109 Such a state of affairs may lead to the
conclusion that the whole of a receipt, or part of it, or none of it is taxable as income from a
source within the Union, according to the particular circumstances of the case, but I am not
aware of any decision which has laid down clearly what would be the governing consideration in
such a case.
...
[The judge then referred to the case of COT v William Dunn Ltd 110 and said:] The statement of
Innes CJ that the word ‘source’ denotes ‘origin’ and not ‘location’ should be noticed. It means
that the word ‘source’ in the Act does not denote the quarter whence the money is received but
the originating cause of the receipt (ie the particular activity of the taxpayer which earns money)
...
. . . In the case of Rhodesian Metals Ltd v COT 111 this Court followed the decision in the Overseas
112
Trust case. That decision was upheld by the Judicial Committee of the Privy Council. Lord
Atkin in his judgment mentioned the cases of Dunn and the Overseas Trust and said that their
Lordships had no criticism to make of those decisions. He pointed out, however, that income
could be derived from more than one source even if that source was business. He referred with
approval to the following extracts from the dissenting judgment of De Villiers JA in the Rhodesia
Metals case in this Court. ‘Source means not a legal concept but something which the practical
man would regard as a real source of income. The ascertaining of the actual source is a practical
hard matter of fact.’ This is a quotation taken from a judgment of Isaacs J in an Australian case,
Nathan v FCT 113 . . .
I turn now to the facts of the present case . . . The activities of Levers which resulted in an obli-
gation binding on Overseas Holdings to pay interest upon £11 million to Levers were confined
to making . . . the contracts by virtue of which the obligation to pay interest arose . . . Sub-
sequently, Levers stepped into Mavibel’s shoes and Levers performed [Mavibel’s] obligations
under the contracts which included the provision of credit in England and by these services
earned the income now sought to be taxed. No business was carried on by Levers in South
Africa, no capital was adventured by them in South Africa, no services were rendered by them in
South Africa and no obligation . . . was performed . . . in South Africa . . . As I have pointed out
above, to call the debt of £11 million the source of the income is to make use of metaphor. The
same may possibly be said of calling the taxpayer’s activities the source; but there is a vital dis-
tinction which makes the word ‘source’ more appropriate . . . to denote the taxpayer’s activities
than to denote the debt resulting from them. This distinction lies in the fact that the mere
existence of the debt did not entitle the taxpayer to receive money from Overseas Holdings; it
was the agreement between the parties that interest should be paid . . . which created the right
of Levers to receive the money . . . So it could more properly be said that it was the making and
carrying out of the agreement relating to the £11 million by the taxpayer which earned the
income for him, rather than the existence of the debt resulting from that agreement.
...
Again, if Lord Atkin’s suggestion be followed and the question be asked what would the practical
man regard as the real source of the income, I think the answer would probably be that the

________________________

109 1940 AD 432 at 436.

110 1918 AD 607 at 615.
111 1938 AD 282.
112 1940 AD 432.
113 25 CLR 183.
 Source 93

source of Levers’ income was the operations of the American Companies which produced the
money out of which the interest was paid. I cannot think that the practical man could ever come
to the conclusion that the money came from a source in South Africa.
Schreiner JA: (dissenting) In my view the source of Levers’ income, so far as it consisted of the
interest, was the debt ie the aes alienum or money of Levers in the possession of Overseas Holdings.
If money had been sent to South Africa the presence of the debt in the Union would perhaps
have seemed more obvious but the position is, I think, equally clear without that feature. No
doubt the location of an incorporeal in space by a rule of law carries a flavour of artificiality but
even the practical business man of the cases would realise, when the matter was explained to
him, that for certain purposes it is unavoidable. I respectfully agree with what was said by Lord
Buckmaster in English, Scottish and Australian Bank Ltd v CIR 114), that, apart from any special rule
relating to speciality debts, once it is assumed that a debt must have a local situation, it can only
be where the debtor or where the creditor resides. The unanimous decision of the House of
Lords in that case was that a debt exists where the debtor resides . . .
...
Where the debtor obtains the means to pay the interest on his debt and what arrangements he
makes for the transfer of the funds to the creditor seems to me to have no bearing on the question
in issue. I am disposed to think that a practical business man would be surprised if he were in-
formed that the source of interest on a long term loan was the contract, made possibly decades
ago, and not the loan debt itself.
The income in question in this case, was, in my view, derived from property owned by Levers in
the Union, namely, the debt owed by Overseas Holdings. I would accordingly allow the appeal.

Notes
The crux of Watermeyer’s judgment is that the source of interest on borrowed money is
not the debt,115 but rather the activity of the lender, namely the service which the lender
provides to the borrower, by supplying the latter with credit: ‘this supply of credit is the
service which the lender performs for the borrower in return for which the borrower
pays him interest. Consequently, this provision of credit is the originating cause of the
interest received by the lender’.116 The source is located in the place where the credit is
provided.
In applying this principle to the facts of the case, Watermeyer said that, ‘the mere exist-
ence of the debt did not entitle the taxpayer to receive money from Overseas Holdings; it
was the agreement between the parties that interest should be paid, and the performance by
Levers of their obligations under it which created the right of Levers to receive the
money and the corresponding obligation of Overseas Holdings to pay it. So it could
more properly be said that it was the making and carrying out of the agreement relating
to the £11 million by the taxpayer, which earned the income for him, rather than the
existence of the debt resulting from that agreement’.117 (Italics added.) It is interesting to
note that, having just said that the source of the interest lay in two factors, ‘agreement’
and ‘performance’, Watermeyer then disregards the ‘agreement’, and attributes the
source of the interest exclusively to the ‘performance’, namely the provision of credit.
Later, Watermeyer adds, obiter, that even if the debt itself were regarded as the source
of the interest, that source is located where the debt was enforceable. In this case, the
pledged shares against which it was enforceable were held in England.118 On this point,
Schreiner JA (dissenting) supported the principle that the source of a debt is located
where the debtor resides, irrespective of where security for the debt is realisable.119
________________________

114 [1932] AC 238 at 246.

115 (1946) 14 SATC 1 at 9.
116 (1946) 14 SATC 1 at 10.
117 (1946) 14 SATC 1 at 15.
118 (1946) 14 SATC 1 at 15.
119 Ibid at 21.
94 Income Tax in South Africa: Cases and Materials

Where Watermeyer JA finds the source of the interest in ‘services’, Schreiner JA, dis-
senting, finds it in ‘property’. Schreiner held that the source of the interest in this case
was ‘the debt’,120 and that a debt is located where the debtor resides, in this case, South
Africa. Schreiner makes it clear that, by ‘the debt’ he does not mean the contract as such,
but the incorporeal right vested in the creditor.121 This is explained later in his judgment
where he says: ‘The income in question in this case [ie the interest] was, in my view,
derived from property owned by Levers in the Union, namely the debt owed by Overseas
Holdings.’122 (Italics added.)

[58]
ITC 82
(1927) 3 SATC 141
The taxpayer was a partner in a firm of produce dealers carrying on business in the
Union of South Africa, which sold large quantities of produce to a company in England.
Since the taxpayer’s firm had no use for the funds in England, it allowed a portion of the
selling price of the produce to remain in the hands of the English company, from which
it received interest on the money.
Issue: was the source of the interest received by the taxpayer from a source within the
Union?
Held: in the negative. The interest arose from the employment of the taxpayer’s capital
in England, and was therefore not from a source within the Union.
GJ Maritz, President . . . said that the position was that appellant’s firm had lent the company in
England a certain sum of money, and on that they got a return of interest, and the question now
arose whether that interest so received, which undoubtedly was income, was received from a
source within the Union. It was not necessary to enter into the authorities. It was sufficient to
rely upon the dictum of the Chief Justice in the Overseas Trust Corporation case123 where he said
that capital was located where it was employed. The firm had lent certain sums of money to
people in England. In other words, their capital was employed in England. The capital employed
in England earned income. That income had as its source the location of the capital which pro-
duced that income. That capital was located in England. Therefore the interest was located in
England. If that was so, it was income which escaped Union taxation. The court was of opinion,
therefore, that the interest received from this investment was derived from a source outside the
Union, and was not subject to Union taxation.

Where the first borrower is paid out and a new borrower is substituted under an agreement with the
lender, the source of the interest payable by the new borrower is not the contract, but the provision of
credit to the new borrower.

[59]
ITC 1021
(1963) 25 SATC 416
The taxpayer, a resident of South Africa, was a client of a company which carried on
the business, in the Republic, of investing funds on behalf of clients. The procedure
was that the company would receive applications from persons who wished to borrow
________________________

120 (1946) 14 SATC 1 at 20.

121 See his judgment at SATC 22: ‘I am disposed to think that a practical business man would be surprised if
he were informed that the source of interest on a long term loan was the contract . . . and not the loan
debt itself.’
122 (1946) 14 SATC 1 at 23.
123 2 SATC 71.
 Source 95

money on the security of a mortgage over their property. Where the amount to be bor-
rowed was greater than the resources of an individual investor, the company would form
a nominee company which would, on behalf of the individual investors, advance the
investors’ money to the borrower on the security of a ‘composite’ mortgage bond regis-
tered in favour of the nominee company. Each individual investor had a ‘participation’
in the bond. One such composite bond was registered in 1959 in favour of the nominee
company over property in South West Africa to secure a loan of £55 000, advanced by
various participants. In 1961 one of the participants wanted to be repaid his investment.
By an agreement concluded in the Republic between the two companies, the taxpayer
and the original participant, the original participant was repaid the amount he had
originally lent, and the taxpayer stepped into his shoes as a participant in the bond.
During the tax year, the taxpayer was paid interest of R140 in respect of his participation
in the bond. The Commissioner included this amount in the taxpayer’s gross income.
The taxpayer objected on the grounds that this interest was not from a source in the
Republic.
Issue: was the source of the interest paid to the taxpayer as a participant in the mort-
gage bond from a source located in the Republic?
Held: in the negative. The source of the interest was not the contract, but the provision
of credit by the taxpayer. This credit was provided by him in South West Africa, and the
source was accordingly located in South West Africa.
Watermeyer J: Mr Lambert, who appeared for the Commissioner, did not dispute that the interest
received by, or accruing to, the original participating parties in a bond of this nature would
be from a source outside the Republic, but the appellant was not an original participating
party.
...
Mr Lambert submitted that the effect of this transaction [whereby the original participant was
repaid, and the taxpayer took cession of his rights in respect of the loan] was that the appellant,
acting through his agent, the parent company, paid to the retiring participant the amount
loaned by him to the mortgagor, that the retiring participant ceded to appellant his rights under
the bond, and inasmuch as the whole of this transaction took place in the Republic, the interest
which was subsequently received by appellant was received from a Republican source. As I
understood the argument, one must look at the activities of the taxpayer which produced the
income, that such activities consisted of the conclusion of the contract with the retiring parti-
cipant, and that this took place in the Republic.
In my opinion the fallacy in this argument lies in the assertion that the conclusion of the con-
tract produced the income.
The leading case in our courts on the source of interest on a loan is CIR v Lever Bros.124 In that
case Watermeyer CJ . . . held that it was not the debt but the services which the lender performs
for the borrower, viz the supply of credit, in return for which the borrower pays him interest.
As I have already said; it was not disputed that the source of the interest received by the original
participants in the bond was South West Africa. Indeed, if one applies the tests laid down by the
three Judges in the Lever Bros case, even that of the dissenting Judge, the source was clearly
South West Africa.
Can it make any difference that the appellant subsequently stepped into the shoes of one of the
original participants? I do not think so . . . The important point to note, however, is that appel-
lant did not become entitled to receive the interest merely by reason of the conclusion of the
contract. He became entitled to receive it only if, and so long as, he continued to allow the
mortgagor to have the use of his money. In other words, the originating cause, or source, of the
interest was the service which the appellant performed by providing credit to the mortgagor.
________________________

124 1946 AD 441, 14 SATC 1.

96 Income Tax in South Africa: Cases and Materials

The appellant at no stage lent his money to the parent company, nor did he lend it to the nomi-
nee company, nor to the retiring participant. What he in effect did was to lend his money to the
mortgagor, and the interest which he received was the quid pro quo for allowing the mortgagor
to have the use of it. In my view it makes no difference that the interest was collected on his be-
half by the nominee company or by the parent company. All that they did was to act as a conduit
pipe, and they at no stage incurred any personal liability to him other than to pass on to him his
pro rata share of the interest as and when they received it, less no doubt a commission. (Cf Arm-
strong v CIR.)125
In these circumstances it seems to me that the source of the interest was South West Africa. By the
arrangement which was entered into, instead of the original participant providing the mortgagor
with credit in South West Africa, the appellant provided such credit there, and that in my opinion
rendered the source of appellant’s interest South West Africa.
The appeal is accordingly allowed.

Notes
This decision applied the principle laid down in [57] Lever Bros, that the source of
interest on a loan of money is not the contract of loan, but the service provided by the
lender, namely the provision of credit. The source is located where the loan capital is
advanced by the lender, in this case, South West Africa.

§12 Royalties
There is no single principle which determines the source of royalties and the general
principles which determine source must be applied to the facts of each case, except in
those situations where the Act deems certain royalties to be from a source in the Repub-
lic; as to which, see Silke §5.21 and §5.32 and Meyerowitz and Spiro para 213.
Where the taxpayer carries on the trade of a novelist, the source of her income from royalties is her
wits, labour and intellect in writing the book and in dealing with the publishers. The source of the
royalties is located where these faculties are employed. The place where the contract with the publish-
ers was entered into is irrelevant.126

[60]
Millin v CIR
1928 AD 207, 3 SATC 170
The taxpayer wrote novels in South Africa which were published in England under a
contract with publishers entered into in England whereby she retained the copyright and
gave her publishers a licence to publish.
Issue: was the source of the royalties located within South Africa?
Held: in the affirmative. The exercise of her wits and labour, which were employed in
South Africa, produced the royalties.
Solomon CJ: The question to be determined is whether royalties received by Mrs Millin from her
publishers in London were rightly included in the taxable income of her husband, the appellant,
________________________

125 1938 AD 343, 10 SATC 1.

126 This principle (which was held to be applicable on the particular facts of CIR v Millin and might not be
applicable to different facts) is presumably equally applicable to all forms of intellectual property. But if
the author, inventor, etc were to cede her rights to another person (as in ITC 1494 1991 (53) SATC 206)
the source of the latter’s income from royalties will not be the author’s wits, labour and intellect. The orig-
inating cause in those circumstances could be, inter alia, the cessionary’s ownership of the rights in ques-
tion, the latter’s business, the employment of his capital, the contract of cession, or the use of the
intellectual property rights.
 Source 97

as having accrued from a source within the Union, or from a source deemed to be within the
Union . . .
The main case set up for the Commissioner was that Mrs Millin carried on within the Union the
‘trade’ of a writer of works of fiction for profit; that the royalties received by her were profits
derived from that trade; and that, as the trade was carried on by her in Johannesburg, the profits
accrued to her from a source within the Union. That Mrs Millin carried on a trade, in the wide
sense in which that word is used in the Income Tax Act, including, as it does, any occupation or
calling, is not open to question. Her calling consisted in writing works of fiction for profit. It was
a business which did not depend upon capital within the ordinary meaning of that term, but
simply upon her own brains. But the production of works of fiction was only part of her trade; if
it had stopped there, no profit would have accrued to her. Something further had to be done to
realise a profit from her work. The novel had to be published and sold. Being the owner of the
copyright or ‘the sole right of producing the work in a material form’ she, in the words of the
stated case, granted to her publishers the right of printing and publishing it in book form in
Great Britain and elsewhere, they undertaking to pay her a percentage of the published price of
the novel as royalties. And it was from these royalties that her income was derived. Her business
thus consisted, not only in writing the book, but also in subsequently dealing with her copyright,
a business involving, as the learned Judge said, the exercise of both literary and commercial
faculties. Upon these facts he held that she carried on her trade as an authoress partly in the
Union and partly in England, where she makes the contracts with her publishers, and that, con-
sequently, there was ‘substance in the contention that, as part of her business is carried on over-
seas, her income cannot be correctly described as derived from a source within the Union’. I am
unable to agree with this view, for if any income is earned by her in the Union, to that extent it
would be from a source within it, and would be assessable for the tax. The learned Judge, how-
ever, did not definitely decide this point in favour of the appellant; he held that there was sub-
stance in that contention, and there left it, for on another ground he came to the conclusion
that she was liable under the provisions of [the now-repealed] s 9(1) of the Act . . .
Does the production of a novel by Mrs Millin fall within the words of this section? It is true that
she expended labour on the book, but she is not paid for her labour but for the novel which she
has produced by the exercise of her literary faculties and by her labour. There appears to me to
be a vital distinction between paying a person for his labour and paying him for an article which
he has produced by his skill and labour. If I employ a carpenter to make a chair and agree to pay
him, say so much an hour for his work; he is paid for his labour, not for the chair. On the other
hand, to employ him on contract to make me a chair and agree to pay him a certain amount for
it; I pay him for the chair, not for his work or labour. So here the royalties received by Mrs Millin
were not paid to her for the labour that she had expended on her novel, but for the right to
publish it. Section 9(1)(b) [now repealed] deals with the case of a person carrying on any trade
in the Union, who is paid for his services or work or labour in such trade, and it provides that the
amount which he receives shall be deemed to have accrued to him from a source within the
Union, no matter whether the payment is made by some one outside the Union, and without
regard to the place where such payment is made . . . If Mrs Millin had been engaged by a pub-
lisher to write a novel, and was to be paid by the amount of labour that she had expended on the
book, say so much per day or so much per sheet of manuscript, the section would apply. But I
fail to see how it can be applied to a case like the present, where she is not employed by anyone,
and where she is not paid for her labour. Stress was laid by the learned Judge on the words ‘by
virtue of’ in the section, but I agree with counsel for the appellant that it is merely a convenient
expression to employ in connection with each of the subsections (a), (b), (c), (d), which obviat-
ed the necessity of using a different word or words before each subsection. In my opinion, as
applied to subsection (b), it merely means ‘for,’ so that the section would refer to any amount
received ‘for any services or work or labour done’. The connection in the present case between
the labour and the receipt of the royalties is too remote to bring the case within the words of the
section.
I pass on then to consider the main question raised in this appeal, which was whether the
amount received by Mrs Millin from royalties was from a source within the Union. For the appel-
lant it was contended, in the first place, that it accrued from a source in England. The conten-
tion may be shortly stated as follows: Mrs Millin, by writing a work of fiction, produced a capital
asset, viz the copyright of her book: by the contract made with her publishers she granted them a
98 Income Tax in South Africa: Cases and Materials

licence to publish the novel in book form, the copyright remaining her property: the royalties
which she received came from the use made by her of this capital asset; and the source of her
income must be taken to be in the place, viz London, where her capital was employed. But this
contention cannot be sustained, for it is based on the fallacy that the copyright of any work pro-
duced by Mrs Millin is a capital asset. That copyright is, in my opinion, not capital. In the case of
the COT v Booysen’s Estates127 it was pointed out that income was sometimes the product of capital
invested, and sometimes was earned by the labour or the wits of the recipient. Mrs Millin’s busi-
ness of writing novels was based, not upon capital, but upon her wits and labour. By the exercise
of these she produces, let us suppose, a novel a year and sells the copyright outright, say, for
£1 000. Can there be any doubt that this amount, less any expense to which she may have been
put, would represent the income of her business for the year, and it cannot make any difference
in principle that, instead of receiving a lump sum for the copyright, she is remunerated by royal-
ties spread over a term of years . . . I cannot concur in the contention that the copyright was
capital and that it was the employment of this capital which produced the income . . . I agree
with the respondent’s contention that the source of the whole amount of Mrs Millin’s royalties
was in the Union. In the case of an ordinary business based upon capital it has been held in the
Court that, in determining the source of the income, regard must be had to the place where the
capital was employed which produced the profits. (COT v William Dunn & Co Ltd.)128
129
A strong case on this point is that of Overseas Trust Corporation Ltd v CIR There a financial and
investment company, registered in Cape Town, was formed to take over certain interests held by
one L. These interests consisted mainly of shares and debentures in mining companies in the
Union. Among other transactions, the company had, through brokers, sold in Germany certain
shares at a price fixed by it which yielded a profit. It was held that this profit was earned from capi-
tal employed in the Union, and that the amount was properly included in the income of the com-
pany . . . It is true that in this case no capital in the ordinary sense of that term was employed by
Mrs Millin. It was the exercise of her wits and labour that produced the royalties. They were em-
ployed in the Union, and it matters not, on the analogy of the Overseas Trust case, that the grant to
her publishers of the right to publish her book was contained in a contract made in England. Her
faculties were employed in the Union both in writing the book and in dealing with her publishers,
and, therefore, on the test applied in the cases cited, the source of the whole of her income would
be in the Union.
...
On the whole, therefore, I come to the conclusion that the appeal should be dismissed with
costs.
WESSELS JA and CURLEWIS JA concurred.

Notes
This decision has been criticised on the basis that there were two distinct sources, namely
the writing of the books and the contract granting the right to publish, and that the
income ought to have been apportioned between the two; see Meyerowitz and Spiro
para 212.

________________________

127 1917 TPD 278.

128 1918 AD 614.
129 1926 AD 444.
 4
RECEIPTS AND ACCRUALS

§ Page
1 Introduction ............................................................................................................. 100
2 The income tax base in South Africa ...................................................................... 101
[61] Margo Report ................................................................................................. 101
[62] SIR v Silverglen Investments (Pty) Ltd ......................................................... 101
3 The total amount ..................................................................................................... 102
[63] CIR v Butcher Bros (Pty) Ltd ........................................................................ 102
4 The meaning of ‘received by’ the taxpayer ............................................................ 104
[64] ITC 525 ........................................................................................................... 104
[65] ITC 702 ........................................................................................................... 104
[66] Geldenhuys v CIR ........................................................................................... 105
[67] COT v G .......................................................................................................... 106
[68] MP Finance Group CC (in liquidation) v CSARS ........................................ 108
5 The meaning of ‘accrued to’ the taxpayer.............................................................. 111
[69] Lategan v CIR ................................................................................................. 111
[70] Margo Report ................................................................................................. 112
[71] CIR v People’s Stores (Walvis Bay) (Pty) Ltd ............................................... 113
[72] The proviso to the definition of ‘gross income’ ........................................... 116
[73] Criticism of the proviso to the definition of ‘gross income’ ........................ 116
[74] Cactus Investments (Pty) Ltd v CIR .............................................................. 117
6 The time of accrual may be determined by the terms of a contract ..................... 118
[75] ITC 1847 ......................................................................................................... 118
7 Discounts .................................................................................................................. 120
[76] Gud Holdings (Pty) Ltd v CSARS ................................................................. 120
8 Non-monetary receipts and accruals....................................................................... 123
[77] CIR v People’s Stores (Walvis Bay) (Pty) Ltd ............................................... 123
[78] Mooi v SIR ...................................................................................................... 124
[79] Lace Proprietary Mines Ltd v CIR ................................................................. 124
[80] Ochberg v CIR ................................................................................................ 125
[81] Mooi v SIR ...................................................................................................... 128
[82] Ochberg v CIR ................................................................................................ 130
[83] Stander v CIR ................................................................................................. 130
[84] CSARS v Brummeria Renaissance (Pty) Ltd ................................................. 134
[85] Interpretation Note 58 (issue 2) on the decision in Brummeria
Renaissance .................................................................................................... 141
9 Time of accrual and valuation of the accrued amount.......................................... 146
[86] Lategan v CIR ................................................................................................. 146
[87] South African Marine Corporation Ltd v CIR .............................................. 147
[88] Mooi v SIR ...................................................................................................... 147
99
100 Income Tax in South Africa: Cases and Materials

§ Page
10 Beneficial receipt or accrual ................................................................................... 148
[89] Geldenhuys v CIR ........................................................................................... 148
[90] Pyott Ltd v CIR ............................................................................................... 149
[91] Brookes Lemos Ltd v CIR .............................................................................. 150
[92] Greases (SA) Ltd v CIR .................................................................................. 151
[93] Jay’s the Jewellers Ltd v IRC .......................................................................... 154
[94] ITC 1346 ......................................................................................................... 157
[95] CSARS v Cape Consumers (Pty) Ltd ............................................................. 158
11 Notional receipts and accruals ................................................................................ 163
[96] Land Dealing Company v COT ..................................................................... 164
[97] Natal Estates Ltd v SIR ................................................................................... 165
12 Deemed receipt or accrual ...................................................................................... 166
12.1 Income of minor child deemed to be parent’s income: s 7(3) .................... 166
[98] CIR v Berold ........................................................................................ 166
[99] CIR v Widan ......................................................................................... 168
[100] Joss v SIR .............................................................................................. 171
[101] CIR v Woulidge (C)............................................................................. 174
[102] CIR v Woulidge (SCA) – the in duplum rule ...................................... 177
12.2 Donee’s or beneficiary’s income deemed to be donor’s income: s 7(5) ..... 179
13 Application of income after receipt or accrual ...................................................... 179
[103] CIR v Witwatersrand Association of Racing Clubs ....................................... 179
14 Antecedent disposals of income ............................................................................. 180
[104] Hiddingh v CIR .............................................................................................. 180
[105] Rishworth v SIR .............................................................................................. 181
[106] SIR v Smant .................................................................................................... 183
[107] Holley v CIR.................................................................................................... 185
[108] Moodie v CIR, Transkei ................................................................................. 187

§1 Introduction
A taxpayer’s income tax is levied on his ‘taxable income’ as defined in the Income Tax
Act, for a particular year of assessment. The starting point in determining a taxpayer’s
‘taxable income’ is to ascertain his ‘gross income’. The definition of ‘gross income’ in s 1
of the Income Tax Act begins as follows (italics added):
‘gross income’ in relation to any year . . . of assessment means, in the case of any resident, the total amount
. . . received by or accrued to or in favour of such person during such year . . . of assessment . . . excluding receipts
or accruals of a capital nature . . .’
A consequence of the words in italics is that, as a general principle, the income tax
system of the Republic works on a strict annual basis in which income tax is determined
and levied on a taxpayer for each year of assessment, as defined,1 often colloquially called a
‘tax year’. In this determination, each year of assessment (normally 1 March to 28 Febru-
ary) is (apart from a few statutory exceptions) treated in isolation from those which
preceded it and those which follow it.
In determining a taxpayer’s taxable income for a particular year of assessment, the
first step is to determine the ‘total amount’ that has been ‘received by’ or has
‘accrued to’ that taxpayer during that year. It is also important to note that what
is brought into account in ‘gross income’ is the total amount of receipts and accruals
________________________

1 Section 1 sv ‘year of assessment’.

 Receipts and accruals 101

during the year of assessment. In other words, the gross amount of income must
be brought into account, not merely the profit element of each transaction. The
question of what expenditure and allowances qualify as deductions in the determination
of ‘taxable income’ is a later, entirely separate step in the process of determining ‘taxa-
ble income’.
The word or in the phrase ‘received or accrued’ connotes that the taxpayer must in-
clude not only income which has been received by him, but also income which has
accrued to him during the year of assessment.

§2 The income tax base in South Africa

The tax base adopted in the Republic is artificial, taxing neither profits nor cash flow, but an
amalgam of both.
[61]
Margo Report
9.3 The existing tax system in South Africa is, in a sense, artificial. The system does not
tax either profits or cash flow, but instead seeks to tax – in accordance with a statutory
formula – an amalgam of both. Briefly stated, gross income – which is the starting
point in the determination of taxable income – consists of all receipts and accruals
with an actual or deemed South African source, [Editor: South Africa has since changed
to a residence-based system] but excluding those of a capital nature. Gross income
also includes certain specified receipts and accruals, whether of a capital nature or
not . . .
9.4 In theory, taxable income could be exactly equated with accounting income, without any
adjustments, but in practice there is no country of which the Commission is aware that has
adopted this approach in its purest form . . .

An amount is included in the taxpayer’s gross income in the year in which it is received by him or the
year in which it accrues to him, whichever occurs first. The taxpayer does not have an election
whether to be taxed only on receipts or only on accruals. Nor, where the taxpayer has disclosed an
amount in the year of accrual, does Inland Revenue have the power to postpone assessment until the
year of receipt.
[62]
SIR v Silverglen Investments (Pty) Ltd
1969 (1) SA 365 (A), 30 SATC 199
Steyn CJ: As to the appellant’s right to select the one or the other of the tax years in question,
I can find little in the Income Tax Act to support such a right. The definition of ‘gross
income’ which is basic to the whole procedure of assessment refers to ‘the total amount in
cash or otherwise received by or accrued to or in favour of’ the taxpayer during a year or period
of assessment. I understand this to be a reference to the total amount of both receipts and
accruals . . .
It would seem that the mention of disjunctiveness [ie receipts or accruals] was merely intended
to make it clear . . . that ‘received by or accrued to’ does not mean that the income must both
have accrued and have been received in the same year of assessment . . . [The decision in Delfos v
CIR] is no authority for the view that gross income, as defined, does not in relation to a year of
assessment, include both receipts and accruals during that year, or for the view that the Secretary
may, at his pleasure, exclude from a taxpayer’s income in one year the amounts returned by him
as accrued during that year, in order that they may be taxed in a subsequent year in which they
will be or have been received . . .
102 Income Tax in South Africa: Cases and Materials

. . . I know of no ground on which the Secretary [of Inland Revenue] could, as of general right,
postpone the assessment of disclosed accruals to a subsequent tax year when it may be more
advantageous to the Treasury to tax them as receipts in respect of that year. It may be that where
an accrual has not been disclosed in the return for the year of accrual, the Secretary could,
under s 76(2), forego the additional tax payable under that section and include the amount in
the gross income of the taxpayer for the year in which it is received; or that by arrangement with
the taxpayer, tacit or otherwise, he could assess on the basis of receipts only. (Cf Marais v CIR.2)
These are matters on which I express no opinion.

§3 The total amount

‘Gross income’ is defined in the Act as ‘the total amount, in cash or otherwise, received by or accrued
to’ the taxpayer. Hence the word ‘amount’ encompasses both monetary and non-monetary benefits.
Where the item is non-monetary, it is included in gross income only if it has an ascertainable mone-
tary value in the year of assessment in which it is to be so included.
[63]
CIR v Butcher Bros (Pty) Ltd
1945 AD 301
In terms of a 50 year lease which it took over in 1929 after it had run for just a few years,
Butcher Bros Ltd, as lessor, was entitled to receive, on termination of the lease in 1976,
as its absolute property and without payment of compensation, the buildings which the
lessee was required in terms of the lease to erect on the leased property to a value of not
less than £55 000. The new buildings were completed during 1935.
At the time, gross income was defined in terms of s 7(1)(d) of the Income Tax Act 40 of
1925 as any amount received or accrued including –
(d) any amount so received or accrued as a premium or like consideration in respect of a grant of a right
of the use or occupation of premises or of the use of machinery.”
One of the issues for determination was whether the benefit received by Butcher Bros
Ltd in terms of the lease in question (that is to say, the benefit represented by the value
of the buildings that the lessee was obliged to construct on the lessor’s property) consti-
tuted an amount in terms of this provision that had been received by or had accrued to
Butcher Bros Ltd in the year of assessment ending 30 June 1935, in which it became the
lessor, given that the buildings had been constructed during that year.
In assessing Butcher Bros Ltd to income tax for the year ending 30 June 1935, SARS
had included in its gross income the sum of £55 000 on the ground that this was a receipt
by or an accrual to Butcher Bros Ltd of an amount falling within s 7(1)(d) of the Income
Tax Act 40 of 1925 that had been received by or which had accrued to Butcher Bros Ltd
on completion of the buildings in that tax year
Held: the assessment by SARS, as set out above, ignored the fact that until the termination of
the lease in 1976, the lessee had the exclusive right to such buildings.
Held further: there was no basis for the assumption made by the Tax Court that the
buildings would still be worth £55 000 when the lease terminated in 1976.
Held further: the onus was on SARS to show that an ‘amount’ had been received by or
had accrued to the taxpayer during the year of assessment in issue.
Held further: the facts in the stated case did not show that any ‘amount’ either accrued
to or was received by Butcher Bros Ltd, as lessor, by reason of the erection of the buildings
on the leased land in the tax year ended 30 June 1935, and that SARS was therefore not
entitled to include in the company’s gross income for that tax year any sum representing
________________________

2 1943 CPD 150.

 Receipts and accruals 103

the value of the buildings that had been erected by the lessee on the land or represent-
ing the company’s right to receive such buildings on the termination of the lease.
Feetham JA: (Watermeyer, CJ, Tindall JA, Greenberg JA and Davis AJA concurring)
I think, however, we must infer that ‘like consideration’ referred to in paragraph (d) must have
an ascertainable money value, and not a merely conjectural value . . . The assessment in dispute,
made by the Commissioner . . . can only be allowed to stand if some “amount” accrued to or was
received by the company in the tax year ended 30th June 1935, by virtue of its rights under the
building clauses in the lease, and it is essential for the Commissioner, in order to support his
assessment, to show that some “amount” has accrued to or been received by the company by
virtue of such rights. (Vide Ochberg v CIR (supra)).

Notes
3
It had been held in Lategan v CIR, some twenty years before this decision, that ‘the
taxpayer’s income for the purposes of taxation includes not only cash that he has re-
ceived or which has accrued to him, but the value of every other form of property which
he has received or which has accrued to him, including debts and rights of action’.
The decision in Butcher Bros affirmed that principle, laying stress on the fact that the
word ‘amount’ connotes that which has a money value, and (by implication) excludes
that which does not have a money value that is ascertainable in the current tax year.
Hence, where the receipt or accrual is not in cash, there can be an inclusion in ‘gross
income’ only if it is an ‘amount’ – that is to say, if it has an ascertainable money value in
the year of assessment in which the Commissioner seeks to include it in the taxpayer’s
gross income as receipt or accrual.
The same principle was affirmed, some decades later, in CIR v People’s Stores (Walvis
Bay) (Pty) Ltd 4 where it was held that, “The first and basic proposition [laid down in CIR v
Lategan] is that income, although expressed as an amount in the definition, need not be
an actual amount of money but may be ‘every form of property earned by the taxpayer,
whether corporeal or incorporeal, which has a money value . . . including debts and
rights of action’. This proposition is obviously correct . . .”
In Butcher Bros Ltd it was held that the company, as lessor, would not get the benefit of
the improvements to the property until the expiry of the lease some 30 years into the
future and that it was impossible, in the current tax year, to determine what those build-
ings would be worth at the end of the lease and to include that value as an accrual in the
current tax year. Since the benefit had no ascertainable monetary value in the present
tax year, no ‘amount’ had accrued to the taxpayer in that tax year in respect of those
improvements.
As a result of the decision in Butcher Bros the definition of gross income was amended by
the insertion of sub-para (h) which provides for the inclusion in the lessor’s gross income
of the value of leasehold improvements. The taxability of leasehold improvements and
their valuation is thus now governed by this statutory provision and not by the common-
law principle laid down in Butcher Bros and People’s Stores.
It should be borne in mind that the Seventh Schedule, which deals with fringe benefits
(ie non-monetary benefits provided by an employer to an employee) is a mini-code on
what non-monetary benefits are taxable in the hands of an employee, and how they are
to be valued. Hence, the taxability and valuation of non-monetary benefits provided by
an employer to an employee is governed by the Seventh Schedule, and the principle laid
down in Butcher Bros is not applicable.
________________________

3 1926 CPD 203.

4 1990 (2) SA 353 (A).
104 Income Tax in South Africa: Cases and Materials

§4 The meaning of ‘received by’ the taxpayer

The total amount ‘received’ by the taxpayer in respect of services rendered is included in his ‘gross
income’ in the year of assessment in which such receipt occurs. This principle applies even where the
services are to be rendered over a period of several years in the future, and the taxpayer cannot
circumvent this principle by contractually allocating specified proportions of the amount to particu-
lar years of assessment.

[64]
ITC 525
(1942) 12 SATC 424
In terms of a contract entered into in 1932, the taxpayer undertook to render certain
services to a company. Such services were rendered over the period April 1932 to 30 June
1935. The contract gave rise to litigation between the taxpayer and the company. A deed
of settlement was entered into which attributed an amount to each of the years during
which services were rendered by the taxpayer, and fixed the total sum due to the taxpay-
er at £4 069. This amount was paid to the taxpayer during the year of assessment ended
30 June 1939.
The Commissioner included this sum in the taxpayer’s income for the year ended
30 June 1939. The taxpayer objected on the grounds that this sum ought to have been
allocated to the years of assessment in which it was earned in the proportions laid down
in the deed of settlement.
Issue: can the taxpayer, by contract, determine in which tax years an amount is to be
included in his gross income?
Held: in the negative. The Income Tax mandates that income is included in gross in-
come in the year of receipt or accrual, and this principle cannot be contractually over-
ridden.
Dr Manfred Nathan KC: It is clear from the decision in the Delfos case5 that as all the money was
received in one year, ie £7 000 less deductions, it is taxable in that year, notwithstanding that by
the voluntary allocation made in the Agreement of Settlement the different sums were appropri-
ated ex post facto to previous periods. It may be pointed out, that this really appears to be conclu-
sive, that the definition of gross income in s 7(1) of Act 40 of 1925 refers to ‘a total amount
whether in cash or otherwise received by or accrued to or in favour of any person . . . in any year
or period assessable’ and that it does not say ‘in respect of any year’. It is plain that receipts in
any year are taxable in that year. These sums were received in the tax year ended the 30th June,
1939, and were rightly assessed to tax in that year.
A payment received by the taxpayer in tax year 1 as consideration for the rendering of services in
subsequent tax years is included in his gross income in the year of receipt.

[65]
ITC 702
(1950) 17 SATC 145
The taxpayer company carried on the business of technical consultants and advisers.
During the year of assessment under review, the taxpayer received payment of the sum of
£12 500 in the form of 12 500 fully paid shares, with a nominal value of £1 each, in a
company to which the taxpayer had rendered technical services during the tax year, and
had undertaken to render similar services for a further ten years. The Commissioner
included the full amount of £12 500 in its taxable income.
________________________

5 1933 AD 242, 6 SATC 112.

 Receipts and accruals 105

Issue: whether the whole or only part of the consideration of £12 500 should be in-
cluded in the taxpayer’s gross income for the tax year in question.
Held: the whole of that amount, being an amount not of a capital nature which had
been received by the taxpayer during that tax year, must be included in his gross income.
Shaw AJ: It was not contended on behalf of the company that the 12 500 shares were not re-
ceived by it during the year of assessment, nor was it contended that they were not worth
£12 500. It was contended, however, that the two agreements in terms of which the shares were
received should be read together and that if this were done the £12 500 was to be regarded as a
payment in advance for technical services to be rendered for ten years as from 8th September
1947 . . .
Upon this basis it was submitted by Mr Bizzell, who appeared for the company, that as the sum of
£12 500 had been received for services to be rendered for a period of ten years as from 8 Sep-
tember 1947, it was not received for services rendered in terms of s 7(b); that the whole amount
was not proper for inclusion in the company’s income for the tax year in question and that only
a proportion of that amount, based upon the period of time that had elapsed prior to the end of
the year of assessment, should be so included . . .
Assuming, therefore, that . . . an amount is not of a capital nature, it falls within the definition,
because it is only amounts of a capital nature other than those referred to in paragraphs (a) to
(h) which are excluded from the definition, . . . As the sum of £12 500 was admittedly not of a
capital nature and was admittedly received by the appellant company during the year of assess-
ment it was properly included in the assessment for the year ended 30 June 1948.

The words ‘received by . . . the taxpayer’ in the definition of gross income mean ‘received by the
taxpayer on his own behalf for his own benefit’.

[66]
Geldenhuys v CIR
1974 (3) SA 256 (C), 14 SATC 419
The taxpayer, a widow, was a farmer. She and her late husband who had been married in
community of property had made a joint will under which the survivor was entitled to the
fruits and income of the joint estate for his or her lifetime, and their children were the
heirs of the joint estate. On the death of her husband, the taxpayer adiated and accepted
the benefits conferred on her under the will. One of the assets of the estate was a flock of
sheep, which on the death of the taxpayer’s husband was valued at £1 451. Thereafter,
owing to a drought, a number of the sheep died, and the flock was never allowed to
reach its former level, as the farm was considered to be overstocked. In 1943 the taxpayer
decided to give up farming, and the children agreed. The flock, though in numbers
considerably below the 1930 figure, realised £4 941. The Commissioner included in the
taxpayer’s assessable income the amount of £3 490 being the difference between the
value of the flock when the taxpayer adiated (£1 451) and the amount realised on the
sale of the flock (£4 941).
Issue: was any sum ‘received by’ or ‘accrued to’ the taxpayer on the sale of the flock?
Held: in the negative. The taxpayer was the usufructuary of the flock and since, at the
time of realisation, there were no surplus progeny to which she was entitled, the whole of
the proceeds belonged to the heirs and did not form part of her income.
Steyn J: Both ‘income’ and ‘taxable income’ are in their respective definitions linked up with the
definition of ‘gross income’ and it seems to be clear that in the definition of ‘gross income’ the
words ‘received by or accrued to or in favour of any person’ relate to the taxpayer, and the words
‘received by’ must mean ‘received by the taxpayer on his own behalf for his own benefit’.
106 Income Tax in South Africa: Cases and Materials

Notes
A usufruct is a personal servitude and creates a right to use the property of another
person. The usufructuary is entitled to the possession of the property and to take its
fruits, but is not entitled to take the substance of the property. The usufructuary must, on
the termination of the usufruct, restore the capital of the property to the owner of the
property. In a usufruct over a flock of sheep, the usufructuary is entitled to keep, in
addition to the wool, the progeny over and above the full complement of the flock.
This judgment examines in detail the principles laid down by the Roman-Dutch
authorities in regard to usufructs and the rights of usufructuaries. The court held that
these authorities decreed that a usufructuary of a flock of sheep must maintain the flock
at the same number of animals as at the time the usufruct began, the young animals
replacing the old as they die. Ownership in the flock at its original complement vests in
the remainderman, that is to say in the person who owns the property which is subject to
the usufruct. But the usufructuary is entitled to keep, as his own property, any surplus
over and above the original numbers. In Geldenhuys there were no surplus progeny to
which the usufructuary was entitled, and therefore the whole flock and the proceeds
which were realised when it was sold, belonged to the remainderman and not to the
taxpayer as usufructuary. The increase in the value of the flock between the inception of
the usufruct and the sale of the flock did not accrue to the usufructuary because the
usufruct was in respect of the flock as such, not its monetary value. Hence, the differential
of £3 490 was also subject to the usufruct and accrued to the heirs and not to the taxpay-
er as usufructuary. It was irrelevant that the proceeds of the sale were paid to the taxpay-
er, that she gave a receipt in her own name and put the proceeds in her own bank
account because the usufruct continued to exist over the proceeds of the sale, and she
was dealing with those proceeds qua usufructuary. In law, ownership of those proceeds
vested in and accrued to the heirs.
Stolen property is not ‘received by’ the thief.
[But see the decision in [68] MP Finance Group which does not support a principle in
the above broad and unqualified terms].

[67]
COT v G
1981 (4) SA 167 (ZA), 43 SATC 159
Fieldsend CJ: This appeal concerns the novel and interesting question whether amounts stolen
by a person during a year of assessment form part of his gross income and so become assessable
to tax.
As the case was presented to us it is unnecessary to consider the facts in any detail. It is sufficient
to say that over a period of four years the respondent was in a position of responsibility with the
Government which entailed his being entrusted with funds for secret operations. He took ad-
vantage of his position to obtain from the Government from time to time more money than was
legitimately required for official purposes and to appropriate this for himself, either by putting it
in his own bank account or by using it to buy goods for himself. Over the period he stole some
$58 000. He was convicted and sentenced to imprisonment a part of which was suspended on
condition of repayment. The whole amount has, in fact, been repaid by him.
The respondent was assessed to tax on the amounts he stole, and to penalties in terms of s 35 of
the Income Tax Act Chap 181 (Z) . . .
The argument for the appellant is simple. He contends that gross income as defined by s 8(1) of
the Act means every amount received by or accrued to or in favour of a person in any year of
assessment, and that what the respondent stole he received in terms of that definition.
The respondent’s argument is equally simple. It is that the money the respondent took never
became his, despite his intention to treat it as his own, and was therefore never received by him
within the meaning of that word as used in the definition of gross income in s 8.
 Receipts and accruals 107

...
The essential issue in this appeal is whether the respondent received the money he stole within
the meaning of that word in s 8(1) of the Act.
The section reads:
‘Gross income’ means the total amount received by or accrued to or in favour of a person . . .
...
I can see no warrant on the face of the statute for construing the word ‘received’ in s 8 in any but
its ordinary meaning. To extend it to cover a unilateral taking such as theft, which in any event
confers no right upon the taker to the things taken, would be to give the word a meaning that
could not be justified on any rational construction of the Act as a whole. In short a thief takes, he
does not receive, and that is what the respondent in this case did.
The Commissioner’s contentions may superficially appear to have substance in them when what
is stolen is money, but they must be tested on the basis of whether they are sound if what is sto-
len is a corporeal thing. In short, is a burglar taxable on what he steals?
I appreciate that the relevant English tax legislation is based upon taxation of the profits of
trade, but the remarks, albeit obiter, of Lord Denning in Griffiths (Inspector of Taxes) v J P Harrison
6
(Watford) Ltd are of interest in showing the need for a common sense approach. He said:
‘[T]ake a gang of burglars. Are they engaged in trade or an adventure in the nature of trade? They have
an organisation. They spend money on equipment. They acquire goods by their efforts. They sell the
goods. They make a profit. What detail is lacking in their adventure? You may say it lacks legality, but it has
been held that legality is not an essential characteristic of a trade. You cannot point to any detail that it
lacks. But still it is not a trade, nor an adventure in the nature of trade. And how does it help to ask the
question: If it is not a trade, what is it? It is burglary and that is all there is to say about it.’
In my view the taxpayer in the appeal before us did not receive the money, he stole it.
This I think is a sufficient basis upon which to decide the appeal, but I would not be doing jus-
tice to the argument if I were to leave the matter there.
It was common cause that the word ‘received’ was not to be given its ordinary wide meaning and
that it had to be limited at least to meaning ‘received as part of the recipient’s patrimony’. This
concession, if it can be rightly so called, by the Commissioner is obviously correct. A person who
borrows a lawnmower from his neighbour receives it from him in the broadest sense of the term,
but would clearly not receive it within the meaning of the word in the definition. The same is the
case in regard to a person who obtains from another a sum of money as a loan, . . . This conclu-
7
sion is reinforced by a case such as Geldenhuys v CIR in which it was held that a usufructuary did
not receive the money as part of his ‘gross income’ for the purpose of the equivalent South Afri-
8
can tax legislation. Steyn J held that ‘received by’ must mean ‘received by the taxpayer on his
own behalf and for his own benefit’.
Whether or not the respondent in this appeal received the money on his own behalf and for his
own benefit must depend not only on his own intention but on the intention of the person who
passed the money on to him. To return for the moment to the lawnmower, the person who ob-
tains a lawnmower from his neighbour genuinely intending to return it does not receive the
mower in his own right; nor does a person who fraudulently induces his neighbour to lend him
his mower intending to keep it for himself. The intention of the taker cannot of itself result in
him receiving the thing in his own right. He can only receive the thing in his own right if the
giver intends that result as well.
Applying this to the present appeal, the Government never intended that any of the money it paid
to the respondent should be his to do with it as he liked. It was all paid to him to be applied to a
specific Government purpose. Accordingly at no time did the respondent receive it on his own
behalf and for his own benefit. In my view, therefore, it did not fall within his gross income and he
should not have been taxed on it.

________________________

6 1963 AC 1 at 20.
7 1974 (3) SA 256 (C).
8 At 260.
108 Income Tax in South Africa: Cases and Materials

Notes
It is submitted that this decision misconceives the underlying issue. The question wheth-
er a thief is taxable on what he steals does not, it is submitted, turn on whether there was
a ‘receipt’, although it is true that the issue seems to have been so conceived in [127]
Genn. It is submitted that the real issue is whether stolen property possesses the quality
of ‘income’ in the thief’s hands; see [136] CIR v Delagoa Bay Cigarette Co.
The decision in CoT v G has now been overridden in significant respects, as far as
South Africa is concerned, by the Supreme Court of Appeal decision in [68] MP Finance
Group CC (in liquidation) v CSARS, below.
Where the operators of an illegal pyramid scheme accepted ‘investments’ from the public, then, from
the date that the scheme became insolvent and they knew it would be impossible to pay the investors
the promised returns, they ceased to have any intention to have a contractual relationship with those
investors and commenced merely swindling the public; from that juncture, the amounts paid to them
were ‘received’ for the purpose of the definition of ‘gross income’.

[68]
MP Finance Group CC (in liquidation) v CSARS
2007 (5) SA 521 (SCA)
In 1998 and for some years thereafter, one Marietjie Prinsloo (with her family and em-
ployees) used a number of legal entities to operate an illegal investment enterprise of the
kind commonly called a ‘pyramid scheme’. Like all such schemes, this scheme eventually
collapsed, and all the entities created to implement the scheme were insolvent. By order
of court, these entities were consolidated into a single close corporation (in liquidation).
SARS regarded that close corporation as the taxpayer liable for the tax due by the origi-
nal entities, and assessed it to income tax for the years 2000–2002.
The liquidators of the close corporation objected to the assessment on the grounds
that the amounts invested in the scheme had not been ‘received’, as contemplated in the
section 1 definition of ‘gross income’ in the Income Tax Act. Their principal argument
was based on dicta in an earlier decision of the Supreme Court of Appeal in regard to this
particular scheme, in which it was held that, since the scheme was illegal, any person who
invested moneys in it was, in law, immediately entitled to demand repayment of his
money and to recover it by way of a condictio.
The assessments were upheld by the Tax Court, and the liquidators then appealed
against that decision.
Held: For the tax years in question, from 1 March 1999 to 28 February 2002, the perpe-
trators of the scheme knew that it was insolvent and fraudulent, and that it would be
impossible to pay all the investors what they had been promised. From that date, the
entities operated by Prinsloo made their money by swindling the public. This was their
income, and it followed that the amounts they were paid in that period were ‘received’,
as contemplated in the definition of ‘gross income’. The operators of the scheme ac-
cepted such amounts with the intention of retaining them for their own benefit; such
amounts were therefore ‘received’ even if the scheme was not legally entitled to retain
those moneys.
Howie P: (NUGENT JA, LEWIS JA, VAN HEERDEN JA AND SNYDERS AJA CONCURRING)
[1] For some years beginning in 1998 one Marietjie Prinsloo operated an illegal investment
enterprise commonly called a pyramid scheme. As is the pattern with such schemes, it readily
parted greedy or gullible ‘investors’ from their money by promising irresistible (but unsustaina-
ble) returns on various forms of ostensible investment. It paid such returns for a while to some
before finally collapsing - owing many millions - when the predictable happened and the total
amount of supposedly due returns vastly exceeded the total amount of obtainable investment
money.
 Receipts and accruals 109

[2] The scheme was conducted by way of successively created entities, incorporated and unin-
corporated. They were all eventually insolvent. By order of 4 February 2003 made by the High
Court at Pretoria, these original entities were, for ease of administration and legal practicality,
consolidated into a single entity named MP Finance Group CC (in liquidation) (‘the CC’). . . .
[3] Presumably pursuant to that order, the respondent (the Commissioner) has regarded the
CC as the taxpayer liable for the taxes respectively due by the original entities. He accordingly
assessed the CC to tax in respect of the tax years 2000, 2001 and 2002.. . . The liquidators ob-
jected on behalf of the CC. By letter dated 15 December 2003 their attorneys … contended, in
the main, that investment amounts (referred to by them and in the record as ‘deposits’, among
other terms) were not ‘received’ within the meaning of ‘gross income’ as defined in the Income
Tax Act 58 of 1962 (the Act). (For convenience I shall refer to the moneys paid to, and accepted
by, the entities concerned as ‘deposits’.)
[4] The objection was disallowed and the CC appealed. The appeal was heard by the Tax Court
at Durban, Levinsohn J presiding. The appeal was dismissed, the Tax Court concluding that
notwithstanding that the scheme was illegal, as also the investors’ transactions in the course of
the scheme, the deposits were ‘receipts’ within the meaning of the Act. With the necessary leave,
the CC appeals to this Court.
[5] On behalf of the CC, its counsel advanced two arguments in their heads. The principal one
was that, as contended before the Tax Court, the deposits were not taxable because they were
not amounts ‘received’. The other submission was that any tax payable could not in law be owed
by the CC because it was merely a creature of convenience formed after the tax years in ques-
tion.
[6] The second argument has no merit and was not seriously pressed before us. Not only were
the liquidators parties to a consolidation agreement which led to the Court order of 4 February
2003 but, as already stated, they accepted that the assessments in issue were appropriately raised
on the CC. . .
[7] Reverting to the main contention for the CC, it relied essentially on a passage in a judgment
of this Court pertaining to the same scheme in which the question was whether repayments to
investors were recoverable by the liquidators in terms of section 30(1) of the Insolvency Act 24 of
1936.
On the premise that investors’ deposits were loans, the passage in question reads as follows:
‘All loans made to the scheme were - in the light of at least the provisions of s 11 of the Banks Act 94 of
1990 and a prohibition under the Consumer Affairs (Unfair Business Practices) Act 71 of 1988 - illegal and
therefore void; this proposition of law is uncontested. The scheme never had the least entitlement to re-
tain investors’ money until the date which had supposedly been agreed as the due date for repayment.
The perpetrators of the scheme knew the investments to be illegal. There is, on the other hand, no evi-
dence that any of the investors knew their investments to be tainted, nothing from which to infer that any
of them acted ex turpi causa. That being so, no question arises of relaxing the in pari delicto potior est conditio
defendentis rule . . . . Upon receipt of a payment the scheme was liable promptly to repay it to the investor
who had a claim for it under the condictio ob iniustam causam. Instead, it used the money to pay the claims
of other investors who had invested earlier. That was the whole idea of the scheme.’
[8] The argument for the CC was that because, on the authority of the quoted passage, the
scheme was liable in law immediately to refund the deposits, there was no basis on which it could
be said that the deposits were ‘received’ within the meaning of the Act. They were, it was argued,
consequently not subject to tax.
[9] In section 1 of the Act ‘gross income’ means the total amount ‘received by or accrued to or
in favour’ of a taxpayer during a tax year. This case is concerned with receipt, not accrual.
[10] To place the CC’s principal argument in proper perspective I would make brief reference
to the contents of the statement of agreed facts admitted into the record before the Tax Court.
The salient features may be summarised as follows. Prinsloo operated the scheme with the aid of
family and employees, as also so-called agents who solicited and transmitted investors’ deposits
in return for commission. She controlled the various entities in the names of which the scheme
was conducted and procured their printing of a range of convincing-looking documentation issued
to investors when they made deposits. This included acknowledgments of receipt, membership
certificates and share agreements, all of which purported to pertain to their investments. Most of
the money received by the scheme was kept in cash and not banked. This cash float provided the
110 Income Tax in South Africa: Cases and Materials

source of payments to investors. However, substantial amounts of it were appropriated by Prins-

loo and her accomplices. Some investors received repayment of their investments plus returns.
The majority received less or nothing. What is of essential importance in the present matter is
that throughout the tax years in question, ie 1 March 1999 to 28 February 2002, the perpetrators
of the scheme knew that it was insolvent, that it was fraudulent and that it would be impossible to
pay all investors what they had been promised.
[11] On those facts the inference must be that whatever intention there was at any time on the
part of investors to enter into a contractual relationship with the entities concerned and whatev-
er corresponding intention to contract there might possibly have been on the relevant entities’
part prior to 1 March 1999, there can no longer have been any such corresponding intention
after that date. In short, from that date onwards the entities run by Prinsloo made their money
by swindling the public. That was their income. It must follow that the amounts they were paid in
that period were ‘received’ within the meaning of the Act. It was for the CC to prove the contra-
ry and that onus was not discharged.
[12] This Court’s judgment in the matter of Fourie NO v Edeling NO9 cannot assist the CC. That
dealt with the relationship between investor and scheme. This case is about the relationship
between scheme and fiscus. Even if, as correctly stated in that matter, with respect, the scheme
was legally obliged to repay an investor immediately on receipt; that was because of the legal
principles applicable to the parties to an illegal contract, as between themselves. An illegal con-
tract is not without all legal consequences; it can, indeed, have fiscal consequences.
The sole question as between scheme and fiscus is whether the amounts paid to the
scheme in the tax years in issue came within the literal meaning of the Act.
Unquestionably they did. They were accepted by the operators of the scheme with the intention
of retaining them for their own benefit. Notwithstanding that in law they were immediately re-
payable, they constituted receipts within the meaning of the Act. In other words it does not mat-
ter for present purposes that the scheme was not entitled, as against the investors, to retain their
money. What matters is that what they took in was income received and duly taxable. The as-
sessments were correctly raised.
…
[14] The appeal is dismissed, with costs, including the costs of two counsel.

Notes
This decision, it is submitted, is inconsistent with that in [67] CoT v G and the latter can
no longer be considered good law in South Africa.
This is to be welcomed. The premise underpinning COT v G, namely that a person
who appropriates money for himself, intending to keep it, does not ‘receive’ it as envis-
aged in the definition of gross income, is untenable.
Regrettably, however, the present decision has its weaknesses. There are, it is submit-
ted, two issues at stake. Firstly, did the amounts in question have the character of ‘in-
come’? Secondly, if the amounts were indeed income, had they been ‘received’, as
contemplated in the definition of ‘gross income’?
The Supreme Court of Appeal dealt with the first issue via a bald assertion. (“. . . from
that date onwards the entities run by Prinsloo made their money by swindling the public.
That was their income . . What matters is that what they took in was income received and
duly taxable”).
The court offers no reasoned refutation of the trenchant stand taken by Lord Denning
LJ in Griffiths (Inspector of Taxes) v J P Harrison (Watford) Ltd 10 where he said that a ‘gang of
burglars’ was not engaged in a ‘trade’ and thus, by implication, that their gains would
not be ‘income’.
________________________

9 Fourie NO v Edeling NO [2005] 4 All SA 393 (SCA).

10 1963 AC 1 at 20.
 Receipts and accruals 111

Would the Supreme Court of Appeal, for example, regard the fee paid to a profes-
sional assassin as subject to income tax in his hands? The proposition is revolting and
unthinkable. Or is there a difference between the taxability of a confidence trickster who
merely deceives people into handing over their money – as in COT v G and MP Finance
Group – and a thief who actually steals their money?
This Supreme Court of Appeal decision is lamentably silent on the underlying issue of
the taxability of the proceeds of unlawful activities in general, and of criminal activities in
particular. This case offered an unparalleled opportunity for the court – particularly in
this era of widespread crime and corruption – to make its voice heard on this important
matter.
An argument can be made that the fiscus should not sully itself by staking a claim in
the form of income tax to the proceeds of criminal activities, but should leave the crimi-
nal justice system to exact a forfeiture of the proceeds of crime.
As was noted, above, I suggest that public opinion would not countenance the State’s
taxing, for example, the fee paid to a professional assassin, and that no court that was
mindful of the values underpinning the Constitution could hold otherwise.
But the decision in MP Finance Group had a result that many would also find distasteful,
namely that the fiscus, by virtue of its statutory preference in respect of income tax, took
first bite at the residue of funds held by the insolvent pyramid scheme entity, thereby
diminishing the proceeds that were available to pay the claims of the cheated investors.
The second weakness in the decision of the Supreme Court of Appeal is that it con-
flates two discrete issues – was the amount ‘income’ and, if so, was it ‘received’ – in such
dicta as What matters is that what they took in was income received and duly taxable.

§5 The meaning of ‘accrued to’ the taxpayer

An amount ‘accrues to’ a taxpayer when he becomes entitled to it. Where, in year 1, money becomes
owing to a taxpayer which is payable in a future year, a right to payment accrues to the taxpayer in
year 1. That right to future payment is a right which the taxpayer can turn into money, if he chooses
to do so. (But note that in CSARS v Brummeria Renaissance (Pty) Ltd11 the Supreme Court of
Appeal ruled that convertibility to money is not the critical criterion for determining whether a non-
monetary amount must be included in gross income.) Its value must therefore be included in the
taxpayer’s gross income in the year in which he becomes entitled to that right. In valuing the right to
payment of a debt, something must be deducted from the face value of the debt to allow for the fact
that it is not payable immediately, but is payable in a future year of assessment.

[69]
Lategan v CIR
1926 CPD 203, 2 SATC 16
In May 1920 the taxpayer, a wine farmer, sold the wine he had produced for £5 924. Of
this sum, £3 500 was payable prior to 30 June of that year. The balance was payable in
instalments thereafter. The taxpayer was a member of a winefarmers’ co-operative,
formed to control and regulate the sale of wine by its members. Under the articles of the
co-operative, certain ‘retention’ and ‘contribution’ moneys were deducted from the sums
payable to the taxpayer. The ‘retention’ moneys were applied by the co-operative to its
working expenses and the ‘contribution’ was applied in part to its administrative costs
and in part to a reserve, in respect of which the taxpayer became entitled to receive
shares.

________________________

11 [2007] SCA 99 (RSA).

112 Income Tax in South Africa: Cases and Materials

The Commissioner included the entire amount of £5 924 in the taxpayer’s gross in-
come and refused to allowed a deduction for the retention and contribution moneys.
Issue: in addition to what the taxpayer had ‘received’ during the tax year, what amount
had ‘accrued’ to him?
Held: accrued means ‘become entitled to’; what had accrued to him was the right to
payment in the future. The value of this right had therefore to be included in his gross
income.
Watermeyer J: In my opinion, the word ‘amount’ must be given a wider meaning [than an
amount of money] and must include not only money but the value of every form of property
earned by the taxpayer, whether corporeal or incorporeal, which has a money value. If this view
be correct then the taxpayer’s income for taxation purposes includes not only the cash which he
has received or which has accrued to him, but the value of every other form of property which
he has received or which has accrued to him, including debts and rights of action.
It was argued on behalf of the appellant that a debt payable in the future was not an amount of
money ‘accrued to’ the taxpayer, and consequently it was not part of his ‘gross income’, and a
number of cases were cited on the meaning of the word ‘accrue’.
In my opinion the words in the Act, ‘has accrued to or in favour of any person’ merely mean ‘to
which he has become entitled’.
So far as a debt is concerned which is payable in the future and not in the year of assessment, it
might be difficult to hold that the cash amount of the debt has accrued to the taxpayer in the year
of assessment. He has not become entitled to a right to claim payment of the debt in the year of
assessment, but he has acquired a right to claim payment of the debt in future. This right has
vested in him, has accrued to him in the year of assessment, and it is a valuable right which he
could turn into money if he wished to do so.
According to what has been stated above, the value of this right, must in my opinion, be includ-
ed in the taxpayer’s gross income for taxation purposes.
...
In my opinion therefore . . . the instalments must be regarded as gross income but something
must be deducted from their face value to allow for the fact that they were not payable at the
close of the year of assessment. Assuming that the right to receive the instalments was not con-
verted into money by sale or otherwise during the year of assessment, the value to be fixed (apart
from any question whether the debt was good or bad) would be the present worth of the instal-
ments at the end of the tax year, ie 30 June 1920.
BENJAMIN and LOUWRENS JJ concurred.

Notes
For discussion of this decision, see the notes following [71] People’s Stores.

[70]
Margo Report
9.7 It was held in Lategan v CIR 12 that income accrues when the taxpayer is entitled to it, while
in CIR v Hersov13 and CIR v Delfos14 some support was expressed for the view that income
accrues only when it is due and payable . . . The test of entitlement is clearly appropriate
as it determines when an asset exists in the business. In applying the entitlement test, arti-
ficial devices which are adopted in an endeavour to defer entitlement must be disregard-
ed. Where a taxpayer has become entitled to a right in terms of which amount is payable
in a future year of assessment, due allowance should be made in the valuation thereof for
the futurity of that right beyond twelve months.

________________________

12 1926 CPD 203.

13 1952 (1) SA 485 (A).
14 1933 AD 242.
 Receipts and accruals 113

[71]
CIR v People’s Stores (Walvis Bay) (Pty) Ltd
1990 (2) SA 353 (A)
The taxpayer, a subsidiary in the Edgars group of companies, was a retailer of clothing,
footwear and other goods. In the course of trade, the taxpayer sold goods on what
was referred to as a ‘six-month revolving credit scheme’. Under this scheme, a customer
who purchased goods on credit had to pay the amounts charged to his account in six
equal monthly instalments. On the last day of the year of assessment in issue, instalments
under this scheme which were not payable until the following year, amounted to
R341 281. The Commissioner included this sum in the taxpayer’s gross income. The
taxpayer objected to the assessment and contended that instalments which were neither
payable nor paid during the current year of assessment ought not to be included in gross
income for that year; in the alternative, the taxpayer averred that the face value of such
instalments ought not to be included in his gross income but only the present worth of
the debt.
Issue: does an amount ‘accrue’ to the taxpayer when it is ‘due’ ie when he becomes
entitled to it, or only when it is both ‘due’ and ‘payable’?
Held: an amount accrues in the tax year that the taxpayer becomes entitled to it.
Hefer JA: The question to be decided relates to the definition of ‘gross income’ in s 1 of the Act
which provides that –
‘gross income’, in relation to any year or period of assessment, means, in the case of any person, the total
amount, in cash or otherwise, received by or accrued to or in favour of such person during such year or
period of assessment from a source within or deemed to be within the Republic, excluding receipts or ac-
cruals of a capital nature . . .’
(I have emphasised the pertinent part of the definition.) . . .
Three questions were submitted to the special court for decision. The third one is no longer
relevant; the first two read as follows:
19.1. Ought the value of the instalments not yet payable nor paid to have been included in the
taxpayer’s gross income?
19.2. If so, at what value ought those instalments to have been included in the gross income?
Ought it to have been done at the face value or at the value to the taxpayer or at the mar-
ket value or at some other value?’
The special court answered the first question in the affirmative and ruled that the outstanding
debts had to be valued at their market value. The matter was accordingly remitted to the Com-
missioner ‘for further investigation and assessment in accordance with the principles set out
above.’ . . .
The special court considered itself bound by the judgment of the full bench of the Cape Provin-
cial Division in Lategan v CIR.15 Under consideration in that case was the definition of ‘gross in-
come’ . . . in the context of the sale during the year of assessment of wine by a wine farmer in
terms of an agreement providing for payment of part of the purchase price in the succeeding
year. ‘Gross income’ was defined in s 6 as ‘the total amount received by or accrued to or in
favour of any person other than receipts or accruals of a capital nature . . .’ and the question was
whether the part of the purchase price that was payable during the succeeding year could rightly
be regarded as having accrued to the taxpayer during the year of assessment. The court held
that it could . . .
I have quoted extensively from the judgment because, as will presently be seen, there is a con-
troversy about the correctness of the ruling that the words ‘accrued to or in favour of’ merely
envisage that the person concerned has become entitled to the amount of question, and since
the reasoning underlying the ruling must obviously be considered as a whole . . .

________________________

15 1926 CPD 203.

114 Income Tax in South Africa: Cases and Materials

The precise ambit of the expression ‘accrued to or in favour of’ has never been defined by the
court; on the contrary, the conflicting pronouncements in CIR v Delfos16 seem to be the origin of
the present controversy about the meaning of the words in question . . .
It is our task now to consider the position afresh. For convenience I shall do so by stating and
considering the validity of the two main propositions in the judgment in Lategan’s case.
The first and basic proposition is that income, although expressed as an amount in the defin-
ition, need not be an actual amount of money but may be ‘every form of property earned by the
taxpayer, whether corporeal or incorporeal, which has a money value . . . including debts and
rights of action’ (per Watermeyer J at 209). This proposition is obviously correct . . . It is hardly
conceivable that the legislature could not have been aware of, or would have turned a blind eye
to, the handsome profits often reaped from commercial transactions in which money is not the
medium of exchange . . . Nor can the reference in the definition of ‘gross income’ in the 1962
Act to receipts and accruals ‘in cash or otherwise’, or other provisions of the Act (such as paras (h)
and (i) of the definition, s 26(1) read with the First Schedule and s 11(i) and (j) be ignored.
There are clear indications in all these provisions of the extended meaning of ‘amount’.
This court has, in any event, adopted and acted upon the principle that income in a form other
than money may be taxable . . .
It must be emphasised that income in a form other than money must, in order to qualify for
inclusion in the ‘gross income’, be of such a nature that a value can be attached to it in money.
As Wessels CJ said in the Delfos case:17
‘The tax is to be assessed in money on all receipts or accruals having a money value. If it is something
which is not money’s worth or cannot be turned into money, it is not to be regarded as income . . .’
18
(See also Mooi v SIR.) On the other hand, the fact that the valuation may sometimes be a matter
of considerable complexity (cf the Lace Proprietary Mines case)19 does not detract from the princi-
ple that all income having a money value must be included. How the valuation is to be done
depends, of course, entirely on the nature of the income and the circumstances of the case.
The second proposition – that no more is required for an accrual in terms of the definition of
‘gross income’ than that the person concerned has become entitled to the ‘amount’ in question
– is a practical application of the first one. The pith of the supporting reasoning is that any right
(of a non-capital nature) acquired by the taxpayer during the year of assessment and to which a
money value can be attached, forms part of the ‘gross income’ irrespective of whether it is im-
mediately enforceable or not, but that its value is affected if it is not immediately enforceable.
According to Watermeyer J:20
. . . he has acquired a right to claim payment of the debt in future. This right has vested in him, has
accrued to him in the year of assessment, and it is a valuable right which he could turn into money if he
wishes to do so.
There is no logical answer to this reasoning . . .
Counsel for the taxpayer did not refer us to, nor could I find, any other provision of the Act that
supports his contention that a debt can only be said to have accrued if it is payable during the
year of assessment. He submitted, however, that the result of the application of the Lategan prin-
ciple could be that a taxpayer is taxed twice in successive years on the same income – in the first
year on the accrual of the debt and in the second on the amount received when the debt is paid.
I do not agree. The possibility of double taxation in the sense just mentioned arises, not from
the application of the Lategan principle, but from the essential principle on which South African
income tax is based, viz that receipts and accruals both form part of the ‘gross income’. (Cf SIR v
Silverglen Investments (Pty) Ltd.)21 That this is so is demonstrated by the fact that there is a possibil-
ity of the same income being taxed twice even in cases where a debt, payable during one year,
is paid during the next or a later one. The real answer to the submission is, however, that the
possibility of double taxation is more imaginary than real since there is, what has been referred
to as, a ‘necessary implication’ ‘that an amount which has been taxed as an accrual or receipt,
________________________

16 1933 AD 242.
17 At 251.
18 1972 (1) SA 675 (A) at 682A-F.
19 1938 AD 267 at 279-281.
20 Lategan v CIR, supra, at SATC 20.
21 1969 (1) SA 365 (A) at 377A-C).
 Receipts and accruals 115

cannot again be taxed when it is received or accrued’. (Meyerowitz & Spiro, Income Tax in South
Africa.22 See also Silke on South African Income Tax23 . . .
In my view the decision in the Lategan case reflects the law correctly. It being common cause that
the debts which accrued to the taxpayer in the present case could be turned into money. I am
also of the view that the special court’s ruling on the first question was correct. This conclusion
disposes of the cross-appeal.
Very little need be said about the Commissioner’s appeal. His contention is that the debts have
to be reflected as part of the ‘gross income’, not at their present value as the special court found,
but at their full or face value. This is plainly not so . . . All that need be added, is that Watermey-
er J’s ruling on the value of accrued rights is inseparably linked to the rest of the principle. It is
the right to receive payment in the future that accrued to the taxpayer, it is that right that has to
be valued and, as stated before, its value is obviously affected by its lack of immediate enforcea-
bility . . .
CORBETT CJ, JOUBERT JA, NESTADT JA and NICHOLAS AJA concurred.

Notes
The decision in Lategan takes as its starting point the principle that the word ‘amount’ in
the definition of ‘gross income’ is not restricted to money, but includes every form of
property which has a money value. The ‘value’ of all such receipts and accruals of a non-
capital nature must therefore be included in the taxpayer’s ‘gross income’ in the year in
which the accrual takes places. Where the property is money, its value is its nominal
value. Where the property is something other than money, its money value must be
included in gross income.
Until the decision in CSARS v Brummeria Renaissance (Pty) Ltd24 it was widely believed that
if a non-monetary receipt or accrual could not be converted into money, by sale or
otherwise, then it had no money value, and did not give rise to any inclusion in gross
income. However, the Supreme Court of Appeal held in Brummeria Renaissance that the
primary question is whether a receipt or accrual has a money value, and the question
whether it can be turned into money is merely one of the way in which it can be deter-
mined whether this is the case.25
Where the ‘amount’ in question consists of a right to be paid a specified amount of
money in a future year of assessment, the realisable value of that right to future payment
will of course not be its nominal value, that is to say, its face value, but a reduced value,
which takes account of the element of futurity of payment – this was the principle laid
down in Lategan.
That principle was affirmed in CIR v People’s Stores (Walvis Bay) (Pty) Ltd but has since
been overridden by the enactment of a proviso to the definition of gross income which
requires that the full value, that is to say, the face value (and not the ‘present value’,
discounted to take account of the element of futurity) of an amount that has accrued in
year 1 but is payable in a subsequent year must be included in gross income.
The decision in Lategan is explicit that, where a debt payable in the future is discount-
ed in order to arrive at its ‘present value’, this is entirely separate from the question
whether the debt ‘is good or bad’ – in other words, the question whether the debtor will
be able to pay it when it falls due. The purpose of the discounting is purely to take ac-
count of the futurity in the payment of the debt. If the debt was a bad or doubtful debt,
the taxpayer could claim an allowance under the specific statutory provisions relating to
bad and doubtful debts; see s 11(i) and s 11(j ) respectively.
________________________

22 At para 134.
23 11 ed 2-3, 2-4, 25-26 para 25.3.
24 [2007] SCA 99 (RSA).
25 Ibid at [15].
116 Income Tax in South Africa: Cases and Materials

In Peoples’ Stores the Appellate Division upheld the correctness of both the first leg
(‘accrued’ means ‘has become entitled to’) and the second leg (the ‘present value’ of a
right to future payment is arrived at by deducting an amount from its face value to allow
for the fact that it is not immediately payable) of the ‘Lategan doctrine’. However, the
second leg was unacceptable to Inland Revenue who (as was noted above) swiftly pro-
cured an amendment to the definition of ‘gross income’ which added a proviso to the
definition to ensure that there would be no such discounting, and that the full face value
of the debt would be included in gross income in the year of accrual.

[72]
The proviso to the definition of ‘gross income’
The proviso, quoted below, to the definition of ‘gross income’ was enacted in 1990 in
order to nullify the principle laid down by the Appellate Division in People’s Stores that,
where an amount accrues to the taxpayer during the year of assessment but is payable to
him in a future year, the amount to be included in his gross income in the year of
accrual is the ‘present value’ of the amount. The amendment provides in essence –
though it is poorly expressed – that, in these circumstances, the amount which must be
included in the taxpayer’s gross income in the year of accrual is not the ‘present value’
but the ‘full value’ ie the nominal value of the amount in question. The amendment
is deemed to have come into effect on 1 July 1962 and applies to all amounts which
accrued on or after that date.
‘Provided that where during any year of assessment the taxpayer has become entitled to any
amount which is payable on a date or dates falling after the last day of the year, there shall be
deemed to have accrued to him during such year –
(a) if the taxpayer has on or before 23 May 1990 submitted a return of income drawn on the
basis that the present value of such amount has accrued to him during such year, such
amount; or
(b) in any other case, such amount . . .’

[73]
Criticism of the proviso to the definition of ‘gross income’
Editorial: (1990) The Taxpayer 81
[This editorial discusses the proviso, discussed in [72] above, which amended the defini-
tion of ‘gross income’.]
As to the merits of the proposed amendment there is nothing good to be said. It goes without
saying that legislation which seeks to tax income should endeavour to approximate the amount
subject to tax to what in an economic sense is truly income both in nature and in value. This the
definition of ‘gross income’ in our Act broadly succeeds in doing. Thus it was that both in Late-
gan’s case and in the People’s Stores case the court held that when a taxpayer becomes entitled to
anything, in cash or otherwise, of a revenue nature, that property accrued to the taxpayer in the
year of entitlement, but if it did not consist of cash, it had to be valued. As was said by Hefer JA
in the People’s Stores case, when a right to payment in the future accrues to the taxpayer, it has to
be valued and its value is obviously affected by its lack of immediate enforceability; the accrual of
the right and its value are inseparably linked. The proposed amendment would sever this link.
This severance is hopeless in concept, since it departs completely from commercial and econom-
ic reality. It equates in value for tax purposes a cash payment and a debt payable at some future
date. With respect to those who instigated the amendment, it is hard to conceive of anything
more inequitable. It throws the whole credit system into disarray for tax purposes.
 Receipts and accruals 117

Where a contract involves synallagmatic obligations,26 no rights under the contract accrue to one
party unless and until he has performed (or is ready to perform) his own contractual obligations
toward the other party.

[74]
Cactus Investments (Pty) Ltd v CIR
1999 (1) SA 315 (SCA)
Hefer JA: ‘gross income’ is defined in s 1 as –
‘the total amount, in cash or otherwise, received by or accrued to or in favour of such person during (any)
year or period of assessment . . . ’.
This includes, as explained in CIR v People’s Stores (Walvis Bay) (Pty) Ltd,27 not only income actually
received, but also rights of a non-capital nature which accrued during the relevant year and are
capable of being valued in money . . .
The judgment in the People’s Stores case tells us that no more is required for an accrual than that
the person concerned has become entitled to the right in question. Accordingly, apart from
cases falling under s 7 [or s 24J in the case of interest] the entitlement to any particular right is
regulated by the common law . . .
Rent can obviously be regarded as compensation to the lessor for the use of his property and the
lessor can (depending on the terms of the agreement) rightly be said to have continuing obliga-
tions apart from making the subject of the lease available to the lessee . . .
The question is really one of reciprocity. It is trite that the reciprocity of obligations under
synallagmatic28 agreements entails that neither party is entitled to demand performance from
the other until he has performed himself.

Notes
In terms of the judgment in Lategan v CIR,29 which was affirmed by the Appellate Division
in CIR v People’s Stores (Walvis Bay) (Pty) Ltd,30 an amount ‘accrues’ to a person when he
becomes entitled to it, in other words when he obtains an unconditional right to it, even
if the amount has not yet been actually paid to him.
Where the question arises as to whether, in terms of a contract, a party has become
‘entitled’ to an amount – that is to say, whether he has acquired a ‘right’ to it, it is neces-
sary to determine whether the contract is synallagmatic.31 For if it is a synallagmatic
contract, then a party has a ‘right’ to the amount promised by the other party, only if he
(the first-mentioned party) has performed – or is ready to perform – his own obligations
under the contract.32 If not, then he has not acquired a right to demand that the other
party perform.
In certain contracts, a party is obliged to render a continuous performance, as for ex-
ample in a lease, where the lessor has a continuous obligation to make the leased proper-
ty available to the lessee for the period of the lease. Hence, in this situation, the lessor
has a ‘right’ to the rent only if he continues to comply with those continuous obligations.
This is why (unless the lease stipulates otherwise) the rent for the whole period of the
lease does not accrue to the lessor as soon as the lease is entered into. He becomes
entitled to periodic payments of the rent as and when he performs his continuing obli-
gations under the lease.
________________________

26 In other words, contracts where the parties are required to make reciprocal performance and neither
party is obliged to perform unless the other party simultaneously makes performance.
27 1990 (2) SA 353 (A).
28 See the explanation of this term, above.
29 1926 CPD 203, 2 SATC 16.
30 1990 (2) SA 353 (A).
31 See the explanation of this term, above.
32 See also Nesci v Meyer 1979 (2) SA 56 (A) at 513F.
118 Income Tax in South Africa: Cases and Materials

If a contract is not synallagmatic, in other words if the parties are not subject to recip-
rocal obligations, then a right under the contract may accrue to one party even if he has
not himself performed his contractual obligations.

§6 The time of accrual may be determined by the terms of a

contract
Where an amount is payable to the taxpayer in terms of a contract, the juncture at which it accrues
to the taxpayer (that is to say, the vesting in him of a right to payment) is determined by the terms of
the contract.

[75]
ITC 1847
(2010) 73 SATC 210 (Gauteng Tax Court)
The taxpayer company, a wholly-owned subsidiary of D Ltd, a public company listed on
the Johannesburg Securities Exchange, carried out mining operations in Zeerust, yield-
ing exportable fluorspar.
Fluorspar contains high concentrations of calcium fluoride which has a number of
industrial applications. Fluorspar is a fungible, that is to say, a class of goods that is sold
by number, weight or measure. In this instance, the fluorspar was sold by number (the
number of dry metric tons), weight (that is to say, the weight of the dry metric tons) and
measure (the degree of purity of the calcium fluoride).
The fluorspar had been shipped by the taxpayer in terms of FOB (‘free on board’)
contracts from Durban to the country of destination.
In terms of the contract, the taxpayer would be paid for the dry metric tonnage of the
fluorspar as determined after delivery to the purchaser in the country of destination, and
in terms of the contract, the delivered fluorspar was subject to inspection and analysis by
assayists33 nominated by the purchaser in the country of destination.
At least two of the determinants of the selling price of the fluorspar (namely, weight
and measure) were subject to verification and approval in the country of destination. If
the fluorspar did not comply with the purchaser’s specifications, the purchaser could
reject the entire shipment, but in practice a reduced price would be negotiated. Minor
discrepancies in meeting the standards required by the purchaser could result in large
adjustments to the purchase price.
Although advance payments were sometimes made by the purchaser, the seller had no
entitlement to these amounts until the final price had been determined after inspection
of the goods in the country of destination.
SARS contended that the price of the exported fluorspar accrued to the taxpayer on
delivery of the goods to the ship in Durban and the procurement of a bill of lading34 to
the purchaser’s order. The taxpayer contended that accrual occurred only after inspec-
tion and analysis of the fluorspar by assayists in the country of destination.
Issue: when did the right to claim payment for the exported fluorspar vest in the tax-
payer as the seller with result that the amount ‘accrued’ to the taxpayer?
Held: it did not necessarily follow from the fact that a contract was FOB (‘free on
board’) that, once the cargo was ‘on board’, the seller acquired the right to claim pay-
ment from the purchaser.

________________________

33 An assayist is a person who tests a metal or ore to determine its ingredients and quality.
34 A bill of lading is a written receipt furnished by a carrier in respect of goods that he has accepted for
transportation.
 Receipts and accruals 119

Held further: The juncture at which the purchaser acquired the right to payment de-
pended on the intention of the parties as reflected in their contract.
he right to claim payment vested in the taxpayer only when the price of the exported
fluorspar had become certain or had been ascertained; consequently, pending the
outcome of the assayist’s inspection in the country of destination, there had been no
accrual of the price, and the price accrued to the taxpayer only in the tax year in which
payment was made.
Willis J:
[1] This is a tax appeal against assessments of the appellant for the 2000, 2001 and 2002 years of
assessment, ending on 30 June in each respective year. The issues in this appeal are the follow-
ing:
(i) Whether, in respect of five specific transactions for the sale of fluorspar which the appellant
had despatched to customers overseas, the amounts thereof had accrued to the taxpayer in
the tax year of despatch or the tax year of payment; . .
[5] Fluorspar is a fungible product. Fungibles are goods that are sold by number, weight or
measure.35 The fluorspar in question was sold by number (the number of dry metric tons),
weight (the dry metric tons were weighed) and measure (the measurement of the degree of
purity of the calcium fluoride).36 At least two of these determinants of price (weight and meas-
ure) were subject to verification and approval in the countries of destination. In Page NO v
37
Blieden & Kaplan, the following was said:
‘Now according to our law if a person sells a mass and leaves the exact amount of the price to be deter-
mined later either by weighing or by measuring or counting, then that price is not ascertained until the
weighing or measuring or counting is done. . . . ’
Similarly, in the present case, the sale of the fluorspar was, in each instance, a venditio imperfecta:38
39
there was no certum pretium until either (a) the assayist in the country of destination had con-
firmed that the delivery met the purchaser’s specifications or, (b) if not, the parties had negoti-
ated and agreed upon a different but mutually acceptable price in the light of the assayist’s
findings. The sales in question were, in effect, subject to suspensive conditions.
[6] Ordinarily, where goods have been shipped in terms of FOB contracts, ownership of the
goods passes upon the handover of a bill of lading to the purchaser in respect thereof, but even
if the contract of shipment is FOB, where the purchaser could refuse to accept the goods upon
inspection, this general rule does not apply: there must have been a mutual intention that own-
ership should pass upon loading on the ship.40
[7] As Johannes Voet said:41 [translated from the Latin]
‘Furthermore, the making of an acceptance must ensue on the part of him to whom the property is to
pass, so that in this way the inclinations of the contracting parties on both sides may come together and
42
the minds of both may agree to the transfer of ownership.’
Thus, as between the appellant and the purchasers of fluorspar, this mutual intention between
the seller and the purchaser as to the event which triggers the passing of rights and obligations
when goods are to be in transit is of critical importance.43 Even where one is not dealing with
finished goods that are be transported from the seller to the purchaser, this principle relating to
________________________

35 See Grotius 3.10.3; Voet 12.1.1; Van der Linden 12.1.1.

36 ‘Measurement’ is not confined to a determination of size. See The Oxford English Dictionary.
37 1916 TPD 606 at 612.
38 An incomplete sale – Editor.
39 Certain (ascertained) price – Editor.
40 See Weeks v Amalgamated Agencies Ltd 1920 AD 218 at 230-231 and Anderson & Coltman Limited v Universal
Trading Co 1948 (1) SA 1277 (W) at 1280-1.
41 Voet 41.1.35. Quoted in the Weeks case (supra) at 230.
42 Translated by Sir Percival Gane.
43 See also, the article Passing of Ownership- Delivery to Carrier – Credit Sales published in 1930 in the SALJ, Vol
47, 50 at p 52 by ‘TBH’. In that article reference is made to the judgment of Solomon J (as he then was) in
Stephen Fraser & Co v Clydesdale Transvaal Collieries Ltd 1903 TH 121 at 124-5 where the court refers to the
fact that there may be exceptions to the general rule in such contracts of carriage. The learned judge was
dealing with an ‘FOR’ (Free on Rail) contract but the same principle would apply to an FOB contract.
120 Income Tax in South Africa: Cases and Materials

the critical importance of the event that brings about the coming into being of reciprocal rights
and obligations was, in general terms, affirmed in Cactus Investments (Pty) Ltd v CIR.44
[8] . . . It does not necessarily follow from the fact that a contract is FOB that, once the cargo is
‘on board’, the seller has acquired the right to claim payment for the purchaser. When the pur-
chaser acquires this right depends on the intention of the parties. That intention need not be
express but may also be inferred.
[9] In the case of Lategan v CIR45 Watermeyer J (as he then was) said of an accrual of income for
tax purposes:
‘In my opinion, the words in the Act, ‘has accrued to or in favour of any person’ merely mean ‘to which he
has become entitled. . . . ’
. . . The critical question is therefore: ‘When did the right to claim payment vest in the taxpay-
er?’ It did so once the pretium became certum (the price became certain or had been ascer-
tained). Before that, there was no accrual. In other words, pending the outcome of the assayist’s
inspection in the country of destination, there was no accrual. The appellant’s objection on the
accrual point was well founded. The respondent has been wrong.
[25] The following is the order of the court:
(a) Save in respect of the respondent’s alternative claim in terms of s 23F(2) of the Income Tax
Act, the appeal is allowed;
(b) The appellant’s 2000, 2001 and 2002 assessments are referred back to the respondent to be
reassessed on the basis that:
(i) there was no accrual of income in respect of the five challenged transactions in the
years of assessment in which the respective deliveries of fluorspar had been des-
patched from Durban shortly before the appellant’s year-end; . . .

§7 Discounts

Where a trader offers his customers a discount for early settlement, the question of what amount must
be included in the trader’s gross income at the end of the tax year to take account of discounts so
given depends on what amount has ‘accrued’ to the trader at the end of the tax year – was it the full
invoiced price or was it that price less the discount?

[76]
Gud Holdings (Pty) Ltd v CSARS
(2007) 69 SATC 115 (N)
The appellant carried on business as a manufacturer and distributor of automotive parts,
selling almost exclusively to wholesalers. The appellant operated a discount scheme
whereby such wholesale purchasers would be entitled to a settlement discount if they
made payment in respect of each sale by the 25th day of the month following that in
which the relevant invoice was issued by the appellant.
The appellant’s standard terms of sale provided in this regard that –
1.1 Unless otherwise stated, all prices are net, and Value-Added Tax is additional. Pay-
ment must be made by PURCHASER to SELLER without deduction, set off or de-
mand at SELLER’s address.
1.2 Unless SELLER has agreed or stipulated otherwise, payment must be made not later
than the 25th day (or earlier full business day) of the month following the month
during which delivery takes place.

________________________

44 1999 (1) SA 315 (SCA) at 321A-H, 61 SATC 43 at 46-7.

45 1926 CPD 203 at 209-10, 2 SATC 16 at 20.
 Receipts and accruals 121

1.3 Should payment be made by PURCHASER to SELLER not later than the 25th day
(or earlier full business day) of the month following the month during which deliv-
ery takes place, the PURCHASER shall be entitled to deduct a settlement discount
from his payment, in accordance with SELLER’s discount scheme, which may be re-
vised by SELLER from time to time.
A wholesaler who made such early or prompt payment would pay the selling price less
the settlement discount. In other words, the customer would himself deduct the settle-
ment discount and pay only the net amount. Effectively, all of the appellant’s customers
took advantage of this offer of a reduced price in return for prompt payment.
In its accounting records, the appellant raised provisions which had the effect that on-
ly the gross selling price less the settlement discount was reflected as the appellant’s
income.
The appellant’s return of gross income for the tax year ended 30 June 2003 thus
showed the amount accrued as being the sales figures less the prompt payment discount
offered in terms of the appellant’s standard conditions of sale.
Following an audit, SARS issued the appellant with an additional assessment for the
year 2003 in which the latter’s declared gross income was increased by R4 371 015, being
the sum of the discounts for which the appellant had made provision and had omitted
from its accrued income as at 30 June 2003.
46
The tax court held that the amount which had accrued to the appellant as at the end
of the tax year was the full amount of the unpaid purchase price, and that the appellant
was entitled to an adjustment only in those cases where payment was effected within the
period stipulated in the standard conditions of sale in the following tax year.
On appeal to the Natal High Court, the sole issue was the question of precisely what
had ‘accrued’ to the appellant as at midnight on 30 June 2003, in other words, whether
what had accrued was the total income reflected on the invoices issued up to midnight
on 30 June 2003 but not yet paid to appellant by its customers, or whether what had
‘accrued’ to the appellant was only the amount to which it would be entitled in the event
of the debt’s being paid within the time prescribed in its standard conditions of sale.
Held: The customer became indebted for the full invoice price only if his payment was
tardy. The ‘settlement discount’ referred to in the standard conditions of sale was not so
much a ‘discount’ as it was a penalty which would be added for late payment.
Held further: On the basis of the decisions in Lategan v CIR and CIR v People’s Stores
(Walvis Bay) (Pty) Ltd the question was simply ‘What was the value of the taxpayer’s right
at midnight on 30 June 2003?’ On the basis of the approach of Watermeyer J in Lategan’s
case, it was erroneous to suggest that the full invoiced price had accrued to appellant as
part of its gross income, at the close of the tax year.
The appeal was allowed and the assessment appealed against was set aside.
Hurt J: Before us, Mr Shaw (for the appellant/Taxpayer) and Mr Stevens, for the Commissioner,
were ad idem that the central issue in the appeal concerned the question of precisely what had
‘accrued’ to the Taxpayer as at midnight on 30 June 2003.
Mr Stevens submitted that the court a quo had correctly decided that the Taxpayer’s accrued in-
come was the total income reflected on the invoices issued up to midnight on 30 June 2003 but
not yet paid over to the Taxpayer by its customers.
Mr Shaw’s argument was that, in respect of unpaid amounts, what had ‘accrued’ to the Taxpayer
was only the amount to which it would be entitled in the event of the debt being paid within the
time prescribed in sub-clause 1.3 [of the Appellant’s standard terms of sale]. In this regard, Mr
Shaw referred us to the judgments in CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353
________________________

46 See ITC 1815 (2006) 68 SATC 312.

122 Income Tax in South Africa: Cases and Materials

(A) at p 364 to 365; Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA) at p 319; and ITC
1645 (61 SATC 31) and the cases referred to at p 35 of that report.
The fons et origo of judicial pronouncements on the meaning of the word ‘accrued’ in tax legisla-
tion is the case of Lategan v CIR 1926 CPD 203 at pp 209 to 210. In that case, Watermeyer J em-
phasised that the concept of ‘gross income’ was not confined to an amount of money but
embraced every other form of property, including debts and rights of action. He said (loc cit) –
‘So far as a debt is concerned which is payable in the future and not in the year of assessment, it might be
difficult to hold that the cash amount of the debt has accrued to the taxpayer in the year of assessment. He
has not become entitled to a right to claim payment of the debt in the year of assessment but he has ac-
quired the right to claim payment of the debt in future. This right has vested in him, has accrued to him in
the year of assessment, and it is a valuable right which he could turn into money if he wished to do so.
According to what has been stated above, the value of this right must, in my opinion, be includ-
ed in the taxpayer’s gross income for taxation purposes.’
Between the years of 1926 and 1990, there appears to have been some doubt as to the validity of
the approach adopted by Watermeyer J in the Lategan case. But this doubt was laid to rest by the
Appellate Division in the People’s Stores case, supra. Hefer JA sketched the history of the debate
but concluded that the reasoning of Watermeyer J in the passage which I have quoted above was
irrefutable . . .
I think that this is one of the fairly rare cases where the maxim ‘plus valet quod agitur quam quod
simulatione concipitur’ applies in favour of the Taxpayer and against the Commissioner.
What is aimed at by the Taxpayer and its customer, alike, is that the customer will purchase the
goods for the net price, after deducting the clause 1.3 discount. The prescription that this price
must be paid within the stipulated time is an incentive, to the customer, to take advantage of the
lower price. The customer only becomes indebted for the full invoice price if his payment is
tardy. Judged from this viewpoint the ‘settlement discount’ referred to in clause 1.3, is not so
much a ‘discount’ as it is a penalty which will be added for late payment. From this viewpoint,
also, the concept that an amount equivalent to the discount ‘accrues’ to the Taxpayer for the
purpose of determining the gross income is as illogical as saying that, where a contract of sale
provides for the payment of interest if payment is made after a certain date, such interest ‘ac-
crues’ to the seller at the time of sale.
On the basis of the Lategan and People’s Stores cases, the question is simply, ‘What was the value of
the Taxpayer’s right at midnight on 30 June 2003?’ Paraphrasing the words of Watermeyer J, if,
at the close of the tax year, the Taxpayer had wanted to turn its rights to unpaid debts into mon-
ey, what amount would it recover for them? I do not think that there can be any debate but that
a factor would only be prepared to pay the Taxpayer the selling price less the ‘discount’ provid-
ed for in clause 1.3, for this would be all that the debtor was obliged, and would be likely, to pay.
Based on this approach, it is, in my view, erroneous to suggest that the full invoiced price had
accrued to the Taxpayer, as part of its gross income, at the close of the tax year.
There is substituted for the order of the Tax Court the following order:
‘The appeal is allowed and the assessment appealed against is set aside’.
Van der Reyden J and Gyanda J concurred.

Notes
With respect, this judgment comes to the correct conclusion but for the wrong reasons.
The invocation of the maxim plus valet quod agitur quam quod simulate concipitur is mis-
placed. There was no question in this case of any simulated transaction. The simple
question – as the court correctly pointed out – was what had ‘accrued to’ the taxpayer as
at 30 June 2003?
That question can only be answered by a legal analysis of clauses 1.2 – 1.3 of the tax-
payer’s standard terms of sale. And in this regard, the fact that clause 1.3 could have
been drafted in a different way, with different legal and tax results, must be disregarded.
Since there was no simulation, the clause must be taken, and interpreted, as it stands.
 Receipts and accruals 123

Clause 1.3 could have been drafted so as to impose a penalty for late payment, but it is
submitted that it does not. It is expressed as a discount for early payment. In legal terms,
it is submitted, this provision imposes a resolutive condition,47 namely – the taxpayer has
a right to the full selling price, but if payment is made before the due date, then the
resolutive condition is fulfilled, the right to the full price falls away, and is replaced by a
right only to the discounted price.
It is submitted that where the taxpayer acquires a right to a stipulated sum of money,
for example, a defined purchase price, and this right is subject to a resolutive condition,
then, pending the fulfilment of that condition, there is an ‘accrual’ of the right to the
full amount so stipulated. If the resolutive condition is fulfilled at or before the end of
the tax year, then the value of the accrued right must be reflected at the end of the tax
year in the light of the occurrence of that resolutive condition.
In the present case, after the occurrence of the resolutive condition, in other words,
early or timeous payment, the resolutive condition was fulfilled and, for this reason – and
not (as the judgment would have it, because of the non-imposition of a penalty) the right
to payment of the full price fell away, and the taxpayer became entitled only to the
discounted price.

§8 Non-monetary receipts and accruals

It was held in [69] Lategan and confirmed in [71] People’s Stores that where an amount
of income, in a non-monetary form, accrues to the taxpayer, its realisable value must be
included in the taxpayer’s gross income. Some authorities hold that the value must be
fixed as at the last day of the year of assessment,48 others that the value must be estab-
lished at the date of the transaction in question.49 The ‘value’ of a non-monetary amount
is a question of fact (see [79] Lace Proprietary Mines) and must be determined objective-
ly (see [80] Ochberg).
The cases dealt with below are concerned with the common law principles relating to
the accrual of non-monetary amounts. There are a number of statutory provisions which
override the common law in particular situations. Of particular note are the provisions of
the Seventh Schedule which apply to most ‘fringe benefits’ of employees. The Seventh
Schedule has its own rules regarding the valuation of non-monetary benefits. A further
significant statutory provision, overriding the common law principles for the valuation of
an accrued amount, is para (h) of the definition of ‘gross income’ which applies to
leasehold improvements.
The term ‘amount’ in the section 1 definition of ‘gross income includes every form of property earned
by the taxpayer, whether corporeal or incorporeal, which has a money value, including debts and
rights of action’.

[77]
CIR v People’s Stores (Walvis Bay) (Pty) Ltd
1990 (2) SA 353 (AD), 52 SATC 9
For the facts of this case, see extract [71].
Hefer JA: It is our task now to consider the position [ie the meaning of accrued’ in the definition
of ‘gross income’] afresh. For convenience I shall do so by stating and considering the validity of
________________________

47 ‘The effect of the fulfillment of a resolutive condition is to destroy the contract . . . so that the contract
will be regarded as if it never existed’; Christie The Law of Contract, 4 ed at 167. In the present context, it is
submitted, fulfilment of the resolutive condition merely destroyed the right to payment of the full pur-
chase price.
48 Lategan v CIR 1926 CPD 203 at 211, 2 SATC 16; Caltex Oil (SA) Pty Ltd v SIR 1975 1 SA 665 (A), 37 SATC 1.
49 SA Marine Corp Ltd v CIR 1955 1 SA 654 (C), 20 SATC 15.
124 Income Tax in South Africa: Cases and Materials

the two main propositions in the judgment in Lategan’s case. The first and basic proposition is
that income, although expressed as an ‘amount’ in the definition, need not be an actual amount
of money but may be ‘every form of property earned by the taxpayer, whether corporeal or in-
corporeal, which has a money value . . . including debts and rights of action’. This proposition is
obviously correct . . . It is hardly conceivable that the legislature could not have been aware of, or
would have turned a blind eye to, the handsome profit often reaped from commercial transac-
tions in which money is not the medium of exchange . . . Nor can the reference in the definition
of ‘gross income’ in the 1962 Act to receipts and accruals ‘in cash or otherwise’, or other provi-
sions of the Act (such as paras (h) and (i) of the definition, s 26 (1) read with the First Schedule
and s 11 (i) and (j) be ignored. There are clear indications in all these provisions of the extend-
ed meaning of ‘amount’.
When the taxpayer becomes entitled to an amount of income in a non-monetary form, its monetary
value must be included in his gross income.

[78]
Mooi v SIR
1972 (1) SA 675 (A), 34 SATC 1
For the facts of this case, see extract [81].
Ogilvie-Thompson CJ: Linguistically inappropriate though the word ‘amount’ may be in this
context, when a taxpayer becomes entitled to a right ‘in respect of services’ a money value must
be assigned to that right in order to determine the relevant ‘amount’ to be incorporated as
‘gross income’.

Where a contract provides for a non-monetary consideration, then what accrues to the taxpayer is the
value of that consideration, and such value is a question of fact. The value of the property means the
price that could have been obtained for it, on the date of accrual,50 by adopting some reasonable
method of sale on that date.

[79]
Lace Proprietary Mines Ltd v CIR
1938 AD 267, 9 SATC 349
The taxpayer company acquired certain mineral rights over the farm Spaarwater for the
purpose of disposing of those rights to a company to be formed to mine that property. In
1933 the company duly sold those mineral rights to another company. The contract of
sale stated the purchase price to be the sum of £250 000 to be paid and satisfied by the
allotment to the taxpayer of 1 000 000 fully-paid up shares, with a nominal value of five
shilling shares each, in the purchasing company.
Issue: was the ‘amount’ received by the taxpayer in terms of the contract cash or
shares?
Held: the intention of the parties was that the consideration due to the taxpayer under
the contract was one million shares in the purchasing company; this consideration had
to be valued, and its value was a question of fact.
Stratford CJ: The next question concerns the valuation of the share consideration; what mone-
tary amount was on 29 November 1933 (the agreed date) received by appellant company for the
Spaarwater mining rights? . . . The reference in that clause to the sum of £250 000 and to the
nominal value of the shares (five shillings) cannot override the true intention of the parties
which was that the true consideration was 1 000 000 shares in the purchasing company. No cash
consideration could be demanded from the purchaser who was entitled and obliged to deliver
________________________

50 Some authorities hold that the property must be valued on the last day of the year of assessment in which
the accrual occurred, not on the date of accrual itself.
 Receipts and accruals 125

these shares in fulfilment of its obligation to pay for the assets bought. Thus the consideration
must be valued and such valuation cannot be affected by the reference to £250 000 or to the
nominal value of the shares . . .
The ascertainment of the value of the shares was a question of fact; . . . The market price on the
agreed date was admittedly relevant, but it might have been fictitious and momentary. The sta-
bility of the market quotation and its approximation to value is properly tested to some extent by
reference to the market quotation before and after that date . . . The value of the shares on the
29th November must, of course, be ascertained by enquiring what price could have been ob-
tained for them, by adopting some reasonable method of sale on that date.
To throw the whole 1 000 000 shares on the Johannesburg market on a given date would obvi-
ously be the worst possible way of gauging their value. Both common sense and the evidence
suggest that the quotation would become fictitious or nil long before the major portion of the
shares were sold . . . But there are obviously other methods of effecting a selling of shares whole-
sale than by throwing them all on the open market. What has to be looked for is a person who is
willing to buy wholesale at a price under the retail price of the Stock Exchange quotation. He
would get his profit over a period by retail sales.

The value of a non-monetary amount of income must be determined objectively; its value to the
particular taxpayer is irrelevant.
[80]
Ochberg v CIR
1931 AD 215, 5 SATC 93
A company had a nominal share capital of £10 000 shares of which £5 107 had been
issued. Of the issued shares, the taxpayer held 5 101 and six other persons held one £1
share each. In terms of an agreement with the company, the taxpayer received the bal-
ance of the nominal capital of £4 893 in consideration for services rendered and remu-
neration for the use of certain premises. In assessing the taxpayer for income tax, the
Commissioner valued the shares at £4 893. The taxpayer did not dispute this value, but
argued that, since he was already in full control of the company, the issue to him of the
unissued shares did not give him any benefit that he did not already have.
Issue: when an amount is received by or accrues to a taxpayer, must it be valued objec-
tively or subjectively?
Held: it must be valued objectively.
Roos JA: The appellant in this Court based his argument on the fact that appellant before the
transaction held all the issued shares except six, that he was in full control of the company, that
the further issue to him of the unissued shares gave him no benefit that he did not already have
. . . It seems to me impossible to hold that a contract of this nature . . . can be regarded as ficti-
tious. Full effect must be given to the transaction which means in terms that an asset of the value
of £4 893 is paid for the goodwill and the financing of the company by the appellant and for the
cession of a lease . . . The point is, however, made that it is necessary to consider the relationship
between appellant and the company and that if one considers that relationship he in truth ob-
tains nothing under the contract . . . It may be that it was a foolish agreement to enter into, and
that the result of its being entered into halved the value of the old shares which he had acquired
at some previous date, but that does not alter the fact of the transaction. The halving in value of
his previously acquired shares is obviously loss of capital. The acquisition of the new shares is
obviously income. Supposing that someone other than appellant had entered into precisely the
same agreement with the company that appellant entered into. He would not be able to evade
liability for income tax on the amount of £4 893. How can appellant avoid such liability merely
because he stands in a special position towards the company? It is argued that appellant was not
benefited by the transaction. That is certainly not the test. If it were the test, it is clear that he is
benefited by the company having put it out of its power to make a similar agreement assigning
these unissued shares to some person other than the appellant. That benefit has value . . .
126 Income Tax in South Africa: Cases and Materials

. . . Here the question is whether the shares received fall under s 7 of the Act. Surely they form
an amount received ‘in cash or otherwise.’ They are given for services to be rendered and for the
cession of a lease. They have value. An assessment having been made they fall, in every respect,
within the language of the Statute as being income and it lies upon the appellant to show the
contrary . . . Can the appellant dispute the position by proving that a special relationship exists
between himself and the company which, at the moment that he received the asset, reduced his
prior shareholding by 50 per cent, in value? If in case of this kind the shares accrued to him as
capital the question would be concluded by s 7 of the Act. But did he receive them as capital? On
the contrary he received them as ordinary remuneration for services to be rendered and for the
cession of a lease and therefore as ordinary income, which he himself values in his books at
a certain figure. It seems to me that the fact that he previously held practically all the issued
shares and that therefore the unissued shares which he obtained under the agreement did not
increase the value of his holdings, does not affect the case because if his contract is a valid one
he received a value under that contract. The true position is that the receipt of that value as
income reduced the value of his previously acquired capital. This reduction would have taken
place if the unissued shares had been issued to a third party on exactly the same terms which are
contained in his contract. In this latter event he could not set off his shrinkage in capital value
against his taxable income; in the present case he cannot do so either. On these grounds I am of
opinion that the first question should be answered against the appellant.
The next question was dealt with by the Court a quo as being a finding of fact, viz that the inten-
tion of the appellant, when purchasing the properties in question was not to invest his money
but for the speculative purpose of purchasing with a view to making profits on resale. It seems to
me that the question whether a person bought a property for a specific purpose is a question of
fact and in no sense of the word a question of law . . . The appeal upon the second question,
therefore, fails . . .
De Villiers CJ: The reasoning ignores the very clear provision of the law that any receipt consti-
tutes income with the single exception of a receipt or accrual of a capital nature. Only in the one
case where the receipt is one of a capital nature, only in that case does it not fall within income.
In all the other cases the law says it is to be regarded as income. Whether and to what extent the
person may have been benefited by the receipt of the income is irrelevant, for that cannot alter
the nature of the receipt, converting what is income into capital. The amount of benefit may or
may not be a good reason for the Legislature to step in and alter the law, but it cannot affect our
decisions. As long as the law is what it is, the receipt is income and as such liable to income tax.
...
The fact is the law is not concerned with the amount of benefit accruing to a person from a cer-
tain income. It is sufficient to determine that what the appellant has received is income and not
capital. What repercussions the receipt of that income may have upon the rest of his property
does not matter.
CURLEWIS JA concurred.
Stratford JA: (dissenting) It was not disputed that [the new issue of shares] were worth their par
value. The question . . . is whether the receipt of this allotment . . . amounts to a receipt of in-
come by the appellant . . . In the view I take of the matter, it is immaterial whether the appellant
gave full consideration [for the shares] or none at all. In neither case was the allotment to him
income within the meaning of the Income Tax Act. Let us take the two assumptions in turn: first,
that the services rendered and the lease were both of no value. It is merely stating the obvious to
say that in such a case an issue of a share per share to the previous existing holder of all the
shares does not give him anything he did not have before; both before and after the issue, he
holds all the shares of a company whose assets have not varied . . . The next assumption is that
the services and lease are valuable and that the company’s assets are increased pro tanto by the
new issue of shares to [the appellant]. A moment’s reflection, however, will show that this is not
so. The company obviously is richer for having valuable services conferred upon it, and the per-
son who holds the total number of shares gets the exact equivalent of the added wealth by
reason of his shareholding, and this whether the total number of shares is multiplied or not – so
long as he holds all the shares his interests in the assets of the company remain the same both
before and after the increased issue.
...
 Receipts and accruals 127

. . . To assess the appellant in respect of this issue which clearly brought no added wealth to him,
would be to work a manifest injustice upon him . . . I can find nothing in the Income Tax
Act which compels us to designate as income something which every principle of reason and
common-sense tells us is nothing of the kind.
Wessels JA: (dissenting) Fictitious income is not gross income. If the court is satisfied . . . that in
fact the transaction has not added a penny to [the taxpayer’s] estate, then it will not consider such
a fictitious accrual as gross income . . . I fail to see how [the taxpayer] can be said to have received
any amount during the year of assessment or how anything has accrued to him or his estate . . .
when the sum total of his assets after the so-called receipt is exactly the same as it was before.

Notes
The taxpayer in this case was, for all practical purposes, the sole beneficial shareholder
in the company. He rendered services to the company, and allowed it to use certain
premises, and for doing so he was rewarded by additional shares to a nominal value of
£4 983 in the company. Clearly those shares had the quality of ‘income’ in his hands.
The issue was: what ‘amount’ had he received? In other words, how were those shares to
be valued? The crucial question was: must the shares be valued subjectively, at their value
to that particular taxpayer, or were they to be valued objectively, in other words at their
market value? The Commissioner valued them at par – namely £4 893. The taxpayer did
not contest that this was their market value. But he argued that their subjective value to
him was nil; since he was already effectively the sole shareholder and in full control of
the company, the shares added nothing to his patrimony.
In a split decision, the court held that the shares must be valued objectively, and that
the sum of £4 893 had been properly included in his gross income.
Two years later, in Delfos,51 Wessels CJ made the point that: ‘The tax is to be assessed in
money on all receipts or accruals having a money value. If it is something which is not
money’s worth or cannot be turned into money, it is not to be regarded as income’. (In
Ochberg, the taxpayer could clearly have turned the shares into money.) By clear in-
ference, the subjective value to the particular taxpayer was irrelevant. This same principle
underlies the decisions in Lategan and People’s Stores. In the latter case, Hefer JA quoted
with approval Watermeyer JA’s observation in Lategan that the taxpayer ‘has acquired a
right to claim payment of the debt in future. This right has vested in him . . . and it is a
valuable right which he could turn into money if he wished to.’52 (Italics added.) It seems
therefore that the criterion of value is not the market value of the amount when it left the
hands of the transferor, but the amount of money into which the recipient taxpayer could
turn it. See, for example, Wilkins v Rogerson;53 in this case, if the taxpayer turned the amount
into money he would be selling at their second-hand value, clothes that he had received
new, and the amount accruing to him would be the second-hand value of those clothes.
Since the enactment of the Seventh Schedule, most non-monetary fringe benefits ac-
cruing to employees are valued in terms of the specific formulae laid down in that
schedule. But the principles discussed above still apply in situations falling outside the
Seventh Schedule. For the valuation of share options, see [81] Mooi.

For there to be an accrual, the ‘amount’ in question must have a monetary value. Where a taxpayer
acquires a right which is conditional, in other words, which depends on the occurrence of future
uncertain events, no accrual occurs until the fulfilment of those conditions. Thus, where the taxpay-
er is granted an option which is not exercisable until certain conditions are fulfilled and has no
monetary value until then, there is no accrual until it becomes exercisable.
________________________

51 1933 AD 242, 6 SATC 92 at 99.

52 (1990) 52 SATC 9 at 22.
53 [1961] Ch 133.
128 Income Tax in South Africa: Cases and Materials

[81]
Mooi v SIR
1972 (1) SA 675 (A), 34 SATC 1
The taxpayer was an employee of a copper-mining company, Palabora Mining Co Ltd
(‘the company’). The company wrote a letter dated 25 July 1963 to the taxpayer granting
him an option to subscribe, at R1,25 per share, for 500 of the company’s R1 ordinary
shares, subject to various conditions, inter alia: (a) the option was not exercisable until
six months after the completion of the company’s mine at Phalaborwa; (b) the option
could be exercised only if the taxpayer was still employed by the company. It was com-
mon cause that the option was in respect of services rendered and to induce him to
render future services to the company. In October 1966 the taxpayer exercised the
option and acquired 500 shares for R1,25 each. Their market value at that time was
R6,40 each. The total market value of the shares acquired by the taxpayer thus exceeded
the option price paid by him by R2 575.
The Commissioner included the sum of R2 575 in the taxpayer’s gross income for the
tax year ending 28 February 1967, as an amount which had accrued to him in respect
of services rendered or to be rendered when the option became exercisable, that is,
1 September 1966.
The taxpayer objected on the grounds that all that had accrued to him in respect
of services rendered or to be rendered was the right he acquired on 27 July 1963 to
exercise an option at a later date when certain conditions had been fulfilled. The taxpay-
er argued that, when he exercised the option, the accrual was not in respect of services
rendered.
Note: this issue fell to be decided under the definition of ‘gross income’ and not in
terms of s 8A which only came into force later.
Issue: what precisely was it that accrued to the taxpayer and when did the accrual take
place?
Held: what accrued to the taxpayer was the right, on the fulfilment of certain con-
ditions, to obtain shares at a price of R1,25. This accrual took place when the option to
acquire the shares became exercisable, that is on 1 September 1966. At that date, the
taxpayer was in the service of the company and there was a causal relationship between
the benefit he acquired and his services to the company; hence the benefit fell within the
statutory definition of gross income.
Ogilvie-Thompson CJ: It is common cause that appellant is not a share dealer and that the op-
tion granted to him by the above-cited letter of 25 July 1963, was in respect or services rendered,
and as an inducement to render future services, to the company . . .
It must at once be mentioned that the present case falls to be decided independently of the
provisions of s 8A which were only subsequently inserted in the Act by s 11 of Act 89 of 1969. The
relevant portion of the definition of ‘gross income’ in s 1(xi) of the Act reads:
‘Gross income’, in relation to any year or period of assessment, means, in the case of any person, the total
amount, in cash or otherwise, received by or accrued to or in favour of such person . . . [including]:
(a) . . .
(b) . . .
(c) any amount, including any voluntary award, received or accrued in respect of services rendered or to
be rendered . . .’
In order to determine the ‘amount’ comprehended by this definition it is necessary, in the case
54
of a right, to establish the value of that right (Lategan v CIR; CIR v Delfos.) The main contention
advanced on behalf of appellant is that in the premises the only taxable accrual in respect of
services rendered or to be rendered by him to the company was the value – if any – of the legal
________________________

54 1926 CPD 203 1 at 208-209.

 Receipts and accruals 129

right which appellant acquired upon accepting the above-mentioned option on 27 July 1963. An
alternative contention is that . . . such accrual cannot be said to have been in respect of services
rendered or to be rendered to the company . . .
...
Appellant’s contention vitally depends upon the assumption that the word ‘accrued’ in the
above-cited definition of ‘gross income’ means, as was in effect decided in Lategan’s case (supra)
and in several subsequent decisions, an amount to which the taxpayer has become entitled . . .
. . . It is basic to [the taxpayer’s] argument that the right acquired by appellant on 23 July 1963
had a monetary value. The record, however, contains no evidence to support the contention
that such right as appellant did acquire on 27 July 1963 had a value in the sense of being capable
of being then turned to pecuniary account. No doubt speculative buyers can sometimes be
found who are willing to purchase a mere spes; but having regard to the terms of appellant’s
option, it would seem to be safe to assume that no buyer would have purchased appellant’s
option-right without further undertakings by appellant (i) to remain in the service of the com-
pany until the option became exercisable and for three years thereafter; and (ii) to exercise the
option upon demand and thereafter deliver the shares. The buyer would thus in reality be pur-
chasing a congeries of rights rendering it well-nigh impossible to assign a value to the option-
right itself . . . In the present case, it is common cause that appellant still had to ‘earn his per-
quisite’, namely to become vested with the right to exercise the option . . . However, I shall
assume in favour of [the taxpayer] that, notwithstanding the considerations I have mentioned
. . . the contingent right acquired on 27 July 1963 had some monetary value, and I proceed upon
that assumption.
. . . In my opinion the right acquired by appellant [the taxpayer] on 27 July 1963 lacked any
inherent attribute of income and, but for the provisions of para (c) of the definition of ‘gross
income’, would appropriately be regarded as a right of a capital nature . . . The object of para (c)
of the definition is of course to bring into the category of ‘gross income’ all ‘amounts’, whether
of a capital nature or not, accrued in respect of services. Linguistically inappropriate though the
word ‘amount’ may be in this context, when a taxpayer becomes entitled to a right ‘in respect of
services’ a money value must be assigned to that right in order to determine the relevant
‘amount’ to be incorporated as ‘gross income’ . . .
In the present case, as already emphasized, services still had to be rendered by appellant after
July 1963, and there can be no doubt that the true and real benefit contemplated by the letter of
25 July 1963 was the right, upon due fulfilment of all the conditions stated in that letter, to obtain
the shares at the price of R1,25 per share . . . In my view, the contingent right which appellant
acquired on 27 July 1963, did no more than – to borrow a phrase used by Sellers LJ in the court
of appeal in Abbott’s case55 and subsequently adopted by Lord Keith in the House of Lords – set
up the machinery for creating a benefit’, which said benefit only accrued when the option
became exercisable. Accordingly, I am of opinion that no accrual within the meaning of the
56 57
definition of ‘gross income’ occurred in July 1963 (cf Ochberg v CIR and Hersov’s case, but that
the relevant accrual occurred when the option became exercisable on 1 September 1966. The
real benefit conferred upon appellant, which was at all material times in the contemplation of all
concerned, was the right to apply for the shares at R1,25 per share and that right arose when,
upon fulfilment of the conditions of the option, the latter became exercisable.
On the facts, the measure of the aforementioned benefit – ie the ‘amount’ to be incorporated
in appellant’s gross income – as at 1 September 1966 was R2 575, and as at that date there existed,
in my view, the necessary causal relationship (vide De Villiers v CIR)58 between the benefit acquired
by appellant and his services to the company. I accordingly come to the conclusion that both the
respondent’s assessment and the decision of the Special Court were correct.
The appeal is dismissed with costs . . .
POTGIETER JA, RABIE JA and MULLER JA concurred in the above judgment.
________________________

55 Abbot v Philbin (Inspector of Taxes) [1960] 2 All ER 763 (HL).

56 1933 CPD 256 at 264.
57 Hersov’s Estate v CIR 1957 (1) SA 471 (A) at 481-482.
58 1929 AD 227.
130 Income Tax in South Africa: Cases and Materials

Notes
The taxability of share options granted to employees, directors, or former directors is
now governed by s 8A. The principles laid down in Mooi are still applicable to share
options granted to other persons.
There is no accrual unless the taxpayer’s right to the amount in question is unconditional

[82]
Ochberg v CIR
1933 CPD 256, 6 SATC 1
For the facts of this case, see extract [80].
Watermeyer J: [T]he appellant was a dealer in land who sold land on credit; for income tax pur-
poses he is in exactly the same position as any trader who sells goods on credit. So soon as
an unconditional sale has been concluded there rests in the seller the right to claim the pur-
chase price in defined instalments at defined future dates; in other words the right to claim the-
se instalments accrues to him.
If the sale is for cash, the full purchase price accrues to him, if the sale is on credit, payable in
future instalments then an allowance must be made therefor because what accrues to him is
really only the present value of the right to claim payment in the future.
If the right to claim future instalments were conditional upon performance by the seller of cer-
tain obligations, then wholly different principles would apply. For instance, in any contract of
lease or service of locatio operis, the right to claim payment is dependent upon the rendering of
services and consequently the right to payment is not unconditional and therefore it does not in
my opinion ‘accrue’ to the payee in the sense in which that word is used in the Income Tax Acts
...
The true view is that the value of these rights is part of his ‘gross income’ for the year in which
the rights accrue to him and the only real difficulty is that of valuing the rights.
A non-monetary benefit, given to a person by someone who is not his employer is ‘an amount’ which
can be included in gross income only if the taxpayer can convert it into money. If it is not so convert-
ible, it is of a capital nature and not subject to income tax.

[83]
Stander v CIR
1997 (3) SA 617 (C), 59 SATC 212
Delta Motor Corporation (Pty) Ltd was a manufacturer and distributor of motor vehicles,
which it marketed through franchise dealers. One such dealer was Frank Vos Motors
(Pty) Ltd which held a franchise for the Worcester district. The taxpayer was employed
by Frank Vos Motors as a secretary/bookkeeper. Delta adjudged the taxpayer to be one
of the top five bookkeeper/accountants of the franchise dealers in South Africa and
awarded him a prize of a seven-day overseas holiday for himself and his wife. The cost to
Delta of the air fares and accommodation was R14 000.
For the 1990 year of assessment, the taxpayer was assessed to tax on the value of the
prize, namely R14 000.
It was held that if the prize was taxable, it could only be because it fell within the ambit
of paragraph (c) of the definition of ‘gross income’, namely that it was ‘an amount’
which was ‘in respect of services rendered’ or ‘by virtue of any employment or the hold-
ing of any office.’
It was further held that the prize was not an ‘amount’ because the taxpayer could not
convert it into money, and it was also not ‘in respect of services rendered’ because he
had rendered services only to his employer, Frank Vos Motors, and not to Delta. The fact
 Receipts and accruals 131

that he performed his duties in a manner which Delta considered to be excellent (which
was what qualified him to receive the prize) did not mean that the award he received was
‘in respect of’ services rendered. It was more in the nature of a testimonial gift.
It was further held that the taxpayer did not receive the prize by virtue of ‘the holding
of any office’.
Consequently, the value of the overseas trip in question did not fall to be included in
the taxpayer’s gross income; it was therefore not taxable, and the assessment was set
aside.
Friedman JP: The correctness or otherwise of the Commissioner’s decision to include the
amount of R14 000 or indeed any other amount in respect of the overseas trip awarded to
Stander, in the revised assessment, depends upon whether such award falls within the definition
of ‘gross income’ . . .
As the award to Stander was of a fortuitous nature like an ordinary donation it was an award of a
capital nature . . . and therefore does not fall within the general opening paragraph of the defi-
nition of gross income. This is in fact common cause . . .
If Stander is assessable to tax on this trip it can therefore only be on the basis that the trip falls
within the ambit of para (c) of the definition of ‘gross income’. By virtue of the provisions of
para (c), ‘gross income’ includes –
‘any amount, including any voluntary award, received or accrued in respect of services rendered . . . or any
amount . . . received or accrued in respect of or by virtue of any employment or the holding of any office
. . .’
In order to fall within the provisions of para (c) of the definition of gross income, what Stander
received must be an ‘amount’ which would include a ‘voluntary award’. Moreover the ‘amount’
would have to be ‘in respect of services rendered’ or ‘by virtue of any employment or the hold-
ing of any office.’
The first question therefore is: what is meant by an ‘amount’ in the context of s 1 of the Act? The
general definition of gross income, refers to the ‘total amount, in cash or otherwise’ received by
the taxpayer . . . Consequently, in order to qualify for inclusion in para (c) the ‘amount’ need
not consist of money.
The meaning of the word ‘amount’ was considered in Lategan v CIR.59 . . . Watermeyer J, in deliv-
ering the judgment of the Full Bench, pointed out that income was what a person earned by his
work or his wits or by the employment of his capital and that the rewards which such person gets
may be in the form of cash or some other kind of corporeal property or in the form of rights.
Watermeyer J went on to state:
‘Ordinarily speaking, the value of these rewards is the man’s income . . . [T]he word ‘amount’ must be
given a wider meaning, and must include not only money, but the value of every form of property earned
by the taxpayer, whether corporeal or incorporeal, which has a money value.’ . . .’
60
In CIR v People’s Stores (Walvis Bay) (Pty) Ltd . . . the Appellate Division confirmed the correct-
ness of the proposition as stated by Watermeyer J . . . Hefer JA stated:
‘It must be emphasised that income in a form other than money must, in order to qualify for inclusion in
the ‘gross income’, be of such a nature that a value can be attached to it in money. As Wessels CJ said in
61
the Delfos case:
“The tax is to be assessed in money on all receipts or accruals having a money value. If it is something
which is not money’s worth or cannot be turned into money, it is not to be regarded as income.”
See also in this regard Tennant v Smith.62 In that case the taxpayer who was employed by a bank
was obliged, as part of his duties, to occupy a house which he was not entitled to sublet or to use
for any purposes other than the bank’s business. The question arose as to whether the value of
his occupation of the house was subject to income tax. It was held by the House of Lords that the
occupation of the house rent free did not constitute income in the taxpayer’s hands . . . As the
________________________

59 1926 CPD 203.

60 1990 (2) SA 353 (A).
61 CIR v Delfos 1933 AD 242.
62 [1892] AC 150.
132 Income Tax in South Africa: Cases and Materials

occupation of the house could not be ‘turned into money’ it could not, according to Lord Hals-
bury, constitute income . . . The question which arises in the present case is whether the trip
which Stander was given constitutes ‘property’ which has a money value or whether it constitutes
a right that could be ‘turned into money’.
The facts in the present case were that Stander had to present himself in Johannesburg. He re-
ceived no tickets or vouchers in connection with the trip. These were presumably kept by Delta’s
representative who accompanied the prize winners. He was not permitted to take the cash in-
stead of going on the trip, nor was the trip transferable to anyone else. Had he not been given
this trip, he would not have gone overseas as he could not have afforded to do so. The period
that he was away was taken off his leave. Had he not gone on the trip he would either have stayed
at home or have taken a holiday locally. He saved no money by going on the trip . . .
The question, then, is . . . did Stander, by being given this trip, acquire a right which had a mon-
etary value in his hands? . . .
[The court held in this regard that Delta’s award of a prize amounted to an executory63 contract
of donation. Because it did not comply with the statutory formalities for such contracts in that it
was not in writing and signed by the donor, it was invalid and unenforceable, and Stander could
not be said to have acquired a ‘right’ under this contract even if a monetary value could be
placed on the trip.]
A further requirement in order to bring the trip within the terms of para (c) of the definition of
‘gross income’, is that it must be ‘in respect of services rendered.’
64
In De Villiers v CIR Stratford JA stated:
65
‘The words ‘in respect of’ had received judicial interpretation in the case of CIR v Crown Mines Ltd in
which Innes CJ said that a tax could not be imposed ‘in respect of a particular subject-matter, unless it
‘had direct relationship to that matter,’ by which was meant, I think, ‘causal relationship’.
The fact that Stander’s employment with Frank Vos Motors was a sine qua non of the receipt by
him of the award sought to be taxed, is not sufficient . . .
Conradie J, in delivering the judgment of the Special Court, accepted the principle that in order
to fall within the tax net receipts or accruals other than money had to have a money’s worth.
However Conradie J rejected the argument that only benefits which a taxpayer can turn into
money can be said to have a money’s worth. He stated that there was no warrant for such a
restricted form of valuation and held that a service which is available in the market place has a
value attached to it by the market. That, he stated, was the value of the benefit which anyone
who availed himself of the service, enjoys. In other words, one simply looks at what the consumer
of the service would have had to pay for it if he had not been given it for nothing.
With respect to the learned judge, this approach fails to take account of the impact of
Watermeyer J’s judgment in Lategan’s case supra, as approved by the Appellate Division in the People’s
Store case, supra. Having regard to the conditions applicable to the enjoyment of the award, the
overseas trip had no ‘value’ in Stander’s hands which brought it within the terms of para (c) of
the definition of ‘gross income’.
. . . If the award cannot be said to consist of ‘money’s worth’ it does not qualify for inclusion in
terms of para (c). Nor, in my judgment, is there any basis upon which, on the facts of this case,
‘money’s worth’ can be attributed to Stander’s prize by seeking to place an ‘objective’ or ‘market
value’ on it. Whatever it cost Delta, or whatever a person who wished to go on such a trip would
have had to pay for it, does not constitute an amount which can be said to have money’s worth in
Stander’s hands.
In regard to the question whether the trip could be said to have been given ‘in respect of ser-
vices rendered’ the court a quo found that the award clearly ‘stands in a direct causal relation-
ship to the services rendered by him’.
The awards are, as far as Delta is concerned, a marketing management strategy. They are de-
signed, according to the Honours Brochure issued by Delta, to motivate the people involved in
Delta’s field distribution of retail vehicles . . .
________________________

63 An executory contract of donation is a contract to make a donation in the future.

64 1929 AD 227.
65 1923 AD 21.
 Receipts and accruals 133

In Stander’s case the award was made in recognition of his meticulous manner in which he rec-
orded data and prepared the reports for his employer which were submitted to Delta on a regu-
lar basis.
The manner in which the franchise holders’ employees performed their work, was obviously of
benefit to Delta. The fact that Stander was an employee of Frank Vos Motors, was a sine qua non
to his receiving the award. Had he not been an employee of a Delta franchise holder he would
not have been eligible to receive the award. That fact does not, however, provide the necessary
causal link between the services which he rendered to his employer and his obtaining of the
award. Those services did not constitute the causa causans 66 of the award. He did not seek the
prize by entering a competition. (Cf ITC 976 24 SATC 812.) Nor did he expect to receive any-
thing from Delta for the work he performed for Frank Vos Motors. He merely performed his
normal duties for which he was remunerated by his employer. The fact that these duties were
performed in a manner which Delta considered to be excellent was what qualified him to receive
the prize.
Stander’s position was in my view similar to that of the captain of the English soccer team which
won the World Cup and who received, as a bonus from the Football Association, a sum of money
which was held not to be taxable. See Moore v Griffiths (Inspector of Taxes). In that case Brightman J
stated –
‘The true purpose of the payment was to mark his participation in an exceptional event, namely, the win-
ning of the World Cup Championship – it is exceptional because the Cup is open for competition only
every four years and has never before been won by this country. In other words the payment had the qua-
lity of a testimonial or accolade rather than the quality of remuneration for services rendered.’
Mr de Haan [counsel for SARS] submitted that the trip was granted to Stander in respect of
services rendered to Delta. I do not agree. Stander rendered no services to Delta. The services
which he rendered were to his employer, Frank Vos Motors. The fact that these services were
beneficial to Delta does not mean that the award he received was ‘in respect of’ services ren-
dered. The sine qua non referred to above does not provide the necessary causal link between
what Stander did and the award he received.
An alternative basis upon which a taxpayer may become liable in terms of para (c) of the defini-
tion of gross income, is that the amount received is ‘in respect of or by virtue of any employment
or the holding of any office’. Stander did not receive this award by virtue of ‘the holding of any
office.’ . . .
For these reasons the trip in question was on no basis subject to tax and should not have been
included by the Commissioner as part of Stander’s income.
The appeal is upheld with costs and the revised assessment is set aside.

Notes
This case turned on whether the value of the prize that the taxpayer had received fell
within the definition of ‘gross income’. This raised two main issues. Firstly, whether the
prize in question (which was not in the form of money, but took the form of an overseas
trip, awarded on condition that it could not be converted into cash and could not be
transferred) was an ‘amount’ as envisaged in the definition of ‘gross income’. Secondly,
whether the prize had been given ‘in respect of services rendered’ as contemplated in
para (c) of the definition of ‘gross income’.
When this case was heard in the Tax Court, Conradie J, presiding, accepted the prin-
ciple that, to be an ‘amount’ for purposes of the definition of ‘gross income, a non-
monetary benefit had to have a ‘money value’. However, he rejected the proposition that
a benefit would have a money value only if the taxpayer could have turned it into
money – in other words, Conradie J rejected the ‘convertibility principle’. Conradie J
held that, for a non-monetary benefit to have a ‘money value’, it sufficed if it had an
objective value, in the sense of an amount of money that the person would have had to
pay for it if he had not been given it for nothing. On appeal, the High Court overruled
________________________

66 The dominant or operative cause.

134 Income Tax in South Africa: Cases and Materials

this proposition, holding that it failed to take account of the principles laid down in
Lategan’s case, namely that a non-monetary receipt was not an ‘amount’ unless the recip-
ient could turn it into money.
In overruling the judgment of Conradie J, the High Court followed the principle laid
down in United Kingdom decisions, such as Tennant v Smith, that a non-monetary
amount is ‘income’ only if it is of a kind that the taxpayer can convert into money. In
Tennant v Smith, a bank manager had been allowed to live rent-free in a bank-owned
house, on condition that he did not sub-let it and did not conduct any business in the
house except bank business. It was held that by the English court that his right to live in
the house was not ‘income’ as he was unable to turn it into money.
However, in [84] CSARS v Brummeria Rennaissance (Pty) Ltd67 the Supreme Court of
Appeal held that the decision in Stander’s case had been wrong;68 that if a right has a
money value, the fact that it cannot be alienated does not negate such value;69 that the
primary question is whether a non-monetary receipt or accrual has a money value, and
that the question whether it can be turned into money is merely one of the ways in which it
can be determined whether or not it has a money value.70 In short, the Supreme Court of
Appeal vindicated Conradie J’s judgment in the Tax Court in Stander’s case.
It should be noted that if the prize had been given to Stander by his own employer, it
would have been a taxable fringe benefit in terms of the Seventh Schedule, under which
non-monetary fringe benefits are taxable even if they are not convertible into money.
However, the Seventh Schedule applies only to non-monetary benefits given by an em-
ployer to his employee, and hence the provisions of the Seventh Schedule were not
applicable to Stander, as the prize was given to him by Delta, who were not his employers.
In Stander the High Court held further that the prize had not been given ‘in respect of
services rendered’ in that the taxpayer had performed his normal services for his em-
ployer, Frank Vos Motors, for which he was fully paid. The fact that Delta got a benefit
from the excellent way he performed those services did not mean that the prize was
given to him in respect of services rendered.
The High Court also held that the prize was in the nature of a testimonial or accolade,
rather than remuneration for services rendered; see [126] Moore v Griffiths (Inspector
of Taxes)71 – in other words, the award to Stander was in recognition of his personal
qualities, such as professional excellence, as distinct from services rendered.
Where a taxpayer derives a non-monetary receipt or accrual, the primary question, in determining
whether an ‘amount’ has accrued to the taxpayer is whether the receipt or accrual has a money value;
the question whether the receipt or accrual can be turned into money is merely one of the ways in
which it can be determined whether or not it has a money value.

[84]
CSARS v Brummeria Renaissance (Pty) Ltd
[2007] SCA 99 (RSA)
The three taxpayer companies had, since 1988, been developers of retirement villages as
contemplated in the Housing Development Schemes for Retired Persons Act 65 of 1988.
During the years in issue, the companies entered into written agreements with the pro-
spective occupants of units still to be constructed in retirement villages, on the following
________________________

67 [2007] SCA 99 (RSA).

68 Ibid at [19].
69 Ibid.
70 Ibid at [17].
71 [1972] 3 All ER 399, 48 TC 338.
 Receipts and accruals 135

terms. Each company obtained an interest-free loan from the prospective occupant in
order to finance the construction of a unit in a particular retirement village by the com-
pany; the lender was granted the right of lifelong occupation (a “life right”) of the unit,
whilst ownership remained with the company; and the company was obliged to repay the
loan to the occupant on cancellation of the agreement or on the occupant’s death.
The agreements with each occupier were explicit that the interest-free loans were the
consideration for the life rights.
It was not disputed that the interest-free loans were utilised by the companies solely to
finance the development of the units, that no part of the loans was invested in income-
earning investments, and that the intention of the companies was ultimately to sell the
units at a profit.
SARS issued revised assessments in which amounts equal to the value of the rights of
the companies to use the funds advanced to them as interest-free loans were included in
the companies’ gross income. Such amounts were determined by applying the weighted
prime overdraft interest rate to the average amount of the interest-free loans in the
possession of the particular company in the relevant year of assessment. (On appeal, the
taxpayer did not challenge this basis of valuation.) The grounds for such assessment were
that the benefit of the interest-free loans, received as a quid pro quo for the life right of
occupation, had an ascertainable money value and accordingly fell within the definition
of “gross income” of the Act.
The companies objected to the revised assessments on the grounds that the interest-
free loans did not result in any ‘amount’ being ‘received’ by them, as contemplated in
the definition of ‘gross income’. In their grounds of appeal the companies omitted to
challenge the assessment on the grounds that the amounts in question were of a capital
nature, and the Supreme Court of Appeal refused to allow this issue to be raised when it
was argued in court.
The Johannesburg Tax Court upheld the taxpayer’s appeal on the ground that the
interest-free loans did not constitute an ‘amount’ as contemplated in the definition of
gross income.
Held: the value of the right to retain and use the borrowed funds without paying inter-
est had a money value and such value must be included in the companies’ respective
gross incomes for the years in which such rights accrued to the companies, irrespective
of whether they could turn that right into money. Where a non-monetary benefit is
received by or accrues to a taxpayer, the primary question is whether it has a money
value; and the question whether such receipt or accrual can be turned into money is
merely one of the ways in which it can determined whether or not this is the case.
Cloete JA: (SCOTT JA, VAN HEERDEN JA, KGOMO AJA AND MHLANTLA AJA CONCURRING)
[4] Mr Pauw, who was called by the companies, testified that the interest-free loans were utilised
solely as the source of financing by the companies for the development of the units; that nothing
was invested in income-earning investments; that repayment of a loan was financed by the grant-
ing of a new loan (presumably by a new occupier of the relevant unit); and that the intention of
the companies was ultimately to sell the units at a profit.
[5] In the further revised assessments amounts equal to the value of the rights of the companies
to use the funds advanced to them as interest-free loans were included in the companies’ gross
income. Such amounts were determined by applying the weighted prime overdraft rate for
banks to the average amount of the interest-free loans in the possession of the particular com-
pany in the relevant year of assessment. …
[7] The Johannesburg Tax Court, presided over by Goldblatt J, upheld the appeals by the com-
panies …
136 Income Tax in South Africa: Cases and Materials

[8] The relevant part of the definition of ‘gross income’,72 in relation to any year or period of
assessment, was at the time:
‘… the total amount, in cash or otherwise, received by or accrued to . . . [the taxpayer] during such year or
period of assessment from a source within the Republic, excluding receipts or accruals of a capital nature .
. . ‘.
[9] It is important to emphasise that the Commissioner did not contend that the actual receipt
of the loan capital resulted in the receipt of amounts for the purposes of the definition of gross
income – and rightly so, as it has been decided in this court that a receipt of loan capital, as
such, is not a receipt for the purposes of such definition: CIR v Genn & Co (Pty) Ltd;73 CIR v Felix
Schuh (SA) (Pty) Ltd.74 The Commissioner’s case is that it was the right to retain and use the loan
capital, interest-free, for the relevant periods, which constituted the right which had an ascertaina-
ble money value and which accrued to the companies.
[10] Counsel for the companies sought to argue in this court that the right which the Commis-
sioner sought to include in the companies’ taxable incomes was of a capital nature. This ques-
tion was not an issue before the tax court. . . . The companies did not, in their statement of
grounds of appeal in terms of rule 11 of the tax rules, raise as an issue the question whether the
rights which the Commissioner sought to include in their taxable incomes was of a capital nature
and neither procedure contemplated in tax rule 13 was followed. The issue cannot accordingly
be pursued before this court.
[11] I turn to consider the first ground of appeal, that is, whether the rights to use the loans
interest free constituted ‘amounts’ which ‘accrued to’ the companies. The word ‘amount’ and
the phrase ‘accrued to’ were interpreted by Watermeyer J writing for the full court of the Cape
Provincial Division in Lategan v CIR75 and both interpretations were approved by this court in CIR
v People’s Stores (Walvis Bay) (Pty) Ltd.76 The law was restated by this court in Cactus Investments (Pty)
Ltd v CIR.77 Hefer JA, who wrote both judgments in this court, summed up the law in Cactus In-
vestments by saying that the definition of gross income –
‘includes, as explained in CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), not only income
actually received, but also rights of a non-capital nature which accrued during the relevant year and are
78
capable of being valued in money’
and that –
‘The judgment in the People’s Stores case tells us that no more is required for an accrual than that the per-
son concerned has become entitled to the right in question.’79
[12] The Commissioner’s counsel submitted on the authority of the decisions to which I have
just referred that the right to retain and use the borrowed funds without paying interest had a
money value, and accordingly that the value of such right must be included in the companies’
gross incomes for the years in which such rights accrued to the companies. I agree. This court
has held that the making of an interest-free loan constitutes a continuing donation to the bor-
rower which confers a benefit upon such borrower: CIR v Berold.80 Indeed, it can hardly be
doubted that, in the modern commercial world, a right to retain and use loan capital for a peri-
od of time, interest-free, is a valuable right. The basis upon which the Commissioner valued that
right in each particular year of assessment in the further revised assessments, was not challenged
on appeal.
[13] It was submitted on behalf of the companies that the rights so valued by the Commissioner
could not be turned into money by the companies and therefore did not fall within the ambit of
the decision of this court in the People’s Stores case. For this proposition, counsel for the compa-
nies relied on the decision of the full court of the Cape Provincial Division in Stander v CIR81 and
the decision of the House of Lords to which it refers,82 namely, Tennant v Smith (Surveyor of Taxes).83
________________________

72 In s 1 of the Act sv ‘gross income’.

73 1955 (3) SA 293 (A) at 301B-G.
74 1994 (2) SA 801 (A) at 812D-G.
75 1926 CPD 203.
76 1990 (2) SA 353 (A).
77 1999 (1) SA 315 (SCA).
78 At 319G-H.
79 At 320H.
80 1962 (3) SA 748 (A) at 753F-G and cf CSARS v Woulidge 2002 (1) SA 68 (SCA) para 10.
81 1997 (3) SA 617 (C).
82 At 621E-I.
 Receipts and accruals 137

[14] In Stander’s case the taxpayer received an overseas trip as a prize and the Commissioner
sought to include the value of the prize in his taxable income. The prize was awarded by Delta
Motor Corporation (Pty) Ltd, which was not Stander’s employer. Friedman JP writing for the full
court held:84
‘The question, then, is whether the prize of an overseas trip constitutes “property”, ie did Stander, by be-
ing given this trip, acquire a right which had a monetary value in his hands.
The promise by Delta to give Stander an overseas trip amounted to an executory donation. At common
law the promise by Delta gave Stander, on acceptance by him of the promise, a personal right to compel
performance by Delta. However, by virtue of s 5 of the General Law Amendment Act 50 of 1956 –
“no executory contract of donation . . . shall be valid unless the terms thereof are embodied in a writ-
ten document signed by the donor”.
The terms of the donation were not embodied in a written document signed by Delta. Consequently Del-
ta’s offer of an overseas trip did not give rise to a valid contract of donation which was enforceable by
Stander and Stander cannot be said to have acquired a “right” even if a monetary value could be placed on
the trip he received. However, once he had embarked upon the trip, the donation was no longer executo-
ry and the question then is whether a value could be placed on what Stander received by going on the trip.
The answer to this question is, in my view, in the negative. Having gone on the trip he had not received
any “property” on which a monetary value could be placed in his hands. He was no more able to turn it
into money or money’s worth after accepting the award, than he was at the time when the donation was
still at the executory stage.’
The learned Judge President then went on to deal with ITC 701,85 decided by Conradie J in the
Special Court, and said the following:86
‘Conradie J, in delivering the judgment of the Special Court, accepted the principle that in order to fall
within the tax net, receipts or accruals other than money had to have a money’s worth. However Conradie
J rejected the argument that only benefits which a taxpayer can turn into money can be said to have a
money’s worth. He stated that there was no warrant for such a restricted form of valuation and held that a
service which is available in the market place has a value attached to it by the market. That, he stated, was
the value of the benefit which anyone who availed himself of the service, enjoys. In other words, one simp-
ly looks at what the consumer of the service would have had to pay for it if he had not been given it for
nothing.
With respect to the learned Judge, this approach fails to take account of the impact of Watermeyer J’s
judgment in Lategan’s case supra, as approved by the Appellate Division in the People’s Stores case supra. Hav-
ing regard to the conditions applicable to the enjoyment of the award, the overseas trip had no “value” in
Stander’s hand which brought it within the terms of para (c) of the definition of “gross income”.
I did not understand Mr De Haan, who appeared for the Commissioner, to contend that in order to qualify
87
as an “amount” for the purposes of para (c), it was not necessary for the award to consist of “money’s
worth”. He submitted that in order to determine “money’s worth” an objective value had to be placed on
the award. By “objective value”, he argued, was meant “market value”.
I do not agree. If the award cannot be said to consist of “money’s worth” it does not qualify for inclusion in
terms of para (c). Nor, in my judgment, is there any basis upon which, on the facts of this case, “money’s
worth” can be attributed to Stander’s prize by seeking to place an “objective” or “market value” on it.
Whatever it cost Delta, or whatever a person who wished to go on such a trip would have had to pay for it,
does not constitute an amount which can be said to have money’s worth in Stander’s hands.’
[15] The views of the learned Judge President are contrary to what this court had previously
held in the People’s Stores case, restated in Cactus Investments. The passage in Cactus Investments has
already been quoted in para [11] above: according to that decision, all that is required is that
rights of a non-capital nature ‘are capable of being valued in money’. The relevant passage in
the People’s Stores case88 is the following:
‘It must be emphasised that income in a form other than money must, in order to qualify for inclusion in
the “gross income”, be of such a nature that a value can be attached to it in money. As Wessels CJ said in
89
the Delfos case supra at 251:
________________________

83 [1892] AC 150 (HL).

84 At 622D-H.
85 (1950) 17 SATC 108.
86 At 623C-I.
87 Of the definition of gross income which includes ‘any amount, including any voluntary award, received or
accrued in respect of services rendered . . . or any amount (other than an amount referred to in s 8(1))
received or accrued in respect of or by virtue of any employment or the holding of any office . . . ’.
88 At 364G-J.
89 Commissioner for Inland Revenue v Delfos 1933 AD 242.
138 Income Tax in South Africa: Cases and Materials

“The tax is to be assessed in money on all receipts or accruals having a money value. If it is something
which is not money’s worth or cannot be turned into money, it is not to be regarded as income.”
90
(See also Mooi v Secretary for Inland Revenue (supra at 683A-F).) On the other hand, the fact that the valua-
91
tion may sometimes be a matter of considerable complexity (cf the Lace Proprietary Mines case supra at
279-81) does not detract from the principle that all income having a money value must be included.’
It is clear from the passage quoted from the judgment of Hefer JA, as well as the passage quoted
by him from the judgment of the Chief Justice in the Delfos case, that the question whether a
receipt or accrual in a form other than money has a money value is the primary question and the
question whether such receipt or accrual can be turned into money is but one of the ways in
which it can be determined whether or not this is the case; in other words, it does not follow that
if a receipt or accrual cannot be turned into money, it has no money value. The test is objective,
not subjective. It is for that reason that the passages quoted from the Stander case incorrectly
reflect the law and the reasoning of Conradie J in ITC 701 was correct. The question cannot be
whether an individual taxpayer is in a position to turn a receipt or accrual into money. If that
were the law, the right to live in a house rent-free, or to drive a motor vehicle without paying for
it, for example, could be rendered tax-free by the simple expedient of limiting the right to exer-
cise such benefit to the recipient which manifestly is not the case.
[16] Nor is the decision of the House of Lords in the Tennant case authority for the companies’
argument. That case turned on the provisions of the income tax legislation applicable in Eng-
land at the time, which were very different from the meaning which this court has held must be
given to the definition of gross income in the South African statute. The position as it was in
England appears from the following passage in the speech of Halsbury LC:92
‘Now, Mr. Tennant occupies this house without paying any rent for it. It may be conceded that if he did
not occupy it under his contract with the bank rent free, he would be obliged to hire a house elsewhere,
pay rent for it, and pro tanto diminish his income. And if any words could be found in the statute which
provided that besides paying income tax on income, people should pay for advantages or emoluments in
its widest sense (such as I think the word “emoluments” here has not, for reasons to be presently given),
there is no doubt of Mr. Tennant’s possession of a material advantage, which makes his salary of higher
value to him than if he did not possess it, and upon the hypothesis which I have just indicated would be
taxable accordingly.’
93
The law in South Africa appears from the following passage in the People’s Stores case:
‘The first and basic proposition [in Lategan’s case is that income, although expressed as an amount in the
definition, need not be an actual amount of money but may be “every form of property earned by the tax-
payer, whether corporeal or incorporeal, which has a money value . . . including debts and rights of action.”
(per Watermeyer J at 209).
This proposition is obviously correct so that very little need be added to what Watermeyer J himself said in
support thereof. It is hardly conceivable that the Legislature could not have been aware of, or would have
turned a blind eye to, the handsome profits often reaped from commercial transactions in which money is
not the medium of exchange. Consider, for example, the many instances of valuable property changing
hands, not for money, but for shares in public or private companies; or share-cropping agreements, divi-
dends in the form of bonus shares, or remuneration for services in the form of free or subsidised housing and the
use of motor vehicles. These are only a few of the many possible illustrations that readily come to mind
and which, as we know, have not been overlooked by the Legislature.’
[17] Counsel for the companies submitted that the phrase relating to free or subsidised housing
that I have emphasised in the passage just quoted from the People’s Stores case and the further
statement that such a benefit has ‘not been overlooked by the Legislature’ must be taken as a
reference to paragraph (i) of the definition of gross income94 and to the Seventh Schedule to the
Act; and that unless a benefit of the nature contemplated falls within those provisions, it is not
taxable. I cannot agree. Those provisions were inserted into the Act not because such benefits
are not otherwise taxable, but to put beyond doubt what benefits are taxable and, equally
________________________

90 1972 (1) SA 675 (A).

91 Lace Proprietary Mines Ltd v CIR 1938 AD 267.
92 At 155.
93 At 363I-364C.
94 ‘(i) [T]he cash equivalent, as determined under the provisions of the Seventh Schedule, of the value
during the year of assessment of any benefit or advantage granted in respect of employment or to the
holder of any office, being a taxable benefit as defined in the said Schedule, and any amount required
to be included in the taxpayer’s income under section 8A.’
 Receipts and accruals 139

importantly, to determine how their value is to be assessed for the purpose of calculating the tax
to be deducted by an employer from an employee’s remuneration.95 It is clear from the People’s
Stores and Cactus Investments cases that the word ‘amount’ in the definition of gross income is to
be interpreted widely.
[18] The Tax Court held that the companies received no monies on loan which were used to
produce any income, and that the Commissioner had therefore assessed the companies on no-
tional income. It is true that had the companies invested the amounts lent, the income so de-
rived would also have formed part of their gross incomes. But that is beside the point. The
Commissioner did not seek to tax the companies on this basis. Nor is the fact that the companies
were unable to make such investments but were obliged to use the loans for the purposes of
developing the units relevant, as submitted on behalf of the companies. The Commissioner
taxed the companies on the basis of the benefit consisting in the right to use the loans without
having to pay interest on them. That benefit remained, whatever the companies did or did not
do with the loans. Furthermore, no question of double taxation would arise, as suggested on
behalf of the companies, if the amounts lent were to have been invested so as to produce interest
– in such a case there would be two separate and distinct receipts or accruals, each of which
would fall to be included in the companies’ gross incomes.
[19] The Tax Court also held that the benefit included by the Commissioner in the companies’
gross incomes had no existence independent from the liability to repay the monies borrowed;
that it could not be transferred or ceded; and that it ‘clearly has no money value’. This reasoning
loses sight of the fact that if a right has a money value – as the right in question did, for the rea-
sons I have given – the fact that it cannot be alienated does not negate such value. The contrary
view articulated in Stander’s case is wrong.
[20] I therefore conclude that the first ground of appeal raised by the companies should have
been dismissed by the Tax Court. . . .
Notes
This decision is a landmark in South African tax jurisprudence, ranking in importance
with (and arguably reinterpreting in certain respects) the decisions in CIR v Lategan and
CIR v People’s Stores (Walvis Bay) (Pty) Ltd.
It is also a highly controversial decision, and whether it correctly interpreted the deci-
sion in Peoples’ Stores is debateable. However, being a decision of the Supreme Court of
Appeal, the ratio decidendi of Brummeria is binding on all lower courts.
It is worth bearing in mind that the court refused to consider whether or not the bene-
fit in issue in this case (the value of the right to use the loan funds, interest-free) was of a
capital nature. This was because the taxpayer companies had omitted to include in their
objection to the assessment, a contention that any benefit from the interest free loan was
‘of a capital nature’, and the court therefore refused to allow this issue to be raised on
appeal. This decision is therefore not authority for the proposition that interest-free
loans are not of a capital nature; this issue remains open, and will have to be determined
on the facts of each particular case.
In the circumstances of the Brummeria case, since the benefit of the interest-free loans
had been secured by the taxpayer companies in the course of their ordinary trading
operations, it is clear (I submit) that the benefit of such loans could not be said to be of a
capital nature. Of course, (as the court acknowledged in Brummeria) the loaned funds
were not themselves included in gross income; what was in issue was the value of the benefit
which the taxpayer derived from the fact that the loan was interest-free.
The reason why the Brummeria judgment is controversial is that, prior to the decision,
conventional wisdom had been that, save where the Income Tax Act provides otherwise
(such as in the Seventh Schedule with deals with taxable fringe benefits and their valua-
tion) the general principle is that an ‘amount’, as contemplated in the definition of gross
income, means money or a benefit which the taxpayer could convert into money if he chose
________________________

95 In terms of the Fourth Schedule to the Act.

140 Income Tax in South Africa: Cases and Materials

to do so. In Lategan the court had explicitly pointed out that the right to future payment
which had accrued to the taxpayer in that case was one ‘which he could turn to account
if he wished to’.96 In other words, Lategan could have taken the debt that was owing to
him and sold his rights to a bank or financial institution, thereby converting the benefit
into cash.
The first point of criticism of the decision in Brummeria is that it was wrong to brush
aside the 1892 judgment of the House of Lords in Tennant v Smith on the grounds that
the decision turned on a provision of the income tax legislation which prevailed in
England at the time.
The truth is that, in Tennant v Smith, the law lords, in addition to interpreting and ap-
plying a particular statutory provision, made some profound observations concerning the
nature and characteristics of ‘income’, and it is on account of these dicta that the deci-
sion in Tennant v Smith has, in the century since then, had a lasting impact on tax juris-
prudence and continues to be discussed, not just in the United Kingdom, but in many
countries around the world.
The issue brings to mind Lord Macnaghten’s much-quoted aphorism – ‘Income tax, if
I may be pardoned for saying so, is a tax on income.’97 In other words, the most funda-
mental issue in income tax is the question – what constitutes “income”? And, in this
context, the question arises as to the circumstances in which a non-monetary benefit will
constitute ‘income’ – or to express it in the language of the definition of ‘gross income’
in South Africa’s Income Tax Act, when does a non-monetary benefit constitute an
‘amount’ which is ‘not of a capital nature’?
The case of Tennant v Smith involved a particular kind of non-monetary benefit, name-
ly the right granted to a bank employee to live, rent-free, in a bank-owned house.
In the course of his judgment, Lord Halsbury said, ‘I am of the opinion. . .that the
thing sought to be taxed is not income unless it can be turned into money’. For brevity,
we may call this ‘the convertibility principle’, and this principle was adopted and applied
in South Africa in the case of Stander, only to be overruled by the Supreme Court of
Appeal in Brummeria.
The second point of criticism of the Brummeria judgment is that it (arguably) misinter-
preted the decisions in Lategan and Peoples’ Stores in holding that these two decisions did
not endorse the convertibility principle.
Prior to the decision in Brummeria, it was widely believed that the convertibility princi-
ple was indeed part of our law, except where overridden by statute on the basis that both
Lategan and Peoples’ Stores had (arguably) adopted and applied the convertibility principle.
In Stander v CIR, the Cape High Court applied the convertibility principle, holding
that, in receiving the prize of a free holiday, the taxpayer –
‘had not received any “property” on which a monetary value could be placed in his hands. He
was [not] able to turn it into money or money’s worth’98
because the terms of the prize were such that he could not opt to take it in cash and he
could not transfer his right to the prize. The judgment explicitly based this conclusion
on the decisions in Lategan and Peoples’ Stores.
In Brummeria, the Supreme Court of Appeal held that the decision of the Cape High
Court in Stander was wrong, and that the convertibility principle is not part of our law.
The Brummeria judgment holds that it is not the law that a non-monetary benefit does
not constitute an ‘amount’ for the purposes of the definition of gross income unless the
taxpayer would be able to turn it into money if he chose to do so.
________________________

96 At SATC 20.
97 London CC v AG [1901] AC 26.
98 1997 (3) SA 617 (C) 622H.
 Receipts and accruals 141

Instead, the Supreme Court of Appeal held that a receipt or accrual constitutes an
‘amount’ if it is capable of being valued in money. Thus, in the case at hand, where the
companies had received interest-free loans, the benefit to the taxpayer (namely, the right
to the use of the money, interest-free) was held to be a non-monetary benefit capable of
being valued in money. That value, said the court, was an ‘amount’ that had to be in-
cluded in the companies’ gross income.
It is thus important to note that, despite reaching contradictory conclusions, both
Stander and Brummeria professed to accept and apply the principles laid down in Peoples’
Stores – which in its turn, professed to approve and endorse the decision in Lategan.
The decision in Stander held, in effect, that both Lategan and Peoples’ Stores had adopted
the convertibility principle.
The Supreme Court of Appeal decision in Brummeria held that Peoples’ Stores had not
adopted the convertibility principle, but on the contrary had held that any non-capital
receipt or accrual in non-monetary form, which was capable of being valued in money,
constituted an “amount” which had to be included in gross income, irrespective of
whether or not the taxpayer was able to convert it into money. The primary question,
said the court in Brummeria, was whether the non-monetary receipt or accrual had a
money value, and the question whether the taxpayer could turn it into money was only
one of the ways of determining whether or not this was so.
Unless and until the Supreme Court of Appeal recants, and reinstates the convertibil-
ity principle, the question whether the Brummeria judgment correctly interpreted the
decision in Peoples’ Stores is academic. However, as is pointed out above, the court in
Brummeria did not hold that all interest-free loans give rise to a taxable benefit, and left
open the possibility that, in certain circumstances, the value of an interest-free loan will
be of a capital nature, and is therefore not to be included in the taxpayer’s gross income.
It is submitted that the value of an interest-free loan will be of a capital nature (and
therefore does not fall to be included in gross income) if it was not derived in the course
of a trade or scheme of profit-making carried on by the taxpayer, and if it was not a quid
pro quo for something that falls within one of the sub-paragraphs of the definition of
gross income, for example, if it was not a quid pro quo for services rendered. In other
words, a non-monetary benefit will be included in gross income if it would have been so
included had it been received in the form of money.
99
An editorial in The Taxpayer comments (correctly, it is submitted) as follows –
The Brummeria case is clearly not authority for the general conclusion that the value of the right
to the use of each and every interest-free loan should be included in the gross income of the
borrower. The principles from the judgment should be applied with due regard to the specific
facts and circumstances of each and every matter involving an accrual in a form other than
money (including the right to retain and use an interest-free loan). Amounts received or ac-
crued to a taxpayer (in cash or otherwise) that are not of a capital nature and are capable of
being valued should be included in the owner’s gross income and are therefore taxable.

[85]
Interpretation Note 58 (issue 2) – 4 October 2012
[Replacing issue 1 dated 30 June 2010.]
ACT: INCOME TAX ACT 58 OF 1962 (the Act)
SECTION: SECTION 1(1), DEFINITION OF “GROSS INCOME”
SUBJECT: THE BRUMMERIA CASE AND THE RIGHT TO USE LOAN CAPITAL INTEREST FREE
Preamble
In this Note unless the context indicates otherwise –
• “BGR” means a binding general ruling issued under section 89 of the Tax Administration Act,
2011;
________________________

99 Vol 57 no 10 (October 2008) at 186.

142 Income Tax in South Africa: Cases and Materials

• “SCA” means the Supreme Court of Appeal of South Africa;

• “section” means a section of the [Income Tax] Act;
• “Tax Administration Act, 2011” means the Tax Administration Act No. 28 of 2011;
• “the Brummeria case” means the judgment handed down by the SCA in Commissioner, SARS v
Brummeria Renaissance (Pty) Ltd 2007 (6) SA 601 (SCA), 69 SATC 205; and
• any word or expression in this Note bears the meaning ascribed to it in the Act.

1. Purpose
This Note has been published as a result of the judgment of the SCA in the Brummeria case.
For the purposes of interpreting the definition of the term “gross income” in section 1(1),
this Note –
• outlines the treatment of receipts or accruals in a form other than money; and
• serves as a BGR issued under section 89 of the Tax Administration Act, 2011 on the
meaning of the term “amount” as used in that definition (see 7).

2. Background
The Brummeria case concerned a group of companies (the taxpayers) that granted life rights
over units in a sectional title scheme operating as a retirement village to the occupiers (life-
right holders). As a quid pro quo (in exchange) the life-right holders granted interest-free
loans to the taxpayers for as long as they occupied the units.
The SCA had to adjudicate the appeal on the issues as defined in the statement of the
grounds of assessment read with the statement of the grounds of appeal. Issues that were not
raised in the statement of grounds of appeal could not be pursued before the court. The
court had to consider the taxpayers’ contention that the interest-free loans did not result in
any “amount” being “received by” them which could be, and was, wrongly included in their
gross income.
The complete facts of the case and the arguments of the Commissioner and the taxpayers
may be found in the reported judgment and are therefore not repeated in this Note.
The SCA held that the right to use the loan capital interest free has an ascertainable money
value that should be included in the gross income of the taxpayers.
The SCA did not, in the context of the appeal, consider the position of the life-right holders.
This Note therefore focuses on the borrowers of the money in the context of trade and not
on the position of the life-right holders.

3. The law
Extract from the definition of the term “gross income” in section 1(1)

“gross income”, in relation to any year or period of assessment, means—

(i) in the case of any resident, the total amount, in cash or otherwise, received by or
accrued to or in favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or other-
wise, received by or accrued to or in favour of such person from a source within or
deemed to be within the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital na-
ture, but including, without in any way limiting the scope of this definition, such amounts
(whether of a capital nature or not) so received or accrued as are described hereunder,
namely—

4. Principles enunciated by the SCA in the Brummeria case

The judgment of the SCA in the Brummeria case may be referred to as authority for the fol-
lowing principles:
• The word “amount” in the definition of the term “gross income” is to be interpreted
widely.
 Receipts and accruals 143

• The right to use the loan capital interest free (the right) has a monetary value.
• Even though the receipt or accrual of the right is in a form other than money (in casu,100
the benefit of the use of an interest-free loan), which cannot be alienated or turned into
money, it does not mean that the receipt of the right has no money value. The test to be
applied in order to determine whether the receipt or accrual has a monetary value is an
objective one and not subjective.101
• The value of the receipt or accrual in a form other than money (in casu, the right to use
an interest-free loan) constitutes an “amount” that “accrues” to the taxpayer and should
be included in the gross income of the taxpayer for the year of assessment in which the
right is received by or accrued to the taxpayer.102
• For a benefit of this nature to be taxable the amount does not need to fall within para-
graph (i) of the definition of the term “gross income” in section 1(1) (that is, a “taxable
benefit” as defined in the Seventh Schedule to the Act).

5. Issues not decided by the SCA

The SCA merely accepted, without deciding –
• the nature of the rights under the transaction – that is, whether they were of a capital or
revenue nature (this was not an issue before the court);
• the timing of the accrual; and
• the valuation method.
The court merely accepted the approach taken by the Commissioner in his submission on
these matters, since the taxpayers had not contested them in their grounds of objection and
appeal.

6. Application of the principles enunciated by the Brummeria case

6.1 Receipts and accruals in a form other than money in exchange for goods supplied,
services rendered or any other benefit given
It is evident from the facts of the Brummeria case, that the rights to use the interest-free
loans were intended by the lenders (the life-right holders) to be in exchange for the life
rights granted by the borrower.
As a result the principles from the judgment may be applied in all cases in which benefits
in a form other than money (such as the right to use an interest-free loan) are granted in
exchange for goods supplied, services rendered or any other benefit given.
The receipt or accrual in a form other than money could constitute an amount. Unless
this amount is of a capital nature which is not specifically included in the definition of
the term “gross income”, it should be valued and included in the gross income of the
taxpayer in the year of assessment in which it is received or accrued.
6.1.1 Determination of the value of receipts and accruals in a form other than money
(a) General principles of valuation enunciated by the SCA in the Brummeria case
The SCA made it clear in the Brummeria case that the question whether a re-
ceipt or accrual in a form other than money has a money value is the primary
question. The ability to turn such a receipt or accrual into money is but one
of the ways in which it can be determined whether it has a money value. It
does not follow that a receipt or accrual which cannot be turned into money
has no value. The test is objective and not subjective.103

________________________

100 In the case under consideration.

101 On this point, Stander v CIR 1997 (3) SA 617 (C), 59 SATC 21 was found to incorrectly reflect the law.
102 The principles in Lategan v CIR 1926 CPD 203, 2 SATC 16; CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990
(2) SA 353 (A), 52 SATC 9 and Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA), 61 SATC 43 were
confirmed.
103 The Stander case was found to incorrectly reflect the law on this point.
144 Income Tax in South Africa: Cases and Materials

Arm’s length principles of valuation must be applied in each case, having re-
gard to the facts and circumstances and the intention of the parties.
(b) Value of the right to use an interest-free loan
The basis upon which the right to use an interest-free loan was valued by
SARS was never challenged on appeal by the taxpayers and therefore was not
under dispute before the court. The SCA therefore did not rule on the basis
used in valuing the right.
In the Brummeria case SARS applied the weighted-average prime overdraft
rate of banks to the average amount of interest-free loans in possession of the
taxpayer in the relevant year of assessment as a method in order to place a
value on the right to use an interest-free loan. The SCA neither accepted nor
rejected this approach. It does not necessarily follow that this method will al-
ways be the most appropriate for valuing a right to use an interest-free loan.
Each case must be evaluated on its own merits and all facts and circumstanc-
es pertaining to the right to use the interest-free loan must be taken into ac-
count in the valuation. A person adopting a different method of valuation
will bear the burden of proving its appropriateness in the specific case.
6.1.2 Time of accrual of an amount in a form other than money
The timing of an accrual of an amount in a form other than money must be de-
termined in accordance with general legal principles. In this regard, the courts
have determined that an accrual can only take place when the taxpayer has be-
come unconditionally entitled to the amount in question.104
The timing of an accrual of an amount in a form other than money must there-
fore be determined in each individual case having regard to the law and the facts
and circumstances of each case.
The borrower in the retirement village industry is assessed on the right to use the
interest-free loan in exchange for granting a right of occupation only in the year
in which the borrower becomes entitled to the right to use the loan.
Note: The borrower is not assessed on the right to use the same loan in subse-
quent years irrespective of the term of the loan.
6.2 The right to retain and use an interest-free loan in the context of a group of companies
and between shareholders and their companies
The right to use an interest-free loan given by a shareholder to a company or by a
company to another company in the same group of companies may be made with the in-
tention of providing long-term working capital to the company or to meet capital ex-
penditure requirements within the group of companies.
The shareholder or group company that grants the right to use an interest-free loan may
not necessarily intend the right to be in exchange for goods sold, services rendered or
some other benefit granted by the borrowing company. Interest-free loans between
shareholders and their companies and between companies within the same group of
companies would therefore not necessarily be affected by the Brummeria case since these
interest-free loans may be granted in a capital context.
However, a borrower that has provided any goods, services or other benefits to the
lender in exchange for the use of an interest-free loan, must value the right to use that
loan and include the amount in that borrower’s gross income.
Each right to the use of an interest-free loan granted in this context must therefore be
considered and evaluated against the background of its own facts and circumstances and
intention of the parties to the interest-free loan to determine whether the amount is of
a capital nature or not and whether its value must be included in the borrower’s gross
income.
________________________

104 In Lategan v CIR 1926 CPD 203, 2 SATC 16, CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A),
52 SATC 9 and Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA), 61 SATC 43.
 Receipts and accruals 145

6.3 Receipts or accruals in a form other than money in any other context
The value of a receipt or accrual in a form other than money would usually not have to
be included in gross income if the receipt or accrual did not take place in exchange for
goods supplied or services rendered. The reason for this is that such a receipt or accrual
would probably be of a capital nature. However, each and every transaction will have to
be evaluated on its own merits and against the background of its own facts and the inten-
tion of the parties.
7. Granting of life rights over units in a retirement village – Binding General Ruling (BGR)
The contents of this paragraph constitute a BGR under section 89 of the Tax Administration
Act, 2011 and relate to the definition of the term “gross income” in section 1(1). This BGR
applies with effect from the commencement of years of assessment ending on or after 31 De-
cember 2008 and will apply for an indefinite period.
Agreements in the retirement industry are frequently structured in such a way that one per-
son (the owner of a unit) grants a lifelong right of occupation over that unit to another per-
son (the life-right holder). As compensation the life-right holder advances the owner an
interest-free loan for the duration of the period of occupation.
Only amounts received by or accrued to a taxpayer during a particular year of assessment must
be included in that taxpayer’s gross income for that year of assessment.105 The value of a right
that accrues to a taxpayer in a particular year of assessment must be determined in that year.106
In calculating the monetary value of the right to use an interest-free loan in the year in which
it is granted, it should be taken into account that the owner of the unit has given something
in exchange to the life-right holders. The quid pro quo is the granting of the lifelong right of
occupation of the unit. The owner is therefore left only with the bare dominium of the unit
for the full period of the loan. Only when the loan is repaid and the life right is re-united
with the bare dominium, will the owner be in a position to deal freely with the complete own-
ership of the unit.
The value of this quid pro quo given by the owner of the unit to the life-right holder should
therefore be determined and taken into account in the valuation of the right to use the in-
terest-free loan.
The right to use an interest-free loan granted by an occupant in a retirement village to the
owner of that unit in exchange for the granting of a life right of occupation in respect of that
unit usually does not relate to a fixed period. Instead, the period over which the right to the
use of the loan is to be enjoyed depends on the life expectancy of the life-right holder and
certain other contractually agreed contingencies (such as the possibility that the life-right
holder may cancel the loan before his or her death).
In view of the above, it may be accepted that the value of the right to use the interest-free loan
should be calculated in the year that the loan is granted with reference to the following factors:
[The Interpretation Note gives here cites the factors to be taken into account and gives ex-
amples of the calculation of the monetary value to be included in gross income.]
An owner that is obligated to refund only a portion of the loan on death or cancellation of
the agreement must include the amount not refundable in gross income in the year of as-
sessment in which the loan is granted and paid by the person acquiring the life right.
In the case of an interest-free loan, the benefit to retain and use the interest-free loan will
accrue to the owner on the date the loan has been granted and paid by the person acquiring
the life right.
8. Loans at nominal interest rates
Some recent arrangements make provision for loans at nominal interest rates and a corre-
sponding nominal rental to be paid. It is SARS’s view that this will not change the impact of
the Brummeria case. The value of the benefit received must be calculated in the same manner
as above, but the weighted-average prime overdraft rate (symbol “D” in the formula) must be
reduced by the interest rate payable.
________________________

105 Definition of “gross income” in s 1.

106 CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9.
146 Income Tax in South Africa: Cases and Materials

9. Capital gains tax implications

A developer granting life rights over units in a retirement village to occupiers in exchange
for the right to use loan capital granted interest-free by those occupiers to the developer for
as long as they occupy the units, will not be subject to capital gains tax on these transactions.107

10. Conclusion
The Brummeria case is clearly not authority for the general conclusion that the value of the
right to use an interest-free loan should in each and every case be included in the borrower’s
gross income. The value of a receipt or accrual in a form other than money would usually
not have to be included in gross income if the receipt or accrual did not take place in ex-
change for goods supplied or services rendered. The reason for this is that such a receipt or
accrual would probably be of a capital nature. However, each and every transaction will have
to be evaluated on its own merits and against the background of its own facts and the inten-
tions of the parties.
As a general rule all amounts received by or accrued to a taxpayer (in cash or otherwise) that
are not of a capital nature and are capable of being valued, should be included in the tax-
payer’s gross income and are therefore subject to income tax. The principles from the judg-
ment (see 4) should, however, be applied with due regard to the specific facts and
circumstances of each and every matter involving an accrual or receipt in a form other than
money (including the right to retain and use an interest-free loan).
[An annexure to this interpretation note gives the present value of R1 per annum for life
capitalised at 12 per cent over the expectation of life of males and females of various
ages.]

§9 Time of accrual and valuation of the accrued amount

Silke108 is of the view that the proper date for valuing a non-monetary fringe benefit is
the date of the accrual. This view is supported by [88] Mooi and [79] Lace Proprietary
Mines. The proposition that valuation must take place on the last day of the tax year
in which accrual occurred is suggested by [233] Caltex Oil which held that where
expenditure was incurred during the 1967 year of assessment, ‘it was at the end of the 1967
tax year that the amount of the expenditure actually incurred during the year had to be
determined and brought into account’ (italics added) unless the item was disposed of
prior to that date, in which event the proceeds of the sale constitute the amount of
the receipt or accrual. In [114] Matla Coal the Appellate Division recounted these
two conflicting views but, in the case at hand, found it unnecessary to choose between
them.
For statutory deviations from this principle, see for example s 7A(2), (3) and (4). See
also s 24B and s 24I

The value of an amount which has accrued to the taxpayer must be determined as at the last day of
the year of assessment.

[86]
Lategan v CIR
1926 CPD 203, 2 SATC 16
For the facts of this case, see extract [69].
Watermeyer J: Assuming that the right to receive the instalments was not converted into money
by sale or otherwise during the year of assessment, the value to be fixed (apart from any question
________________________

107 See paras 20(3)(a) and 35(3)(a) of the Eighth Schedule to the Act.
108 At §2.17.
 Receipts and accruals 147

whether the debt was good or bad) would be the present worth of the instalments at the end of
the year, ie 30th June 1920.

Where an amount accrues to the taxpayer, it must be valued at the date of the accrual.

[87]
South African Marine Corporation Ltd v CIR
1955 (1) SA 654 (C), 20 SATC 15
The taxpayer was incorporated in the Union of South Africa and carried on business as
ship-owners and operators. It operated cargo services between the Union and the USA. It
had entered into a joint venture with a US company. On 18 September 1949 the South
African pound was devalued relative to the dollar. At that time, the taxpayer had a credit
of $662 300 in the agency account maintained for it by the US company. All the items
which made up this credit balance were reflected in the taxpayer’s books at the exchange
rate which prevailed at the date of the transaction. When part of these moneys was
remitted to the Union, the taxpayer received £60 920 more than the credit recorded in
its books. The taxpayer reflected this excess in its accounts as an ‘exchange profit’ and the
Commissioner included it in the taxpayer’s taxable income for that year of assessment.
Issue: at what juncture in the tax year ought the accrual in question to be valued?
Held: the amounts which accrued to the taxpayer should be valued at the date of the
transaction in question.
Ogilvie-Thompson J: It follows that appellant’s trading operations as conducted by States Marine
on its behalf – which operations I for convenience call appellant’s American trading operations
– attract Union tax: that is beyond dispute and is not questioned in this appeal. As, however,
those operations are reflected in American dollars, and because for purposes of Union taxation
appellant’s accounts must be expressed in Union currency, it is necessary for appellant in its
books to reflect its American trading operations in terms of Union points. In my opinion such
conversion of dollars into South African pounds should be made at the rate of exchange prevail-
ing on the date whereunder the items concerned – whether credit or debit – appear in the gen-
eral account kept by States Marine; for it is at such dates that (assuming States Marine’s accounts
to have been correctly kept) the accrual or receipt of income occurs: see Payne v Deputy Commis-
sioner of Taxation.109
HALL J and WATERMEYER AJ concurred.

Where the taxpayer acquires a conditional right, accrual occurs on the date the condition is fulfilled.

[88]
Mooi v SIR
1972 (1) SA 675 (A), 34 SATC 1
For the facts of this case, see extract [81].
Ogilvie-Thompson CJ: I am of opinion that no accrual within the meaning of the definition of
‘gross income’ occurred in July 1963 . . . but that the relevant accrual occurred when the option
became exercisable on 1 September 1966. The real benefit conferred upon appellant, which was
at all material times in the contemplation of all concerned, was the right to apply for the shares
at R1,25 per share and that right arose when, upon fulfilment of the conditions of the option,
the latter became exercisable.

________________________

109 (1936) 2 All ER 793.

148 Income Tax in South Africa: Cases and Materials

Notes
A right is ‘conditional’ when its enforceability is suspended, until the occurrence of an
uncertain future event. A ‘conditional’ right must be distinguished from the postponed
enjoyment of a right. If I undertake that, ‘I will pay you R100 on 30 September 2010’,
your right is not conditional; its enjoyment is merely postponed to a time which is certain
to arrive. In Mooi, Ogilvie-Thompson J accepts that, in principle, even a spes that accrues
to a taxpayer must be valued, but that if its value is zero, or if it is impossible to establish
because it is inextricably linked with other rights, then no ‘amount’ accrues to the tax-
payer in respect thereof.110
In ITC 521111 it was held that amounts payable under a policy of insurance did not ac-
crue to the taxpayer until the claim had been notified to the insurer and approved. In
Building Contractors v COT 112 the taxpayer’s entitlement to retention moneys of 10% of the
contract price was conditional on an engineer issuing a final certificate; it was held that
the retention moneys did not accrue to the taxpayer until the certificate had been issued.

§10 Beneficial receipt or accrual

An amount is not ‘received by’ a taxpayer, nor does an amount ‘accrue’ to him unless it is received
by the taxpayer on his own behalf and for his own benefit.
[89]
Geldenhuys v CIR
1974 (3) SA 256 (C), 14 SATC 419
For the facts of this case, see extract [66].
Steyn J: [I]t seems to be clear that in the definition of ‘gross income’ the words ‘received by or
accrued to or in favour of any person’ relate to the taxpayer, and the words ‘received by’ must
mean ‘received by the taxpayer on his own behalf for his own benefit’.

Notes
Where the taxpayer receives an amount qua agent, trustee or usufructuary, such amount
does not form part of his gross income but is included in the gross income of the princi-
pal, in the gross income of the trustee in that capacity (or in the gross income of the
beneficiary if he has a vested right to it) or in the gross income of the holder of the bare
dominium, respectively. The same principle applies in relation to income which ‘accrues
to’ a person.
For example, an amount which a parent receives qua guardian of a child, is not in-
cluded in the parent’s gross income. Hence, if a taxpayer receives income subject to the
direction that it be used for the benefit of his children, the amount accrues to the tax-
payer;113 but if an amount is given to the taxpayer in his capacity as guardian of a child,
that amount accrues to the child.114
For a discussion of these principles, see the notes to [66] Geldenhuys.

A refundable deposit received by a taxpayer in respect of a sale on revenue account is included in his
‘gross income’ unless he holds it qua trustee.

________________________

110 Mooi v SIR 1972 (1) SA 675 (A), 34 SATC 1 at 10.

111 12 SATC 408.
112 1941 SR 233, 12 SATC 182.
113 ITC 417 10 SATC 264.
114 ITC 919 24 SATC 236; ITC 1197 35 SATC 268.
 Receipts and accruals 149

[90]
Pyott Ltd v CIR
1945 AD 128, 13 SATC 121
The taxpayer, a biscuit manufacturer, also had a factory which manufactured the tins in
which the biscuits were sold. The biscuits were sold to the customer together with the tin,
in the same invoice. The tins were charged out to customers at a price slightly in excess
of their cost to the taxpayer. Prior to the war the price at which they were charged out
was two shillings, and customers were entitled to a refund of this sum on the return of
the tins in good condition. Under these conditions some 25% to 30% of the tins were
returned. On the outbreak of war tinplate became scarce, and in October 1941 the
taxpayer increased the price at which tins were charged out to six shillings. Thereafter
some 90% of the tins were returned. For the tax year ending in June 1941, the taxpayer
set aside the sum of £9 000 as a provision for allowances on returnable tins, and did not
include this sum in its taxable income. The Commissioner refused to allow this sum to be
so excluded. On appeal, it was not contested that the taxpayer was contractually obliged
to accept the tins, when returned, and to refund the six shillings.
Issue: did the deposits paid on the tins accrue to the taxpayer beneficially?
Held: in the affirmative. The deposits were not trust moneys. They were not capital and
hence must be income, for there is no half-way house between these two categories.
Davis AJA: Before setting out counsel’s argument on behalf of the appellant, I should refer to
three important, and, I may say, correct, admissions made by appellant’s counsel. Of the first I
have already made mention, namely, that he could not contend that the proceeds of the sale of
the tins, which was the sale of a portion of the floating capital of the appellant, both since the
war and before it, were receipts of a capital nature. The second is that these proceeds were not
in any way ‘trust moneys’ – for if they were, they would not form part of the company’s income
within the meaning of Act 31 of 1941. And the third was that this £9 000 fell under none of the
deductions allowed under s 11(2). Subsection (2) cannot help the appellant, for this sum of
£9 000 represents a mere estimate in respect of contingent liabilities, and not an expenditure
‘actually incurred’. It will be as well also at once to cite as much of the definition of ‘gross in-
come’ in s 7 of the Act as is relevant –
‘Gross income’ means the total amount whether in cash or otherwise received by or accrued to or in fa-
vour of any person, excluding such receipts or accruals of a capital nature as are not receipts or accruals
referred to in paragraphs (a) to (h) hereunder.’
Mr Reynolds’ argument, as I understood it, was as follows: The ‘total amount’ in the definition
which I have cited, before it can be included in ‘gross income’ at all, must first be valued in any
year of assessment, no matter of what it may consist, even if it be cash actually received. As here
the case received for the tins had attached to it an obligation to repurchase these tins at 6s. each,
when so valued with the attached obligation, the cash wholly, or at least partly, disappeared: the
cash had not to be taken in at its face value, but at its true value, after providing for these obli-
gations. The £9 000 which was the difference between the face and the true values, was conse-
quently no income, but was merely a provision to meet the obligations undertaken by appellant.
I see such insuperable difficulties in holding anything of the kind that I venture to repeat and
adopt what was once said by Innes CJ in this Court: ‘My legal nerves may be weak, but I confess
that this argument comes as a shock to them.’
In the first place, I do not know what is meant by valuing cash or by the differences between its
face value and its true value. A sale for cash is a sale for ready money: how can ready money be
valued, save at its face value? It was suggested that it can, on the analogy of foreign currency. But
115
foreign currency is not cash: it is not legal tender. Counsel quoted the case of Lategan v CIR, as
showing that before it can come at all into the ‘amount’ in the definition above cited, every-
thing, including cash, must be valued. But that case decided no such thing: on the contrary, it
decided that ‘the taxpayer’s income for taxation purposes includes not only the cash which he
has received or which has accrued to him, but the value of every other form of property which

________________________

115 1926 CPD 201.

150 Income Tax in South Africa: Cases and Materials

he has received or which has accrued to him, including debts and rights of action’. Cash has to
be brought up as it is; it is only in respect of other forms of property that the value has to be
brought up.
Nor do I understand what is meant by an obligation which ‘attaches’ to cash. Save perhaps, in a
somewhat loose sense, in respect of something in the nature of a quasi fideicommissum or trust,
that seems to me to be a conception wholly unknown to the law: certainly, we were referred to
no authority which even remotely suggested anything like it.
Thirdly, I do not understand how this £9 000 could be, to cite from counsel’s Heads of Argu-
ment, ‘non-capital’, and yet ‘not income’. This is a half-way house of which I have no knowledge.
...
Reliance was, however, placed, for the making of this provision, generally upon the principles of
sound accountancy and upon English cases. While, no doubt, it is in accordance with those prin-
ciples to make this provision in the Balance Sheet, the answer is that our Income Tax Act has
laid down what is to be taxed, even if in so doing it may be said to disregard those principles. No
one could for an instance doubt that the method adopted by the company in the case of CIR v
George Forest Timber Co Ltd 116 was the only proper one from the point of view of sound accountan-
cy: yet that fact made no difference to its liability for assessment . . . Under the Act of 1914, the
subject of the charge was ‘profits or gains’, and it was consequently the same as it is still today in
England. But since 1917, we have had in South Africa an artificial and purely statutory definition
of ‘taxable income’, derived ultimately from the definition of ‘gross income’ as set out above . . .
and it is by no means necessarily synonymous with ‘profits or gains’ . . . I need give only one
quotation from the speech of Earl Loreburn LC in Sun Insurance Office v Clark:117 ‘The only rule
of law that I know of [is] that the true gains are to be ascertained as nearly as it can be done.’
That is not a rule which can be applied to our Act. What has to be ascertained is the ‘taxable
income’, and this has to be ascertained in the manner prescribed by the Act and in no other . . .
The second part of the third question raises the point whether this ‘provision’ is not in conflict
with s 12(e) of the Act, which forbids any deduction in respect of ‘income carried to any reserve
fund . . .’: in my opinion it is, as soon as it is found to have been made out of ‘income’, as it
undoubtedly was made in the present case. It is a reserve out of income to provide for a contin-
gent liability, and, as such, it seems to me to be the very thing which is forbidden by the sub-
section in question.
The appeal is dismissed with costs.

Notes
In this case, counsel for the taxpayer conceded that the deposits were not ‘trust moneys’.
(The judge stated that, if they had been, they would not have formed part of the taxpay-
er’s income.) The judgment records however that the taxpayer did not consider the
deposit which it received ‘as part of its distributable profits’ and created a £9 000 ‘pro-
vision’ in its balance sheet for these refundable deposits. It was held that the creation of
such a ‘provision’, whilst sound accountancy practice, did not have the effect of exclud-
ing the £9 000 from the taxpayer’s ‘gross income’. In other words, it remained ‘income’
which was ‘beneficially received’, even though the taxpayer did not regard it as ordinary
income. This issue was more thoroughly explored a few years later in [92] Greases,
discussed below.

[91]
Brookes Lemos Ltd v CIR
1947 (2) SA 976 (A), 14 SATC 295
The taxpayer manufactured fruit squashes and other foodstuffs which it sold in glass
containers to licensed dealers only. It did not sell by retail to the general public. For a

________________________

116 1924 AD 516.

117 1912 AC at 454.
 Receipts and accruals 151

considerable period, its products were sold in bottles, embossed with a notice that they
were the property of the taxpayer, and used invoices which stated that all bottles bearing
the appellant’s trade mark or brand were delivered subject to the condition that they
were to remain the property of the appellant.
In January 1943 it changed its system and began to require the payment of a deposit
on each glass container delivered to its customers. If a similar container was thereafter
returned by the customer, the taxpayer refunded him the amount of the deposit on it.
No obligation was imposed on the customer to return the container.
Issue: did the deposits paid to the taxpayer on the bottles form part of its gross income?
Held: in the affirmative. The taxpayer did not hold the deposits as a trustee or pledgee.
Watermeyer CJ: [T]he neat question of law which we have been asked to decide is whether the
decision given by the Special Court, that the moneys collected by the appellant from its custom-
ers by way of deposit on glass containers formed part of its gross income, is correct or not.
...
Mr Duncan contended that the deposits were not receipts because amounts which are received as
security or amounts which are held in trust for someone or for some purpose are not ‘received’
in the sense in which that word is used in the definition. If such amounts are really received as
trust moneys, of which the recipient is not the beneficial owner but merely a trustee, then doubt-
less Mr Duncan’s contention is correct, but that position does not exist here. The appellant was
not a trustee holding the deposits on account of the customers as security for the return of the
bottles. Even if the relationship between customer and company could, in common parlance, be
loosely so described, it was not such in law. There was no obligation to return the container rest-
ing on the customer and the deposit was not a security in the nature of a pledge given to secure
performance of such an obligation. Consequently the seller was in no sense a trustee or pledgee.
On the contrary the deposits became the absolute property of the Company and they could use
them as they pleased; and the fact that they had undertaken an obligation to pay to such of their
customers as returned containers an amount equivalent to the amounts which they had paid as
deposits on similar containers did not constitute the company a trustee with regard to those
deposits.
...
It may seem inequitable that appellant, in a year of heavy taxation, has to include in his gross
income without any deduction, an amount which he may have to refund in a later year . . . But
that is not a consideration which can influence our decision . . .

Notes
This case is authority for the principle that where the taxpayer receives a deposit, the
amount is beneficially received by him unless he is a trustee in the strict legal sense of the
word, in relation to the amount he has received. It is not sufficient that he puts the
money aside or does not treat it as his income. The test is not how he in fact treated the
amount, nor how as a matter of business or good accounting practice it ought to be
treated, but whether as a matter of law, the amount was held in trust. Compare the
approach of the courts in England as discussed in [92] Greases.

[92]
Greases (SA) Ltd v CIR
1951 (3) SA 518 (A), 17 SATC 358
The taxpayer company sold drums of grease. Because the supply of drums became
limited, the taxpayer decided not to sell the drums to its customers, but to require them
to pay a deposit of £1 per drum, which it later increased to £2. The taxpayer never
claimed that the deposits were forfeited to it, and claimed that ownership of the drums
vested in it. The taxpayer argued that the deposit was not part of the purchase price of
152 Income Tax in South Africa: Cases and Materials

the grease, and was intended to ensure that the drums were returned to it. Each drum
was stencilled with the taxpayer’s name and address and a notice that the drum, when
empty, must be returned to it. The taxpayer sent letters to all its customers, informing
them that the drums must be returned to it, and the deposit would then be refunded.
The taxpayer’s books of account did not reflect the deposits on drums as sales, and
credited the deposits to a ‘Drums Suspense Account’, debiting this account with amounts
refunded to customers. The taxpayer used the deposits in its ordinary business and did
not deposit them to any trust account. The credit balances in that account, in the rele-
vant tax years were £3 375, £3 433 and £2 883 respectively. The Commissioner included
those amounts in the taxpayer’s gross income, and allowed a deduction for the cost of
drums in the possession of customers at the end of each tax year. The taxpayer objected
to the assessment on the ground that the deposits should not have been included in its
gross income.
Issue: did the deposits form part of the taxpayer’s gross income?
Held: in the affirmative. The case could not be distinguished from the decision in
Brookes Lemos.
Centlivres CJ: Mr Ettlinger, who appeared on behalf of the appellant, contended that the case of
118
Brookes Lemos Ltd was distinguishable from the present case. The main grounds of distinction
on which he relied were:
(1) that in the former case the bottles were sold to the customers whereas in the present case
the appellant did not sell the drums to its customers and
(2) that in the former case the customers were not obliged to return the bottles while in the
present case the customers were bound to return the drums.
Proceeding, counsel contended that the deposits on the drums were not ‘received’ in the sense
in which that word is used in the definition of ‘gross income’ in s 7 of the Income Tax Act in that
the deposits were received in trust for the benefit of the customers of the appellant. An identical
argument was advanced in the Brookes Lemos case but was rejected. For the purposes of this case it
may be conceded that, if the deposits had been received by the appellant as a trustee for its cus-
tomers, such deposits would not have been received within the meaning of the definition of
‘gross income’ but as I shall show this is not what actually happened.
I shall now consider whether there is any substance in the distinctions which Mr Ettlinger sought
to draw between the present case and that of Brookes Lemos. I shall assume, in favour of the
appellant, that it did not sell the drums to its customers. There does not appear to have been a
sale of bottles in the Brookes Lemos case for according to the judgment of Watermeyer CJ:119
‘all bottles bearing the appellant’s trade mark or brand were delivered subject to the condition that they
were to remain the property of the appellant’.
Deposits made by customers in respect of bottles delivered by them were held to constitute part
of the gross income of the company, although the deposit fees were separately debited and cred-
ited in the ledger accounts of the company
As regards the distinction sought to be drawn between this case and the Brookes Lemos case in that
there was no obligation on the part of the customers in that case to return the bottles, I am by no
means satisfied that there was any absolute obligation in the present case to return the drums to
the appellant. There is nothing in the stated case to show that the customers were under any such
absolute obligation: at most they were told that they could not get fresh supplies of grease unless
they returned the empty drums . . .
The dominating fact in the present case is that the appellant, although it opened a Drums
Suspense Account, received the deposits for its own benefit, in that it was entitled to use
these deposits in its business and the moneys were not deposited to any trust account. To adapt
the language used by Watermeyer CJ in the Brookes Lemos case120 the deposits became and were

________________________

118 Brookes Lemos Ltd v CIR 1947 (2) SA 976 (A), 14 SATC 295.
119 At 930-931.
120 At 983.
 Receipts and accruals 153

intended both by the appellant and its customers to become the absolute property of the appel-
lant and it could use them as it pleased; and the fact that it had undertaken to pay such of their
customers as returned drums an amount equivalent to the amount which they had paid as de-
posits in respect of those drums did not constitute the appellant a trustee with regard to those
deposits.
121
Mr Ettlinger relied on the case of Morley v Tattersall for the proposition that the fact that the
moneys were not paid into a trust account does not alter the fact that they were held ‘in trust’ for
customers. That was a case where a firm of auctioneers sold horses on behalf of customers and
received the purchase price of the horses. Some of these purchase prices were not claimed by
customers. By a clause in the partnership deed between the parties it was provided that all such
unclaimed balances existing on 31st December in the accounting year as first arose six years
previously should be transferred to the credit of the partners. The firm was assessed for income
tax purposes in respect of unclaimed balances so transferred in a particular year. It was held that
the quality and nature of a receipt for income tax purposes were fixed once and for all when the
subject of the receipt was received; consequently as the unclaimed balances when first received
were obviously liabilities, no subsequent operation could turn them into trading receipts. In the
course of his judgment in the Court of Appeal, which reversed the decision of Lawrence J,
Green, MR said:122
‘The money which was received was money which had not got any profit-making quality about it; it was
money which in a business sense was the client’s money and nobody else’s. It was money for which they
were liable to account to the client, and the fact that they paid it into their own account, as they clearly
did, and the fact that it remained among their assets until paid out, do not alter that circumstance. It
would have been for income tax purposes, in my judgment, entirely improper to have brought those re-
ceipts into the account at all for the purpose of ascertaining the balance of profits and gains.’
However correct the remarks of Greene MR may be in relation to English Income Tax Law,
which differs from our own, those remarks are of no assistance to the appellant in the present
case, because I do not think that the appellant’s customers ever intended that, when they paid
their deposits, such deposits should be held in trust for them by the appellant and that the ap-
pellant should not have the right to mix those deposits with its own money and to use them for
any purpose it might deem fit. It is interesting to note that in the later case of Jay’s the Jewellers Ltd
v IRC 123 to which Mr Ettlinger also drew our attention, Atkinson J,124 in commenting on Morley v
Tattersall said that:
‘as a matter of law, these moneys when received (by Tattersalls) were not the taxpayers’ moneys at all; they
belonged to their clients and if a client came in the next day and demanded his money they would have to
pay it away.’
That is not the position in the present case: here there was an obligation on the part of the
appellant to pay a customer a sum equivalent to the deposit he had made when the customer
125
tendered to it a usable drum. Atkinson J pointed out that in Tattersall’s case
‘there had been no change whatever in the character and nature of the money held. The Statute of Lim-
itations had not commenced to run, and the Court was dealing merely with the effect of a change in the
method in which these sums were dealt with in the company’s books.’
I can see no essential difference between the case of Brookes Lemos and the present case and in
my opinion the appeal must be dismissed with costs.
SCHREINER JA and HOEXTER JA concurred.

Notes
This case affirmed the principle laid down in [91] Brookes Lemos that for an amount to
be excluded from a taxpayer’s ‘gross income’, it must be received and held ‘in trust’ in
the legal sense of the word. It is not sufficient that the taxpayer does not treat the
amount as ‘income’; nor is it sufficient that the taxpayer credited the deposits to a sus
________________________

121 108 LJ KB 11.

122 At 15.
123 [1947] 2 All ER 762, 29 TC 274.
124 At 765.
125 At 766.
154 Income Tax in South Africa: Cases and Materials

pense account. The crucial question is not how the taxpayer in fact dealt with the
amount, but how he was entitled, in law, to deal with it. It seems that nothing less than a
trust, stricto sensu, or pledge, would have sufficed to convince the court that the moneys
did not form part of the taxpayer’s gross income. In both Brookes Lemos and Greases,
elementary tax planning would have enabled the taxpayer to sell the product on contrac-
tual terms which provided that the deposit would indeed be held in trust.

[93]
Jay’s the Jewellers Ltd v IRC
[1947] 2 All ER 762, 29 TC 274
The taxpayer was a firm of pawnbrokers. In terms of the Pawnbrokers Act 1872, a pawn-
broker was obliged to hold the pledged property for twelve months and seven days. If the
loan was over 40 shillings the pawnbroker was entitled to sell the pledged goods, but the
proceeds of the sale were not his property; he could deduct the loan, the interest and the
costs of the sale, but the balance belonged to the debtor. Subject to any special contract,
the debtor could within three years demand repayment of the surplus. After three years
he lost that right, and the money became the property of the pawnbroker. In the present
case, there was indeed a special contract which provided that if the loan was between
40 shillings and £10, the three year period applied, but for loans over £10 the borrower’s
right to reclaim the surplus was forfeited only after six years. In practice, most of the
surpluses were never claimed and the money became the property of the pawnbroker.
Issue: were the surpluses ‘receipts’ of the pawnbroker’s trade, and were they profits
assessable to tax?
Held: the surpluses were trade receipts, not in the year in which the surpluses arose,
but in the year in which they became the property of the taxpayer.
Atkinson J: The question is: Are these surpluses receipts in the pawnbroker’s trade and are they
assessable profits, and, if so, when? The Crown claims that they are ordinary trade receipts at the
time of the sale and as such become forthwith assessable profits, and that any payment out of
those surpluses during the following years would be an ordinary trade expense allowed in the
ordinary way. Alternatively, they say they must be assessed as in the year of receipt, subject to an
allowance of such a sum as represents the probable amount which the pawnbroker will be called
on to pay . . .
The taxpayers, in their trading accounts, dealt with surpluses thus. They entered them in the
profit and loss account as receipts, with the words: ‘Profits of sale of pledged goods,’ and on the
other side of the account they debited themselves with a sum roughly amounting to two-fifths of
the surplus, with the words ‘Reserve for return of profit on sale of pledged goods.’ This gave
effect to their experience that about three-fifths of sale surpluses went unclaimed and in time
would become their own. In fact, the profit made in this way was expected to be the most valua-
ble part of their business, judging by the trading accounts for the year in question, the year end-
ing March 1943 . . .
I cannot see any principle on which the Crown can claim that surpluses are trade receipts in the
year in which they come into existence. The position can be tested thus. As Lord Greene MR
said in Morley v Tattersall:126 ‘One must look at each sum received as it comes in.’ Supposing there
was only one sale, which produced a surplus of £x, can the Crown say: ‘You must treat that as
your own money as a trade receipt augmenting your taxable profit?’ Surely the taxpayers could
say: ‘But it is not ours, we owe that money to our client. He may come for it at any date’. Can the
Crown retort: ‘Well, you must value the chance of being called on to pay. Experience shows that
it is a three-to-two chance against the payment being demanded.’ The Revenue claim that three-
fifths of that sum is excess profit. It is well established that, if book debts are fairly valued in an
account and written down in an accounting year because of a doubt whether they will be paid,
________________________

126 [1938] 3 All ER 304.

 Receipts and accruals 155

the fact that they ultimately turn out to be good does not entitle the Crown to have the account
re-opened, and the same principle has been established with regard to a debt owing by the ac-
counting party . . .
...
The answer to the Crown’s appeal, in my opinion, is that these surpluses are not trading receipts
in the year in which they are received. I think the case is completely governed on this point by
Tattersall’s case. There, Tattersalls, acting as auctioneers, sold horses for clients and received the
proceeds of the sales. In practice a large proportion of such receipts are never demanded by the
owners of the horses sold. One of the conditions on which Tattersalls acted as auctioneers was
that no money became due to a client until it was demanded, and, therefore, the Statute of Lim-
itations did not run. After a time Tattersalls treated those sums in their books as their own prop-
erty, and the Revenue sought to have these sums included in the taxable profits. That was
resisted successfully. In that case Lord Greene MR said:127
‘. . . It might be more convenient to deal with Mr Hills’s argument first, because that is the one which starts
off with the perfectly clear admission that the money, when received from the purchasers, was not a
trading receipt. That proposition, I should have thought was, in any case, quite incontestable. The money
received was money which had not got any profit-making quality about it. It was money which, in a
business sense, was the client’s money, and nobody else’s. It was money for which Messrs Tattersall were
liable to account to the clients, and the fact that Messrs. Tattersall paid it into their own account, as they
clearly did, and the fact that it remained among their assets until paid out, do not alter that circumstance.
It would have been for income tax purposes, in my judgment, entirely improper to have brought those
receipts into the account at all for the purpose of ascertaining the balance of profits and gains . . .’
That, and the observations following, seem completely applicable to this case. As a matter of law,
these monies when received were not the taxpayers’ monies at all; they belonged to their clients,
and if a client came in the next day and demanded his money they would have to pay it away.
In my opinion, the commissioners were right in holding that these sums could not be deemed to
be trade receipts of the year in which they were received. Therefore the Crown’s appeal fails.
Then comes the more difficult question: Can a surplus be treated as a trade receipt of the year in
which, it not having been claimed by the pledgor, the pawnbroker becomes entitled to retain it
as his own? The taxpayers’ argument is this. Either it is a trading receipt or it is not at the time of
receipt. If it is not a trade receipt, nothing that could happen afterwards could make it a trade
receipt. They rely on what Lord Greene MR said:128
‘I invited Mr Hills to point to any authority which in any way supported the proposition that a receipt
which at the time of its receipt was not a trading receipt could by some subsequent operation ex post facto
be turned into a trading receipt – not, be it observed, as at the date of receipt, but as at the date of the
subsequent operation. It seems to me, with all respect to that argument, that it is based on a complete mis-
apprehension of what is meant by a trading receipt in income tax law. No case has been cited to us in
which anything like that proposition appears. It seems to me that the quality and nature of a receipt for
income tax purposes is fixed once and for all when it is received. What the partners did in this case, as I
have said, was to decide among themselves that what they had previously regarded as a liability of the firm
they would not, for practical reasons, regard as a liability. That does not mean, however, that at that mo-
ment they received something, nor does it mean that at that moment they imprinted on some existing
asset a quality different from that which it has possessed before.’
...
. . . I have already held that these sums cannot be regarded as trade receipts, and, if that be right,
it follows that it is unsound to regard all that follows as merely the elimination from the liabilities
side of the balance sheet of a liability to clients. The true accountancy view would, I think, de-
mand that these sums should be treated as paid into a suspense account, and should so appear
in the balance sheet. The surpluses should not be brought into the annual trading account as a
receipt at the time they are received. Only time will show what their ultimate fate and character
will be . . .
It is, however, argued that I cannot give effect to that view because of Tattersall’s case. Is there
anything in Tattersall’s case to indicate that that view is wrong? In that case there had been no

________________________

127 At 301.
128 Ibid.
156 Income Tax in South Africa: Cases and Materials

change whatever in the character and nature of the money held. The Statute of Limitations had
not commenced to run, and the court was dealing merely with the effect of a change in the
method in which these sums were dealt with in the company’s books. Lord Greene MR said:129
‘What the partners did in this case, as I have said, was to decide among themselves that what they had pre-
viously regarded as a liability of the firm they would not, for practical reasons, regard as a liability. that
does not mean, however, that at that moment they received something, nor does it mean that at that mo-
ment they imprinted on some existing asset a quality different from that which it had possessed before.
There was no existing asset at all at that time. All that they did, as I have already pointed out, was to write
down a liability item in their balance sheet, and how by effecting that operation it can be said that a sum
received years ago has been converted into something which it never was is a thing which, with all respect,
passes my comprehension.’
Here the position is different. Here, at the end of three years, the money in question, the three-
year-old surplus, did attain a totally different quality. I think there was then a definite trade re-
ceipt. At the end of the three years a new asset came into existence, an asset which had arisen
out of a trade transaction. Dealing with the argument that the quality of the transaction was
changed, Lord Green MR said this:130
‘It was essential for the argument, of course, to discover some act of receipt within the income tax year for
which the assessment was made, and, to get an act of receipt, the metaphorical expressions, such as I have
described, were used, – the holding in a new capacity of something which the partners had previously held
in a different capacity, the turning into a trading asset of something which had previously not been a
trading asset . . .’
I have here exactly what the Master of the Rolls was there suggesting. If ‘things of that kind’ rep-
resented the facts, the position might well be different. Things of that kind did here represent
the facts. There, no asset was created. A mere change in the method of book-keeping created no
asset. In this case a new asset was created automatically by operation of law at the end of the
three years, and common sense would seem to demand that that should be entered in the profit
and loss account for the year and be treated as taxable.
. . . Therefore both appeals fail.

Notes
In South Africa, the issues that would arise on these facts would be: when the goods were
pledged to the pawnbroker, were they beneficially received by him and therefore includ-
ed, at this juncture, in his gross income? The answer to this would, it is submitted, clearly
be in the negative. Second, when the pawnbroker sold the goods, was the surplus at that
point ‘beneficially received’ by him? Again, the answer would, it is submitted, be in the
negative; the taxpayer was not yet ‘entitled’ to the surplus. The more difficult question is
whether, at the time when the pawnbroker acquired ownership of the surplus, there was
then a ‘receipt’ by him or an ‘accrual’ to him. In other words, does the alteration in the
capacity in which the surpluses are held constitute a ‘receipt’ or ‘accrual’? The decision
in Jay’s the Jeweller’s lends some weight to an affirmative answer, but the differences be-
tween the English and the South African income tax systems reduces the persuasiveness
of the decision. Note too, the greater weight which the court in Jay’s the Jewellers attaches
to the proper accounting treatment.131 For some judicial discussion of Jay’s the Jewellers, see
[92] Greases.

An advance payment for services is included in the taxpayer’s ‘gross income’ in the year of receipt,
even if it may later become repayable by him.

________________________

129 At 302.
130 Ibid at 303.
131 [1947] 2 All ER 762 at 766.
 Receipts and accruals 157

[94]
ITC 1346
(1981) 44 SATC 31
The taxpayer, a pathologist employed at a university, was granted paid study and re-
search leave for the period 1 February 1977 to 31 January 1978. During this period, he
resigned his post. It was a term of his employment that, in these circumstances, he was
obliged to refund the sum of R6 930, being six months salary received by him whilst on
leave. It was submitted on behalf of the taxpayer (who had since died) that the sum of
R6 930 had not been ‘received by’ him nor had it ‘accrued to’ him.
Issue: was the remuneration which the taxpayer was obliged to refund to his employer,
‘received by’ him, thus forming part of his ‘gross income’?
Held: in the affirmative. The amounts in question were beneficially received by the
taxpayer.
Schock J: At the hearing the appellant confined the case of the taxpayer to one ground, namely
that in the circumstances the said amount of R6 930 was not part of the appellant’s gross in-
come, not having ‘been received by’ or ‘accrued to’ the taxpayer within the meaning of those
words in the definition of ‘gross income’ in the Income Tax Act.
In my judgment the appeal cannot succeed. During the year in question the taxpayer received
the amount in question as his own and presumably used same for his own purposes. It is true
that in certain circumstances he could be obliged to repay an equal amount, namely if he did
not continue with the university after his leave and the university did not elect to allow him to
retain the salary paid to him during his leave. This, however, does not avail appellant. The fact is
that in the tax year in question he received the amount in question and retained it as his own.
The decisions of the Appellate Division in the cases of Brookes Lemos Ltd v CIR 132 and Greases (SA)
Ltd v CIR 133 clearly show that once the taxpayer receives an amount as his own during a tax year,
the fact that in terms of his contract he may, in certain circumstances, have to repay the same
later, does not have the effect of excluding these amounts from his ‘gross income’ for the year in
which he received same.
The result may seem somewhat anomalous but the position would be equally anomalous if the
taxpayer was not liable for tax on the salary in the tax year in question and then in the following
year the university decided to forego its right to reclaim the amount of the salary . . .
I express no opinion as to whether or not the taxpayer in the instant case might have any relief in
the following tax year when he actually was required to refund the amount.
I see no escape from the conclusion that on the facts of this case the amount in question falls
clearly within the taxpayer’s ‘gross income’ in the tax year in question.

Notes
On the facts, the amounts in question in this case were beneficially received by the tax-
payer. By contrast, if the money had been loaned to the taxpayer, it would not have
formed part of his ‘gross income’. The income tax consequences of this kind of arrange-
ment can thus be varied by contract.
A troublesome aspect of the decision is that it is doubtful whether, having repaid the
university, the taxpayer would be entitled in terms of s 11(a) to a deduction for the
moneys repaid. The judgment raises this point, but does not answer it.
Where a taxpayer receives funds which he is contractually required to hold for the benefit of other
persons, in circumstances where such persons have a prior legal right to those funds, there is no
‘beneficial’ receipt or accrual; consequently, those funds do not form part of the taxpayer’s gross
income.
________________________

132 1947 (2) SA 976.

133 1951 (3) SA 518.
158 Income Tax in South Africa: Cases and Materials

[95]
CSARS v Cape Consumers (Pty) Ltd
1999 (4) SA 1213 (C)
Cape Consumers (Pty) Ltd traded as a mutual buying (‘buy-aid’) organisation. Acting on
behalf of its members, the taxpayer would purchase goods from suppliers at a discounted
price (for the payment of which it assumed responsibility), and the relevant member of
the taxpayer company would then pay the taxpayer the full, undiscounted purchase price
of the goods purchased on the member’s behalf. After paying the suppliers for the
goods, and paying its own operational expenses, the taxpayer transferred the surplus to
the ‘buyers’ reserve fund’. The Commissioner included in the taxpayer’s taxable income
certain amounts which had been received by the taxpayer and transferred to the ‘buyers’
reserve fund’. The taxpayer’s articles of association provided that amounts transferred to
buyers’ reserve fund were held for the benefit of buyers.
Issue: had the amounts transferred by the taxpayer to the ‘buyers’ reserve fund’ been
beneficially received by the taxpayer, such that these amounts formed part of its ‘gross
income’, as defined in s 1 of the Income Tax Act?
Held: those amounts had not been ‘beneficially’ received and thus did not form part of
the taxpayer’s gross income. The taxpayer did not have the requisite legal entitlement to
those amounts for them to be regarded as ‘received or accrued’ for the purposes of the
Income Tax Act. As to the onus of proof, where a fixed amount was in issue (as in this
case) the onus was on the taxpayer to show that there had been no receipt or accrual
within the meaning of the Act; even if, on the facts, the onus was on the taxpayer, the
onus had been discharged.
Davis J:
Background
Respondent was established in 1955 as a buy-aid organisation. It grew rapidly and, by the time
the assessments in question had been disputed, it had become the largest buy-aid organisation in
the Western Cape. The report of the directors for the year ending 6 July 1993 described the
activities of the company thus:
‘The company acts as a mutual buying organisation with the object of obtaining benefits for its buyers and
accordingly all income received belongs to the buyers and is received on their behalf and similarly all ex-
penses incurred are so incurred on behalf of the buyers. Similarly the buyers have authorised the company
to create and add to a fund belonging to the buyers and known as the buyers’ reserve fund which is ad-
ministered by the company for and on behalf of the buyers.’ . . .
The members on behalf of whom respondent acts enter into a contract with the respondent,
clause 1(a) of which provides:
‘I hereby undertake to pay to the company in accordance with the terms and conditions hereinafter set
out, all amounts which the company will disburse on my behalf in effecting payment for me and on my
behalf to such suppliers who rendered services to me, or supplied goods to me and with whom the com-
pany has contracted to pay on my behalf against the production to it of the vouchers duly completed by
me . . .’
In essence, respondent obtains discounts from suppliers on behalf of buyers who have entered
into the buyer’s contract, and agrees with such suppliers that it will effect payment of all such
amounts due. Respondent thus assumes responsibility for the payment of the obligations in-
curred by buyers in respect of purchases from suppliers. It collects from the buyers the full
amounts due to the suppliers, that is, without taking into account any discounts which might
have been negotiated with suppliers. The amounts due to the suppliers are then paid over by the
respondent on behalf of the buyers . . .
After deducting the costs incurred by the respondent in the performance of its functions, the
balance is invested by respondent on behalf of the buyers. Twice a year, respondent in advance
determines the percentages of such balance which will be paid out to such buyers. From the total
amount of discounts received during a particular year, together with the total amount of invest-
ment income earned on behalf of the buyers, an amount is transferred annually to a buyers’
 Receipts and accruals 159

reserve fund. This amount represents the undistributed portion of the total amount held on
behalf of the buyers.
The justification for the manner in which respondent deals with such money is to be found in
art 85 bis of the [taxpayer’s] articles of association which provides as follows:
‘(a) All amounts which the company may receive from suppliers by way of discounts, collection fees,
underwriting commission or similar charges as well as interest from investments and the company’s
other miscellaneous income will be received by the company for and on behalf of its buyers subject to
the condition that all amounts so received shall be utilised in the manner and devoted to the following
purposes, namely –
(i) To reimburse the company for all administrative and other expenses incurred by it . . . and to
recompense it in respect of losses sustained by it . . .
(ii) To place to the credit of the buyers’ reserve fund such portion of the said amounts as the
company may determine . . .
(b) The buyers’ reserve fund shall be created and administered for and on behalf of buyers and shall
consist of the amounts credited to it from time to time in accordance with the provisions of the last
preceding sub-article.
(c) The capital and income of the buyers’ reserve fund shall be held by the company in trust for and on
behalf of buyers . . .’
This clause expressly provides that all income from discounts, collection fees, commission and
income from investments is received by respondent on behalf of buyers. The balance of the
clause sets out the manner in which respondent must deal with such moneys on behalf of buyers.
...
The commissioner’s case
On appeal Mr Viljoen, who appeared together with Mr Silke on behalf of appellant [SARS]
submitted that respondent was a trading company in which its directors, largely independent of
the control of the buyers, acted in order to earn profits for shareholders. Accordingly as ‘an
ordinary trading company’ such profits should be taxed in its hands. The buyers did not have a
vested right in the income received by respondent nor in the amounts allocated by respondent
to the buyers’ reserve fund. So long as respondent had an unfettered discretion with regard to
the use and payment of its funds, the buyers could not claim to have any vested right to the
amounts in question . . .
In support of this submission Mr Viljoen referred to the memorandum and articles of associa-
tion of respondent . . . Mr Viljoen submitted that these clauses were inconsistent with the view
that the buyers had vested rights in the income of respondent or in the buyers’ reserve fund. In
short any rights in the buyers’ reserve fund were conditional upon a buyer performing in terms
of the terms and conditions of the contract. Clause 9 of the agreement provided that ‘the com-
pany may at any time at its sole and absolute discretion amend or substitute all or any of the
conditions by notice addressed to me at my domicilium citandi et executandi’ . . .
As authority for the analysis which he placed before the Court, Mr Viljoen invoked the doctrine
of a disguised transaction recently analysed in Erf 3183/1 Ladysmith (Pty) Ltd v CIR 134 where this
doctrine was employed in order to support a submission that the court was free to ‘pierce the
corporate veil’ in order to analyse the true nature of the respondent’s operation, and hence to
determine its liability to taxation. Were the Special Court to have employed this doctrine, Mr
Viljoen submitted, it would have found the respondent to have had a life of its own with its direc-
tors largely independent of the control of buyers and acting as would directors of any trading
company, with the objective of obtaining a profit for the shareholders . . .
The essence of the dispute
The essential dispute between the parties turned on whether the income upon which appellant
had sought to assess respondent to tax was received by or accrued to or in favour of respondent
within the contemplation of the definition of ‘gross income’ in s 1 of the Income Tax Act. The
phrase ‘received by’ or ‘accrued to’ as it appears in the definition of gross income has been held
to connote a receipt by or accrual to a taxpayer on his own behalf and for his own benefit . . .

________________________

134 1996 (3) SA 942 (A).

160 Income Tax in South Africa: Cases and Materials

In CIR v Genn & Co (Pty) Ltd 135 Schreiner JA said:

‘It certainly is not every obtaining of physical control over money or money’s worth that constitutes a re-
ceipt for the purposes of these provisions. If, for instance, money is obtained and banked by someone as
agent or trustee for another, the former has not received it as his income.’
Article 85 bis (a) of the articles of association specifically provides that all amounts which respon-
dent receives, including interest on investments, is received for the benefit and on behalf of the
buyers. Similarly art 85 bis (b) and (c) provide that the buyers’ reserve fund has been created
and is administered and held for the benefit and on behalf of the buyers. As Mr Seligson, who
appeared together with Mr Rogers on behalf of respondent, argued, respondent obtains physical
control over a sum of money which is the difference between what the buyers pay to respondent
and what the latter is obliged to pay to the supplier. From this difference, a surplus is created
and at the end of a financial year respondent retains from the surplus amount operational ex-
penses while the balance thereof is distributed to the buyers. Mr Seligson suggested that re-
spondent acted as an agent on behalf of the buyers, a legal relationship created by respondent’s
memorandum, articles of association and the buyer’s contract.
. . . In support of this construction of the relationship between respondent and the buyers, he
relied upon Raad van Toesig op die Suiwelnywerheid v Ladysmith Towerkop Ko-öperatiewe Kaasfabriek
Bpk136 where it was held that a co-operative society may itself act as a seller of its member’s goods,
though its relationship with its members may be one of agency. Whatever the merits of this con-
struction, the evidence before the court and the arguments thereon were directed to the ques-
tion of whether, on the facts, respondent received the money for itself or on its behalf, rather
than an enquiry into agency.
The structure of respondent as a mutual buying organisation, including the memorandum, arti-
cles of association and the contract with buyers, all support a conclusion that respondent did not
receive the income in the defined sense. The financial statements support this analysis. The 1993
financial statements reflect an amount available for appropriation of R15 255 853, being an ex-
cess of income over expenditure, and that from this an amount of R13 331743 was distributed to
the buyers, while the balance was transferred to the buyers’ reserve fund which at 6 July 1993
stood at R5 013 326. The accumulated surplus of R715 481 on which Mr Viljoen had relied as
indicative of ordinary trading activities was reflected as a profit in the balance sheet on the sale
of capital asset, namely a building . . .
Although respondent decided upon the transfer of income to the buyers’ reserve fund, buyers
were not without rights. In terms of art 85 bis (a)(ii), if the buyers are dissatisfied with the deci-
sion of respondent in the exercise of its discretion to credit part of the profit to the buyers’ re-
serve fund, they could, by way of a majority resolution at a general meeting, vary the decision
and respondent would then be obliged to act in accordance with such a resolution.
In the event that a buyer’s contract was cancelled, art 85 bis (c)(vii) provides that respondent
should distribute to such buyer, within 24 months from the date of cancellation, the total
amount vesting in the buyer as his or her share of the fund as at the date of cancellation.
Respondent was also empowered to distribute to a buyer or his legal representative upon his or
her death the total amount vesting in the buyer as at the date of his or her death.
Viewed in its totality, the factual circumstances show that the income which has been subjected
to tax in the hands of respondent was not received by nor did it accrue to respondent within the
defined meaning. The amounts transferred to the buyers’ reserve fund were held for the benefit
of the buyers. Whether such income vested in the individual buyers is not an issue on which a
decision is necessary for the disposal of this case. Article 85 bis provides that such funds were to
be held for the benefit of buyers and not for the benefit of the respondent. The financial state-
ments reflect that respondent’s activities were strictly in accordance with the provisions of art 85
bis. For this reason it cannot be said that respondent had a legal entitlement to such income
which is necessary for such amounts to have been received by or to have accrued to respondent
for the purposes of the Income Tax Act.

________________________

135 1955 (3) SA 293 (A) at 301E-F.

136 1971 (3) SA 511 (C) at 520-2.
 Receipts and accruals 161
137
Mr Viljoen placed reliance on CIR v Witwatersrand Association of Racing Clubs to counter the
argument that the distribution to buyers showed that respondent had not received income.
In this case, the Witwatersrand Association of Racing Clubs organised a race meeting the pro-
ceeds of which were to be divided between the South African National Turberculosis Association
and the Johannesburg Coronation Foundation. The proceeds of the meeting amounted to
£7 906 which sum, together with £269 received from donations, was divided between the two
charitable bodies for whose benefit the meeting was held. In finding in favour of the Commis-
sioner, Van Blerk JA said: [translated]138
‘The association received the money, and the fact that it had the intention to pay it over to the charitable
organization as a gift, and did in fact pay it over, is irrelevant to the question whether it accrued to the
charitable organization in terms of the Income Tax Act. If it were otherwise, any taxpayer could avoid pay-
ing tax by arranging in advance to make over his income to other persons as he received it, by way of
donation or otherwise. Since the association is subject to tax and the profits of the race meeting which it
received accrued to it in law, the assessment made by the appellant was valid’.
The facts of the Witwatersrand Association of Racing Clubs case differ markedly from those
which confront this Court. In that case the taxpayer decided to organise a race meeting and to
pay over the profits to two designated charities. There was no prior entitlement which the two
charities enjoyed to such money. Rather the association decided that, whatever profits accrued
to it, it would pay these to the charities. By contrast, respondent was obliged in terms of its arti-
cles of association to credit the income earned to the buyers’ reserve fund. In terms of the legal
relationships between itself and the buyers, such monies were not for its own benefit but for the
benefit of the buyers. Accordingly there was no prior receipt or accrual with the defined mean-
ing as was the position in the Witwatersrand Association of Racing Clubs case.
The distinguished transaction
Confronted with art 85 bis of the articles of association which expressly provides that all
discounts and income from investments are received by respondent on behalf of buyers,
Mr Viljoen, relying upon the doctrine of a disguised transaction as set out in Erf 3183/1 Lady-
smith (Pty) Ltd, supra, submitted that the form of this provision must give way to the reality that
respondent traded for its own account. In the Ladysmith case, the issue turned upon the inter-
pretation of the definition of gross income, namely whether there had accrued to the taxpayer a
right to have improvements effected on its land . . . In analysing the doctrine of a disguised
transaction as set out comprehensively in Commissioner of Customs and Excise v Randles, Brothers &
Hudson Ltd,139 Hefer JA said in Ladysmith that he had canvassed this doctrine in order –
‘. . . to reveal the fundamental flaw in a submission which tinged the entire argument for the appellants.
. . . The real question is, however, whether [the parties to the agreement in question] actually intended
that each agreement would inter partes have effect according to its tenor. If not, effect must be given to
what the transaction really is . . .’
In short, the Court examined the true nature of the various agreements in order to ascertain the
nature of the rights which had accrued in terms of the agreement . . .
The evidence [in the present case] revealed that both respondent and the buyers intended that
the relevant agreements between the parties be given effect to according to their tenor. As illus-
trated in the financial statements, this is in fact what occurred. The doctrine of the distinguished
transaction is not a panacea for appellant to ignore agreements where the parties in fact and in
law intend that they must be given their legal effect. This is precisely what occurred in the in-
stant case and accordingly there exists no basis to ignore such agreements. I conclude that
respondent was not entitled to the amount standing in the buyers’ reserve fund and accordingly
such amount had not been received nor had it accrued to respondent within the meaning of
gross income as defined in the Act.
Onus
There was a considerable debate as to the question of onus; in particular whether the Commis-
sioner bore an onus in this case. Mr Seligson argued that, insofar as it might be relevant to
________________________

137 1960 (3) SA 291 (A).

138 At 289C-E.
139 1941 AD 369.
162 Income Tax in South Africa: Cases and Materials

the determination of the case, the onus rested on the Commissioner to prove on a balance of
probabilities that there was a receipt or accrual within the meaning of the Act. He further sub-
mitted that s 82 of the Act, did not impose a burden of proof on the taxpayer in circumstances
where the prime issue was whether income had been received by or accrued to or in favour of a
taxpayer.
For this submission he relied upon CIR v Butcher Bros (Pty) Ltd 140 where Feetham JA said:
‘The assessment in dispute, made by the Commissioner . . . can only be allowed to stand if some ‘‘amount’’
accrued to or was received by the company in a tax year ended 30 June 1935 by virtue of its rights under
the building clauses in the lease, and it is essential for the Commissioner, in order to support his assess-
ment, show that some ‘‘amount’’ has accrued to or been received by the company by virtue of such rights.’
It would appear that the Supreme Court of Appeal in CIR v Datakor Engineering (Pty) Ltd 141 gave
the dictum of Feetham JA in Butcher Bros (supra) a somewhat narrower interpretation than that
urged by Mr Seligson. The decision in the Datakor case (supra) was that where there clearly is a
fixed amount, as is the position in the present case, the onus rests upon the taxpayer to show
that there has been a receipt or accrual. However, even if the onus were upon the taxpayer to
show that there was no receipt or accrual within the meaning of the Act, I am satisfied that the
onus in the instant case has been discharged.
In the light of this finding it is unnecessary to analyse whether this Court should refer the ques-
tion of the taxation of the total amount of respondent’s income from its buy-aid activities includ-
ing the discounts, to the Commissioner for reassessment . . .
In the result, I would dismiss both appeals . . .
VAN REENEN J and VAN HEERDEN AJ concurred.

Notes
The central income tax issue in this case was whether the moneys in the ‘buyers’ reserve
fund’ had been ‘beneficially’ received by or accrued to the taxpayer company, within the
definition of ‘gross income’ in s 1 of the Income Tax Act 58 of 1962 (the Act).
The decisions in Genn and Co, Greases and Brookes Lemos acknowledge that, where a tax-
payer receives moneys, such amounts will not be received ‘beneficially’ if those amounts
are received qua ‘agent’ or ‘trustee’.
It is trite that, if an amount of money is received by or accrues to a taxpayer for his
own benefit, that amount is ‘received’ by him and forms part of his gross income, and
that such receipt or accrual is not undone by the fact that the taxpayer thereafter applies
those moneys in a particular way, for example, by paying them over to someone else, as
occurred in [103] Witwatersrand Association of Racing Clubs.
As appears from the directors’ report at the beginning of the judgment in the present
case, the taxpayer company regarded itself as receiving all income and incurring all
expenses on behalf of its members, and not on its own account as principal. In other words, the
taxpayer argued that all incoming moneys (which – leaving aside some investment in-
come – came from its own members, to be used to pay the suppliers the price of goods
that the company had purchased on behalf of its members) never ceased to be the
members’ money, held on their behalf by the company.
Counsel for SARS argued that, on the facts, the taxpayer company was carrying on a
business in its own right, and that the buyers had no ‘vested rights’ in the amounts
transferred to the buyers’ reserve fund, because the member’s rights were conditional on
their performing their obligations under the buyer’s agreement, and the taxpayer had
certain discretionary powers vis-á-vis those amounts.

________________________

140 1945 AD 301 at 322.

141 1998 (4) SA 1050 (SCA).
 Receipts and accruals 163

The court held that the amounts in question had not been ‘beneficially’ received by
the taxpayer company. In arriving at this conclusion, the court distinguished the decision
in Witwatersrand Association of Racing Clubs by holding that the Association in that case had
not had a prior (contractual) right to the moneys in question. In the present case, by
contrast, the buyers’ agreement read with the taxpayer company’s articles of association
did give the buyers such a prior right.
The court held that these contractual provisions were not ‘sham’ or ‘simulated’
agreements, as contemplated in the Ladysmith case. On the contrary, the parties in the
present case had intended those agreements to have effect according to their tenor, and
the Commissioner therefore had no power to disregard them.
The court held that –
‘viewed in its totality, the factual circumstances showed that the income which had been subjected to tax in
the hands of the respondent had not been received by nor did it accrue to the respondent within the
meaning of the Act. The amounts transferred to the buyers’ reserve fund were held for the benefit of the
buyers, as provided for by art 85 bis of the company’s articles of association. Whether such income vested
in the individual buyers did not need to be decided.’
The court went on to hold that the taxpayer company ‘did not have the legal entitlement
to the income necessary for the amounts to have been received by or accrued to it for the
purposes of the Act’. It is clear that by ‘legal entitlement’ the court meant the rights and
obligations of the taxpayer company and its members as laid down in the memorandum
and articles of association and the contract with the buyers.
A critical overview
The central finding by the court was that –
‘The amounts transferred to the buyers’ reserve fund were held for the benefit of the buyers.’
The court did not specifically find that the company held those funds as ‘agent’ or
‘trustee’ in the strict sense of those words and, to that extent, may impose a less stringent
criterion for non-beneficial receipt or accrual than the decisions in Greases and Brookes
Lemos.
The court did not, however, go as far as did the High Court of Australia in Arthur Mur-
ray (NSW) Pty Ltd v FCT.142 In this case, a company which carried on the business of
providing dancing lessons had received large payments in advance from its clients; the
question was whether these payments in advance had to be included in the taxpayer’s
gross income in the year in which they were received by the taxpayer, or only in the tax
years when the dancing lessons were given. The court in this case said that,
‘The ultimate inquiry . . . must be whether that which has taken place, be it the earning [ie accrual] or the
receipt is enough, by itself, to satisfy the general understanding among practical business people of what
constitutes a derivation of income’.
By contrast, the South African courts regard the question of whether an amount has
been ‘received’ or accrued’ by the taxpayer as involving a technical issue of law, and not
as turning on ‘the general understanding among practical business people’. Thus, the
decision in Cape Consumers holds that the taxpayer did not have the necessary ‘legal
entitlement’ to the funds in question for them to be regarded as having been beneficially
received or accrued; the court did not base its decision on whether ‘in the business
sense’ the moneys should be regarded as forming part of the taxpayer’s own income.

§11 Notional receipts and accruals

The reference in the definition of ‘gross income’ to receipts and accruals means actual (not notional)
receipts and accruals.
________________________

142 (1965) 114 CLR 314.

164 Income Tax in South Africa: Cases and Materials

[96]
Land Dealing Company v Commissioner of Taxes
1959 (3) SA 485 (SR), 22 SATC 310
The taxpayer company acquired certain land in 1940 as a capital asset at a price of
£1 300. In 1947 its shares were taken over and it became a land-dealing company. At that
time the value of the land in question was £6 500. In 1957 the property was sold for
£9 000 pursuant to a scheme of profit-making. The Commissioner assessed the company
to tax on the difference between £9 000 and £1 300. The taxpayer objected on the
grounds that, since the property became stock-in-trade in 1947, it should be assessed to
tax on the difference between its value at that date and the eventual selling price.
Issue: when property held by the taxpayer changes from capital to trading stock, is the
increase in value between its acquisition and the change to trading stock a ‘receipt’ or
‘accrual’ of a capital nature?
Held: in the negative. If the increase in value was a receipt or accrual, it was merely no-
tional, and the Act is concerned only with actual receipts. The only actual receipt was
that of £9 000 which was accordingly ‘gross income’ within the meaning of the Act.
Beadle J: Mr Pollak argued that from the date of acquisition until 1947 the town property was
held as an investment, and that any accrual of value between these dates was therefore an accru-
al of a capital nature and should be excluded in calculating the appellant company’s income;
that in 1947 the town property was valued at £5 500, and that the profit liable to tax is therefore
only the difference between £6 500 and £9 000, and not the difference between £1 300 and
£9 000, as claimed by the Commissioner. I accept as proved that at least until the end of 1946 the
town property was part of the C’s fixed capital, and that it became stock-in-trade only in 1947; so
that the issue on this ground of appeal is a crisp one of law.
The equities as well as the English decisions certainly appear to support Mr Pollak’s argument;
143 144
see for example Sharkey v Wernher, West v Phillips.
145
But it is trite law that ‘there is no equity in income tax’; see the cases quoted in Silke. As far as
English law is concerned, the English decisions must be viewed in the light of the English statute;
and in many respects there are fundamental differences between the English Act and the Feder-
al Income Tax Act 1954. The English decisions are therefore helpful only as far as general prin-
ciples are concerned; but where the issue turns, as I think the present issue turns, on the precise
wording of our own statute, the English cases are not always a safe guide . . .
I now turn to examine the specific provisions of our Act. The first relevant section is s 8, which reads:
‘For the purposes of this Part –
gross income means the total amount, whether in cash or otherwise, received by or accrued to or in fa-
vour of any person, excluding such receipts or accruals proved by the taxpayer to be of a capital nature
as are not receipts or accruals referred to in paragraphs (a) to (j) of this definition.’
The first point to decide is whether the whole of this £9 000 is ‘gross income’ within the mean-
ing of the definition; because if it is then the only manner in which part of it can be exempt
from tax would be if the Act permitted that part to be deducted from ‘gross income’ in deter-
mining ‘the taxable income’.
The £9 000 received by the appellant company for the sale of the town property is clearly a ‘total
amount in cash’ received by the company; and, unless a part of it may be regarded as a ‘receipt’
or an ‘accrual’ of a capital nature, then the whole of it must be regarded as part of the appellant
company’s ‘gross income’. The point to determine here, therefore, is whether or not the in-
crease in the capital value of the town property between 1940 and 1947 can be regarded as a
‘receipt’ of a capital nature within the meaning of the section. For convenience I shall from
henceforth refer to this increase in value as ‘the capital accretion’.
The first point to consider is whether or not this ‘capital accretion’ may be regarded as a
‘receipt’. If it is such a receipt then it can only be a ‘notional receipt’. The question therefore
________________________

143 [1956] AC 58 at 72.

144 37 ATC 207.
145 Silke on South African Income Tax, 7 ed pp 577-579.
 Receipts and accruals 165

resolves itself into the question whether or not the word ‘receipt’ includes a ‘notional receipt’. . .
An examination of the later provisions of the Act shows . . . that in general the Act is concerned
only with ‘actual’, and not with ‘notional’ receipts . . . I am satisfied . . . that the word ‘receipts’
in s 8 does not include a ‘notional receipt’, but is confined to actual receipts.
The next point to consider is whether or not the word ‘accrual’ in s 8 covers a capital accretion
such as the one in the present case. The meaning of the word ‘accrual’ was examined in Delfos’s
case (supra)146 in relation to the Union Income Tax Act, s 7 of which contains almost identical
147
wording to s 8. Wessels CJ said:
148
‘I agree with what is said by Watermeyer J in Lategan’s case that the words ‘has accrued to or in favour of
any person’ merely mean the amount to which he has become entitled.’
It seems clear, therefore, that the word ‘accrual’ in its context here means nothing more than a
payment which the taxpayer is entitled to receive, as opposed to one which he has already re-
ceived, and that the word ‘accrual’ is not intended to cover something which the taxpayer has
only notionally received.
...
I come to the conclusion, therefore, that this capital accretion is neither a ‘receipt’ nor an ‘ac-
crual’ within the meaning of s 8 . . . It follows therefore that the total receipt of £9 000 is ‘gross
income’ within the meaning of the Act.

Notes
The same point arose in [97] Natal Estates, where the judge seemed more receptive to
the taxpayer’s argument that the increase in value whilst the property was held on capital
account ought to be excluded from the gross income when it was sold, but held that the
increase in value at the date of the change to trading stock had not been proved.

[97]
Natal Estates Ltd v SIR
1975 (4) SA 177 (A), 37 SATC 193
The taxpayer company was formed in 1929 and acquired 20,000 acres of land at a price
of R6 per acre. At the time of such acquisition, the land was an asset of a capital nature.
In 1962 the company changed its intention and embarked on a scheme of profit-making
in relation to the land, by developing it as a township. Between 1965 and 1970 the tax-
payer company sold some 5 000 acres of the land at a profit of more than R8 million.
Holmes JA: Counsel on both sides were at one that, on the Act as it stands, there is no way of
taxing the profits on the excess of today’s prices over the value as at the date when an owner
decides and starts to go into the business of selling land for profit, with his land as his stock-in-
trade. Counsel referred to s 22. I express no view on the correctness or otherwise of counsels’
approach. It might be conceivable that, if the owner proves the amount by which the land appre-
ciated in value while he held it as a capital asset, the exclusion of that amount from the profits
might be upheld under the Act as it stands, as being a capital accrual and not gross income, as
defined. No opinion is expressed.

Notes
Holmes JA, without deciding the point,suggests that if there had been proof of the value
of the land at the time it became stock-in-trade, the company might have been taxable
only on the difference between such value and the eventual selling price. It is not clear
on what legal basis he believed that this could be done. Certainly, counsel on both sides
did not think this proposition was arguable. Section 22(2)(b) specifically provides that, in
determining the taxpayer’s taxable income for any year of assessment, property which
________________________

146 1933 AD 242 at 251

147 At 252.
148 (1926) CPD at 209.
166 Income Tax in South Africa: Cases and Materials

did not constitute trading stock at the end of the preceding year of assessment must be
brought into account during the current year of assessment at its cost price to the tax-
payer.

§12 Deemed receipt or accrual

§12.1 Income of minor child deemed to be parent’s income: s 7(3)
Section 7(3) provides that:
‘Income shall be deemed to have been received by the parent of any minor child if, by reason of
any donation, settlement or other disposition made by that parent of that child –
(a) it has been received by or has accrued to or for the benefit of that child or has been
expended for the maintenance, education or benefit of that child; or
(b) it has been accumulated for the benefit of that child.’

In determining whether income has been received by or has accrued to or for the benefit of a minor
child ‘by reason of’ any donation by its parent, the court will have regard to the effective cause of the
income.
[98]
CIR v Berold
1962 (3) SA 748 (A), 24 SATC 279
In 1951 the taxpayer, a company director, formed a company, Luzen Holdings (Pty) Ltd
(‘Luzen’). He was the sole beneficial shareholder of the ten issued shares. He transferred
certain of his assets to Luzen, and the purchase price remained owing to him by Luzen,
interest-free. He then formed a separate trust for each of his five children and he donat-
ed two shares in Luzen to each of those five trusts. He also donated to each of the trusts
£2 000 of the purchase price owed to him by Luzen. In 1954 the taxpayer’s mother, Mrs
Fanny Berold, formed the George Norbert Berold Trust for the benefit of the taxpayer’s
son, George Norbert Berold who was born in 1954, and donated £100 to it. In 1954 the
taxpayer donated to this trust £2 000 of the debt owed to him by Luzen. In 1955 Luzen
allotted two £1 shares at par to this trust. At this point there were six trusts, each holding
two shares in Luzen and £2 000 of the debt owed by Luzen to the taxpayer. In 1955 Mrs
Fanny Berold incorporated a company, Zenlu (Pty) Ltd (‘Zenlu’) in which she held 12
shares, which was the entire issued share capital. In 1955 Mrs Fanny Berold disposed of
all 12 of these shares in Zenlu by donating two shares to each of the six trusts. On 6
December 1955 Zenlu purchased from the six trusts all the shares in Luzen for £1 per
share. At this point Luzen’s liabilities exceeded its assets. The shares in Luzen were now
held by Zenlu, and the six trusts held all the issued shares in Zenlu. On 15 December
1955 Luzen declared dividends of £6 500, all of which was received by Zenlu as sole
shareholder of Luzen. On 31 December 1956 Luzen declared a further dividend of
£5 520 all of which was received by Zenlu. On 31 December 1956 Zenlu declared a
dividend of £6 200 which was received in equal shares by the six trusts. The trustees of
the trusts accumulated this amount for the benefit of the respective trust beneficiaries.
The Commissioner included in the taxpayer’s income for the tax year ended 30 June
1957 the sum of £5 167, being the amount of dividends declared by Zenlu and received
during that year by the five trusts created by him.
Issue: was the amount of £5 167 deemed, in terms of s 9(3) of the Income Tax Act 31
of 1941, to be income of the taxpayer? [See now s 7(3) of the Income Tax Act 1962.]
Held: in the affirmative. The donation from the taxpayer to Luzen was the effective
cause of the dividend paid by Zenlu to the trusts, which was accumulated for the benefit
 Receipts and accruals 167

of the taxpayer’s minor children; therefore that dividend was, in terms of the aforesaid
section, deemed to have been received by the taxpayer.
Hoexter JA: (STEYN CJ, OGILVIE-THOMPSON JA, RUMPFF JA AND WILLIAMSON JA CONCURRING)
For the purposes of this judgment it will be sufficient to quote sub-section (3) of s 9, which reads
as follows:
‘Any income shall be deemed to have been received by the parent of any minor child, if by reason of any
donation, settlement or other disposition made by that parent of that child -
(a) it has been received by or accrued to or in favour of, or has been deemed to have been received by or
accrued to or in favour of that child or has been expended for the maintenance, education or benefit
of that child; or
(b) it has been accumulated for the benefit of that child.’
The argument for the Commissioner consisted of two parts, the first being that the dividend
received by each of the five trusts created by the taxpayer represents income which has been
accumulated for the benefit of the child designated as beneficiary and the second part that it has
been so accumulated by reason of a donation by the taxpayer as parent of such child.
Counsel for the taxpayer has correctly conceded the soundness of the first part of this argument,
but he contends that the income was accumulated by reason, not of the taxpayer’s donation, but
of that made by Mrs Fanny Berold, to whom I shall refer as the grandmother.
When the taxpayer sold and transferred a large number of valuable assets to Luzen, he did so on
credit and without charging interest on the purchase price. In effect he lent a substantial sum of
money to Luzen, and as long as he refrained from compelling Luzen to repay that sum, there
was a continuing donation by him to Luzen of the interest on that loan. This donation benefited
the shareholders of Luzen, but initially the taxpayer was the sole shareholder and the donation
did not alter his financial position. When, however, he donated his shares in Luzen to the five
trusts which he had created, those trusts obtained the benefit of his continuing donation to
Luzen, and it was, of course, for this very purpose that he donated the Luzen shares to the trusts.
One glance at the relevant balance sheets and profit and loss accounts will show that no interest
was paid by Luzen to the taxpayer in respect of the balance owing to him and that probably
Luzen would otherwise not have been able to declare any dividends. If the taxpayer had charged
interest, his income would have been increased thereby. His object, however, was to give his
children the benefit of that interest in the guise of Luzen dividends. The question now arises
whether the incorporation of Zenlu, the donation of Zenlu shares by the grandmother to the
trusts, and the purchase by Zenlu of the Luzen shares in any way altered the effect of the taxpay-
er’s donation.
It seems clear that the income accumulated for the benefit of the taxpayer’s children can be
derived from no source other than the donations made by the taxpayer and the grandmother.
What, then, was it that was actually donated to the trusts by the grandmother?
She donated two Zenlu shares to each trust. Zenlu itself had no assets and its shares were worth
probably a good deal less than their par value. These Zenlu shares only acquired value when
Zenlu purchased the shares of Luzen. From the statement of facts it would seem that Zenlu pur-
chased the Luzen shares only after the grandmother had donated the Zenlu shares to the trusts.
The only result of the purchase was therefore that the trusts thereafter held the Luzen shares no
longer directly, but indirectly through Zenlu. The income accumulated by the trusts for the
benefit of the taxpayer’s children was the dividend paid by Zenlu during the year of assessment.
That dividend was made possible only because, as the sole shareholder of Luzen, it received the
benefit of the dividends declared by that company. Luzen, in its turn, was able to pay the div-
idends, which it did in fact pay, only because the taxpayer did not charge interest on the very
substantial sum owing to him by Luzen.
...
In my opinion, therefore, the value of the grandmother’s donation to each trust was, at its high-
est, the sum of two pounds. It follows that the dividend paid by Zenlu and accumulated by the
trusts for their beneficiaries was derived from the donation made by the taxpayer.
...
I have already pointed out that, although in form the dividend in question is derived from
Zenlu, in fact it is derived from the taxpayer’s donation, and the Court should not allow the
168 Income Tax in South Africa: Cases and Materials

forms of the company law to cancel the effective causal connection between the taxpayer’s dona-
tion and the income accumulated for the benefit of the children. (Cf Barnett v COT.149)
150
In the case of CIR v Widan it was held that there must be a causal connection between the tax-
payer’s donation and the income in question, and in the present case there is clearly such a
causal connection. Furthermore, as in that case, so also in the present case the taxpayer’s dona-
tion was intended to have the result which was ultimately achieved, even though every step taken
may not have been worked out beforehand; and the conclusion cannot be avoided that his dona-
tion was the efficient cause of the accumulation of income for the benefit of his children and
that the dividend paid by Zenlu was therefore income accumulated by reason of that donation.
In my judgment the appeal should be allowed . . .

Notes
In determining whether, for the purposes of (what is now) s 7(3), income was received
by or for the benefit of a minor child ‘by reason of’ a donation by his parent, the Appel-
late Division in this case accepted the principle laid down in [99] CIR v Widan that there
must be a causal connection between the taxpayer’s donation and the income in ques-
tion. The court however looked for the ‘effective cause’ of that income, and said that it
would not allow ‘the forms of company law’ to cancel an effective causal connection. The
court traced the causal chain of a dividend back through an intervening company and
found that the effective cause of the dividend was a donation by the taxpayer, the father
of the minor children for whose benefit the dividend had been accumulated. The ele-
ments of s 7(3) were therefore satisfied, and the dividend was deemed to have been
received by the taxpayer.

The deeming provisions of s 7(3) apply not only to income produced by the donation, but also to
income derived from a reinvestment of the original donation.

[99]
CIR v Widan
1955 (1) SA 226 (A), 19 SATC 341
On 19 June 1951 the taxpayer held 25 000 shares in the Baltic company. The remaining
25 000 shares in this company were held by the Rabmor company of which the taxpayer
was the sole shareholder. In June 1951 the taxpayer formed a trust in favour of his four
minor children (‘the donees’) and donated to the trust his entire shareholding of 100 £1
shares in the R company. The trust deed provided that the income of the trust would vest
in the donees and that, while the donees were minors, such income should be paid to
their guardian to be used for their maintenance as he thought fit.
On 23 June 1951 the taxpayer formed the Winvest company with an authorised share
capital of £30 000, divided into 4 500 ordinary shares of £5 each and 30 000 ‘A’ shares of
five shillings each. On 23 June 1951 the R company declared a dividend of £21 000 which
was paid to the trust as the sole shareholder, and from there it was paid by the trustees to
the taxpayer as the natural guardian of the trust beneficiaries. On 26 June 1951 1 050
shares in the W company were allotted to the taxpayer’s children (the trust beneficiaries)
and were paid for out of the aforementioned dividend of £21 000 which had accrued to
the trust. On the same date the taxpayer sold to the W company 24 900 of the 25 000
shares which he held in the B company and the R company sold to the W company its
holding of 25 000 shares in the B company. On the same date the R company allotted to
the W company 300 shares of £1 each.
________________________

149 1959 (2) SA 713 (FC).

150 1955 (1) SA 226 (A).
 Receipts and accruals 169

As a result of these transactions, as at 30 June 1951, the W company held 49 900 shares
in the B company out of a total shareholding of 50 000 shares and 300 of the 400 shares
of the R company. The trustees of the trust held 100 shares out of a total shareholding of
400 shares in the R company which, however, had disposed of all its assets to the W
company, and the taxpayer’s minor children held 4 200 shares in the W company. The
net result was that the taxpayer had transferred to his minor children four-fifths of the
interest which he had previously held in the B company.
For the tax year ended 30 June 1951 the W company had a taxable income of £29 470
which had been apportioned to it from the B company in terms of the Income Tax Act
1941. In terms of the Act, the income of the W company was apportioned to its share-
holders.
Acting in terms of s 9(3) and s 90 of the Act, the Commissioner allocated to the tax-
payer the entire income of the W company for the 1951 tax year. The taxpayer objected
on the grounds that he held only 21 000 ‘A’ shares in that company, and that the holders
of the ordinary shares in the company were his minor children to whom a proportionate
allocation should have been made.
Issue: had the income of the W company, which had arisen because the trust reinvested
the income which had accrued to it as a result of the taxpayer’s original donation, been
received ‘by reason of’ the donation made by the taxpayer to his minor children within
the meaning of s 9(3) (now s 7(3))?
Held: in the affirmative. The proximate cause of the accrual of the said income to the
taxpayer’s children was the original donation made to them by the taxpayer which was,
in terms of s 9(3) (now s 7(3)), so long as they were minors, deemed to be the taxpayer’s
income.
Centlivres CJ: (GREENBERG JA, SCHREINER JA, VAN DEN HEEVER JA and FAGAN JA CONCURRING)
Section 9(3) of the Act is as follows:
‘Any income shall be deemed to have been received by the parent of any minor child, if by reason of any
donation, settlement or other disposition made by that parent of that child:
(a) it has been received by or accrued to or in favour of, or has been deemed to have been received by or
accrued to or in favour of that child, or has been expended for the maintenance, education or bene-
fit of that child; or
(b) it has been accumulated for the benefit of that child.’
...
The respondent contended that in the events that have happened the notional income of his
children ex Winvest did not accrue to them ‘by reason of any donation, settlement or other dis-
position’ made by him to them within the meaning of s 9(3). That contention is founded upon
Kohler’s case,151 supra . . .
Before us counsel for the Commissioner did not challenge the ratio decidendi in Kohler’s case,
supra, but the fact that he did he not do so does not absolve this Court from the duty of enquir-
ing into the correctness of that decision. In that case Murray J, had to consider a case where the
Commissioner, professing to act under s 9(3), included in the taxable income of a taxpayer
income earned by the taxpayer’s children through the investment of income derived by the
children from the investment of a capital sum donated to them by their father. The learned Judge
held that the ‘income upon income’ did not fall within the provisions of s 9(3) and said152 that
‘though the original donation may have been a causa sine qua non it was not the causa by reason of which
the amounts now in issue [the income upon income] came to the minors’.
As I understand the learned Judge’s reasoning he came to his conclusion on the ground that the
words ‘by reason of’ in s 9(3) should be interpreted as referring to the proximate and not the
remote cause. He seems to have approved of the contention advanced on behalf of the taxpayer
in that case that
________________________

151 1949 (4) SA 1022 (T), 16 SATC 312.

152 At 1028.
170 Income Tax in South Africa: Cases and Materials

‘this causal connection between the donation and the accrual (or receipt) of this ‘income upon income’
was interrupted by the introduction of a novus actus, viz the re-investment of the original income, and it
153
was by reason of this re-investment that such accrual (or receipt) occurred’.
If this line of reasoning is correct then it would follow that interest earned through the invest-
ment of capital donated to a minor child by its parent would not fall under s 9(3), for in such a
case the proximate cause (in the sense in which that phrase seems to have been understood by
Murray J) which resulted in the earning of interest would be the act of investment and not the
donation itself; in other words the operation of s 9(3) would be confined to cases where a parent
donates to his minor child invested capital which produces income at the time the donation is
made. In my opinion it is unlikely that the Legislature intended, when it used the words ‘by
reason of’, that s 9(3) should have such a narrow application. For the purpose of this judgment I
shall assume in favour of the respondent that in applying the words ‘by reason of’ one has to
ascertain what is the proximate cause. When one seeks the ‘proximate cause’ of a certain result,
it does not necessarily follow that a cause nearest in point of time is the proximate cause. On this
point I can not do better than quote what Lord Shaw of Dunfermline said in Leyland Shipping Co
Ltd v Norwich Union Fire Insurance Society Ltd:154
‘To treat proximate cause as if it was the cause which is proximate in time is . . . out of the question. The
cause which is truly proximate is that which is proximate in efficiency. That efficiency may have been pre-
served although other causes may meantime have sprung up which have not yet destroyed it, or truly im-
paired it, and it may culminate in a result of which it still remains the real efficient cause to which the
event can be ascribed’.
The present case . . . is concerned with the proper interpretation to be placed on a provision in a
taxing statute and we must endeavour to ascertain the intention of the Legislature from the lan-
guage it has used. When income has been received by a minor child the enquiry is whether such
income has been so received ‘by reason of any donation, settlement or other disposition’ made
by the parent of that child. There must be some causal relation between the donation and the
income in question. Difficult cases may conceivably arise. Where, for instance, a father donates a
sum of money to a minor child and the child buys a business to which he contributes his skill
and labour and from which he earns an income, that income may be regarded as being attribut-
able to two causes viz: the donation and the skill and labour of the child. In such a case it may be
impossible to say which part of his income was the result of the donation and which part the
result of his skill and labour and it may be that the Commissioner would not be able to apply
s 9(3). But in the present case there is no such difficulty in ascertaining the real efficient cause
(to use Lord Shaw’s language) of the acquisition of the respondent’s minor children of notional
income from Winvest. The donation of the 100 Rabmor shares to the children was intended to
have the result which was ultimately achieved. Every step that was necessary to achieve that result
was carefully worked out beforehand. In these circumstances the respondent cannot be heard to
say that it was not by reason of the donation he made to the children of 100 Rabmor shares that
his children became entitled to income ex Winvest. It is of course clear that a parent may have to
pay tax on his minor child’s income even though he had no design, in donating the capital
without which the income would not have been gained, of providing the child with income. In
the present case, the single all-embracing design puts it beyond question that the income ac-
crued by reason of the donation, but supposing, for instance, the gift of the Rabmor shares had
taken place months before the declaration of a dividend by it and that it could not be shown that
at the time of the donation the acquisition of the Winvest shares was contemplated, what I have
said must not be taken as an indication that in that event the respondent could not have been
taxed under s 9(3). Every case must be decided on its own facts and if in any particular case it
appears that, apart from proof of any specific intention on the part of the parent, the effective
cause of income accruing to a minor child was the donation made by the parent, then such
income is deemed under s 9(3) to have been received by the parent.
In my view there can be no doubt that the income which the respondent’s children are entitled
to receive ex Winvest is, within the meaning of s 9(3), income to which they have become enti-
tled by reason of the donation made to them by the respondent and there is, therefore, no room
for the application of the principle that

________________________

153 At 1026 and 1027.

154 1918 AC 350 at 369.
 Receipts and accruals 171

‘in a taxing statue the proper course is, in cases of doubtful construction, to give the benefit of the doubt
to the person sought to be charged’
155
(Hulett Ltd v Resident Magistrate, Lower Tugela.) Nor is there any room for the application of the
well-recognised principle of law that a person may so order his affairs as to escape taxation. For
in the present case it is clear that the elaborate scheme devised by the respondent does not have
the effect of relieving him of taxation.
The appeal is allowed with costs . . .

Notes
This is the leading case on whether the deeming provisions of (what is now) s 7(3) apply
only to income earned on the amount donated by the taxpayer, or whether s 7(3) also
applies to income earned on new investments made by the donee from the fund of the
original donation; in short, whether s 7(3) applies to ‘income on income’.
In a nutshell, the taxpayer in Widan had donated certain shares to a trust in favour of
his minor children. With the dividends derived from those shares, the trustees purchased
shares in a second company and a dividend was declared by the second company. The
question was whether the dividend from that second company, which accrued to the
taxpayer’s minor children, was deemed to be the taxpayer’s income under (what is now)
s 7(3) on the grounds that the dividend was derived ‘by reason of’ the taxpayer’s original
donation. In short, the question was whether the deeming provisions of s 7(3) extend to
‘income on income’. The court held that, on the facts before it, s 7(3) did extend to the
income on income. The Appellate Division held that the contrary decision in Kohler156 was
wrong.
In Kohler the Transvaal Provincial Division had held that where the taxpayer makes a
donation of capital, and the donees reinvest that capital and earn income, such income
is not derived ‘by reason of’ the donation and therefore falls outside the scope of the
deeming provision of s 7(3). Such income, said the court in Kohler, is derived by reason
of the investment, not by reason of the donation; in other words, the investment breaks
the causal chain and is a novus actus. In Widan, the Appellate Division disagreed with this
reasoning, and held that the legislature could not have intended such a narrow interpret-
ation of s 7(3). The inquiry, said that Appellate Division, was into the ‘proximate cause’
of the income, which did not necessarily mean the cause nearest in time to the income.
In Widan it was clear that the whole stratagem ‘was carefully worked out beforehand’,
but the court said that s 7(3) would apply even where the donor did not intend or con-
template that his donation would produce income.157
The Appellate Division in Widan did however concede that if the taxpayer were to
donate money to his minor child who used that money to buy a business to which he con-
tributes his skill and labour, then income from the business might not be derived ‘by reason
of’ the donation.158 The italicised words make clear that it would only be where the child
made some input into the business by way of labour or skill that the causal link between
the donation and the income might be broken.

[100]
Joss v SIR
1980 (1) SA 674 (T), 41 SATC 206
In 1967 the taxpayer’s father created a trust for the benefit of the taxpayer’s children
and donated R36 to the trustees. He also donated R12 to the taxpayer’s minor daughter,
________________________

155 1912 AD 760 at 764.

156 1949 (4) SA 1022 (T), 16 SATC 312.
157 At SATC 352.
158 At SATC 351.
172 Income Tax in South Africa: Cases and Materials

Nicolle. In that same year, the trust and Nicolle subscribed for 36 shares and 12 shares
respectively in a newly formed company, Wilfred Joss Holdings (Pty) Ltd (‘WJH’). At the
time, those shares were only worth their par value. A year later, the taxpayer sold certain
shares to the WJH company at their market value. The taxpayer also made an interest-
free loan to the WJH company . The taxpayer’s minor daughter, N, by virtue of her
shareholding in WJH derived dividends on her shares.
The Commissioner, invoking s 7(3), included in the taxpayer’s taxable income the
dividends received by N from her shares in the WJH company.
Issue: on the facts, did the provisions of s 7(3) empower the Commissioner to include
in the taxpayer’s income the dividends received by his minor daughter, N?
Held: the shares had been purchased by the WJH company at their market value and
this was therefore not an ‘other disposition’ within the meaning of s 7(3) and (4). On
the facts, there had been first a disposition of shares at their proper value, and secondly,
an interest-free loan. Only the latter was a ‘disposition’ within the terms of s 7(3). The
words ‘by reason of’ in that provision required that the interest-free loan be kept sep-
arate from the disposition of shares in order to determine the causal connection between
the receipt of income by N and the ‘disposition’ involved in the interest-free loan. Where
part of the income was attributed to that ‘disposition’ and part to another factor, an
apportionment had to be made.
Coetzee J: (MCEWAN J AND KING J CONCURRING)
The issue is whether any income accrued to Nicolle and the trust as a result of a
‘donation, settlement or other disposition’ made by the appellant, on a proper construction
of the provisions of s 7(3) of the Act, and, if so, what amount of income accrued as aforesaid.
Section 7(3) reads as follows:
‘Income shall be deemed to have been received by the parent of any minor child, if by reason of any dona-
tion, settlement or other disposition made by that parent of that child -
(a) it has been received by or has accrued to or in favour of that child or has been expended for the
maintenance, education or benefit of that child; or
(b) it has been accumulated for the benefit of that child.’
The first question to be considered is what the meaning is of ‘other disposition’. The appellant
submits that the word ‘settlement’ in the context of s 7(3) means the transference of property to
a beneficiary or to a trustee for the benefit of the beneficiary and that it does not include an
onerous contract. He contends that the words ‘other disposition’ must be interpreted in accord-
ance with the ejusdem generis rule of construction and therefore exclude an onerous contract,
such as a sale. It is also contended that there is no legal basis for the approach of the Court a quo
that, where a transaction exhibits some measure of liberality, eg where purchase consideration is
inadequate, the provisions of s 7(3) can be applied.
...
The respondent contends that the words ‘other disposition’ should not be limited to a gratui-
tous disposition. This question was not decided by the Court a quo which assumed for the pur-
poses of its judgment that such a disposition had to be gratuitous . . .
I think that the one thing which is absolutely certain is that the words ‘other disposition’ in this
context cannot possibly mean every disposition which in law is recognised as such. This would
lead to startling results because it is fundamental to the structure of our income tax legislation
that minor children and parents are separately taxed on their separate incomes. It would then
follow that when a transaction at real arms’ length, occurs between a minor and his parent
whereby the parent transfers property to the minor at better than adequate consideration which
is paid from the minor’s own funds the income from that property is still taxable in the hands of
the parent . . .
...
I . . . am prepared to hold that because there is an element of liberality or benefaction in most
settlements (bearing in mind the general purpose of ss (3)) ‘settlement’ would not include a
transaction made for full value in money or money’s worth. I think that the ejusdem generis rule is
 Receipts and accruals 173

of application and that transactions for full value in money or money’s worth are excluded from
‘other disposition’ in ss (3) and (4) . . .
...
Neither the term nor the concept of ‘settlement’ as a juristic act is really known to Roman-Dutch
law. It is derived from the English law . . .
Once one accepts that the notion of ‘settlement’ is inextricably bound up with motives of liberal-
ity (there is usually a ‘beneficiary’ in whose favour the settlement is made for the purpose of
his enjoyment of the asset so ‘settled’), it seems to me that this is a case where ‘other disposition’
cannot possibly, by a proper application of the ejusdem generis rule, be construed literally and
as widely as the respondent would have us do. The question is then whether in the instant case
the transaction whereby the appellant sold his holdings to WJH was for full value in money
or money’s worth. In this Court the contention of the appellant that there is no legal basis for
saying that, even if consideration is inadequate, the provisions of s 7(3) cannot be applied,
is in my view incorrect. Once the consideration is inadequate it would be necessary to deter-
mine whether it is triflingly inadequate. If so, full value did not pass and this section comes into
play.
In the Court a quo evidence was given by Davis, the appellant’s accountant and auditor of the
companies in which the appellant held shares, that the amount at which WJH took over the
shares where amounts which he had calculated as being the fair value of the shares. Davis says in
his evidence that the shares were valued at the
‘considered market value at that stage and transferred to market value from Wilfred Joss, the appellant, to
Wilfred Joss Holdings (Pty) Ltd.’
. . . Taking the evidence of Davis as a whole, in the absence of any evidence on the principles of
valuation to the contrary, I cannot agree that the taxpayer did not prove that the price at which
the shares were taken over by WJH was anything but the full or fair price . . . The fact that an
onus rested upon the appellant did not mean that the respondent could sit back and content
himself with this patent disagreement between Davis and a member of the Court without pro-
ducing evidence of the opposing view which could similarly be tested by cross-examination. The
evidence of Davis standing uncontradicted, to my mind, was certainly proof that these shares
were taken over at a fair price . . . I think that, once the Court is satisfied that there was substan-
tially a fair price which was stipulated, fine ex post facto reasoning which may slightly or insignifi-
cantly detract therefrom or add thereto is not important. The question remains whether it was
substantially the equivalent of a disposition or a transaction at arms’ length at a fair price which
can reasonably be regarded as the full value of the assets which were disposed. In my view, the
Court a quo erred in its finding of fact that the shares were not taken over by WJH at ‘a realistic
value’.
The question of the allotment of the shares to Nicolle and the trust is not an important one. If
the assets acquired by WJH were substantially in excess of the nominal consideration then it
means that there was by virtue of the allotment a disposition in their favour which is hit by
159 160
s 7(3). CIR v Berold and CIR v Estate Kohler. The fact of the matter is of course that the shares
were paid for not by the appellant out of his own funds and when the shares were indeed allot-
ted it cannot be said that the consideration for the allotment was anything but a fair price for the
shares at that stage. The important matter is what was brought into WJH thereafter by the appel-
lant, the father of the alleged ‘beneficiaries’ under this scheme.
Once the shares were taken over at a fair price the question of the interest free loans becomes
important. This is clear from Berold’s case . . .
...
. . . [I]n a case such as the present one must be careful to distinguish between the disposition of
the shares at a proper value and thereafter the loan to the company which is interest free. Thus
there are two dispositions and it is only the latter which is a disposition within the meaning of
s 7(3) of the Act. It is also logically imperative to separate the interest free loan from the transfer

________________________

159 1962 (3) SA 748 (A).

160 1953 (2) SA 584 (A).
174 Income Tax in South Africa: Cases and Materials

of the shares, to determine the causal connection between the receipt of the income and
the disposition. This flows from the words ‘by reason of’ in the section. Hence, once an amount
received by way of dividend is clearly attributable as to part thereof to such a disposition and
as to the balance to another disposition, then an allocation must be made for tax purposes of
the amount which was received ‘by reason of’ the ‘donation, settlement or other disposition’.
I find myself therefore in disagreement with the Court a quo in holding that, even if the disposi-
tion was made for full value, the fact of the interest free loan results in the application of the
provisions of s 7(3) as this conclusion negates the approach of Hoexter JA (supra) to this kind of
problem.
It is however illogical to suggest that only the interest which normally would have been paid in
respect of the tax year in question affects the dividend. Obviously the interest-free loans during
the preceding years also affect the quantum of the dividend received by Nicolle and the trust in
the tax years under discussion. This was conceded in argument by appellant’s counsel.
In the result the appeal is upheld and the following order is submitted for the that made by the
Court a quo:
The Secretary must amend the relevant assessment so as to reflect the position that only the interest free
loan in respect of the purchase price of the shares is deemed to be a disposition within the meaning of
s 7(3) to the extent that the aggregate of interest that should have been charged on the purchase price of
the shares from the inception of the scheme would have exceeded the aggregate of profits available for
distribution by way of dividend. The payments to the appellant by WJH must in the first instance be credit-
ed against his loan in respect of the purchase price of the shares.

Where assets are sold to a trust at a fair value and no interest is charged on the outstanding pur-
chase price, it is necessary to separate the sale of the shares and the failure to charge interest in deter-
mining the applicability of s 7(3).

[101]
CIR v Woulidge
2000 (1) SA 600 (C)
In 1982 the taxpayer had set up two similar trusts for his minor children, Laura and
Douglas, who were income and capital beneficiaries of the trust. Soon after the creation
of the trusts, the taxpayer sold shares in a group of four companies to the trusts. At the
time the trusts had no funds with which to pay for the shares, and the taxpayer financed
the purchase price by granting the trusts credit. Although the agreement of sale entitled
the taxpayer to charge interest on the outstanding purchase price, he never did so. From
1982 to 1987 the companies declared no dividends and the trusts received no income. In
1988, another company took over the shares of the four companies and became the
holding company. Each trust acquired 50% of the shares in that holding company, and
each trust sold half of those shares in the holding company, after which each trust held
25% of the shares in the holding company. The price received by the trust on the latter
sale of shares enabled the trusts to pay for the shares they had originally purchased from
the taxpayer, and also enabled the trusts to generate income.
The respondent was then assessed to tax, in terms of s 7(3), on the income so derived
by the trusts. In the Tax Court the taxpayer conceded that the s 7(3) applied to the
forsaken interest, but contended that income deemed to have accrued to him under that
provision should be determined by setting off the income actually received against the
interest that should have been charged and contended further that the interest that
would have accrued could not legally exceed the capital by virtue of the operation of the
in duplum rule.
The Tax Court held that the taxpayer should be taxed in respect on the forsaken in-
terest on the unpaid price of the shares sold to the trust (ie the interest that he could
have charged, but did not), but that such interest would not exceed an amount equal to
 Receipts and accruals 175

the price of the shares. This limitation on interest was said to flow from the operation in
the in duplum rule. On appeal, the Full Court of the Cape High Court in a majority
decision upheld that finding, but it was reversed on appeal to the Supreme Court of
Appeal, which held that the in duplum rule was not applicable in the circumstances of
this case. The Supreme Court of Appeal did not disturb the decision of the Cape High
Court that s 7(3) applied to the forsaken interest.
Davis J: Appellant has appealed against [the judgment of the Tax Court], as the result of which
the following issues require decision, namely
(1) whether all the income received by or accrued to respondent’s children and accumulated
by the two trusts was taxable in respondent’s hands in terms of s 7(3) of the Act; alternative-
ly does s 7(3) only apply to deem income to have been received by respondent to the extent
of the notional interest which respondent failed to charge on the purchase price of the
shares which respondent sold and transferred to the trusts;
(2) whether the Court a quo erred in having restricted the amount of interest on which respon-
dent was held liable to pay tax by having applied the in duplum rule.
The application of s 7(3)
Section 7(3) of the Act provides that:
‘Income shall be deemed to have been received by the parent of any minor child, if by reason of any dona-
tion, settlement or other disposition made by that parent of that child
(a) it has been received by or has accrued to or in favour of that child or has been expended for the
maintenance, education or benefit of that child; or
(b) it has been accumulated for the benefit of that child.’
There are two phrases in this section which are crucial to the understanding of the provision,
namely there must be a ‘donation, settlement or other disposition made by the parent of the
child’ and ‘by reason of’ such donation etc income must be received by, or accrue to, the minor
child.
[After discussing the decisions in Ovenstone v SIR,161 Joss v SIR,162 CIR v Widan,163 CIR v Berold 164 the
judgment proceeds:]
In short the test to be applied is whether a gratuitous disposal constitutes the real, substantive
cause of income being received by the minor child. If the answer is in the affirmative, that
amount of income so received or which accrues to the minor child will be deemed to be that of
the donor parent.
The provisions of s 7(3) were not intended to encompass dispositions of property for due consid-
eration, that is a bona fide commercial, business or arm’s-length transaction for full or fair con-
sideration in money or money’s worth, but only a gratuitous disposal of property whereby a
taxpayer seeks to achieve tax avoidance by diverting from him/herself income by donating or
disposing of income producing property without replacing it or being able to replace it fully or
at all. (See Ovenstone’s case.165)
[The judge noted that the purchase price of the shares was a fair value. Hence, the sale of the
shares to the trusts did not constitute a ‘donation, settlement or other disposition’ within the
meaning of s 7(3).]
Accordingly and for similar reasons to those adopted in Joss and Ovenstone, I find no merit in the
submission that all the income received by or which accrued to the two trusts was taxable in re-
spondent’s hands by reason that the sale of shares to the trust was itself a gratuitous disposal
within the meaning of s 7(3).
The further question arises as to whether respondent’s failure to exercise his discretion to
charge interest on the purchase price constitutes a donation, settlement or disposal within the
________________________

161 1980 (2) SA 721 (A) at 740A-C.

162 1980 (1) SA 674 (T).
163 1955 (1) SA 226 (A).
164 1962 (3) SA 748 (A) at 755D-E.
165 At 736A-E and 738B.
176 Income Tax in South Africa: Cases and Materials

meaning of s 7(3). If the answer is in the affirmative, the further question arises as to the impact
thereof on any income received by, accrued to in favour of or accumulated for the benefit of the
respondent’s then two minor children.
166
In CIR v Berold Hoexter JA found that the taxpayer ‘lent a substantial sum of money to Luzen
and as long as he refrained from compelling Luzen to repay that sum, there was a continuing
167
donation by him to Luzen of the interest on that loan’. See also Joss’ case.
The respondent’s failure to have charged interest constituted a disposition and not conduct of a
purely commercial or business nature which in Ovenstone’s case168 was held to fall outside the
ambit of the subsection.
As already stated the concept ‘by reason of’ in s 7(3) has been held to require ‘some causal re-
lationship’ between the receipt or the accrual of income or the accumulation of benefits and
such donation, settlement or disposition. (Widan’s case,169 Berold’s case;170 Joss’ case.171)
For this reason the conclusion to which I have arrived, namely that the sale of the shares and the
transfer thereof did not constitute a donation, settlement or disposition within the meaning of
s 7(3) but that the failure to have charged interest on the purchase price does, makes it neces-
sary to separate the sale of the shares and the failure to have charged interest. In this way it is
possible to determine whether there is a causal relationship between the failure to charge inter-
est and any income received by or accrued to or benefits accumulated for the benefit of re-
spondent’s then two minor children.
In my view, the question of the income received by or accrued to or accumulated to the benefit
of respondent’s two minor children during the 1990 and 1991 tax years was enhanced by
the trusts’ enjoyment of the benefit of an interest-free credit facility. This finding satisfies the
requirement of a causal connection between the particular disposition, namely the interest-free
credit facility and such income.
The application of the in duplum rule
[The court held, by a majority, that the in duplum rule was applicable. This finding was reversed
on appeal to the Supreme Court of Appeal, but the remainder of the Cape High Court’s judg-
ment in this case was affirmed.]

Notes
In this case the court held that separate consideration had to be given to (a) the sale of
the shares to the trust and (b) the failure of the taxpayer, being the seller, to charge
interest on the outstanding purchase price. It was necessary to establish whether either of
these constituted a ‘donation, settlement or other disposition’ as contemplated by s 7(3).
If the sale itself had been a donation, settlement or other disposition, then all the
trusts’ income flowing from the sale would have been subject to s 7(3). If only the failure
to charge interest was a donation, settlement or other disposition, then only the fore-
gone interest would have been subject to s 7(3) and deemed to be the taxpayer’s (the
donor parent’s) income.
In regard to the sale of the shares, the court held that the sale had been at fair value,
and thus was not a donation, settlement or other disposition’ within the meaning of
s 7(3). The provisions of s 7(3) were not intended to encompass dispositions of property
for due consideration, that is a bona fide commercial, business or arms’ length transac-
tion for full or fair consideration, but only a gratuitous disposal of property whereby a
taxpayer sought to avoid tax by diverting income from himself by donating or disposing
of income-producing property without replacing it fully or at all.
________________________

166 1962 (3) SA 748 (A) at 753F.

167 At 682H-683A.
168 At 737E.
169 At 234A.
170 At 755D-E.
171 At 683A-B.
 Receipts and accruals 177

However, the court held that the failure of the taxpayer to charge interest on the out-
standing purchase price was indeed a ‘donation, settlement or other disposition’ and
that there was a sufficient causal link between this disposition and income which accrued
to the taxpayer’s minor children, namely the trust beneficiaries. The court held further
that this gratuitous disposition was the real, substantive cause of the income being re-
ceived by the minor child. This being so, the notional foregone interest was deemed to
be that of the donor parent.
The court held, by majority, that the in duplum rule was applicable to the foregone
interest, with the result that interest stopped running when the unpaid interest equalled
the outstanding capital. This part of the judgment was reversed on appeal to the Su-
preme Court of Appeal which held that the in duplum rule can only be applied in the real
world of commerce and economic activity where it serves considerations of public policy
in protecting borrowers against exploitation by lenders; the present matter was not such
a case.
The court held that the provisions of s 7(3) envisaged a factual enquiry to determine
whether an amount accruing to a minor child was causally linked to a gratuitous disposi-
tion made by the parent. If the answer was affirmative, then the quantum of the attribut-
ed amount had to be factually determined in the same manner. This required one to
postulate conduct by the parent that did not contain any element of liberality or generos-
ity, in this case, the charging of interest.
The majority judgment held that had the taxpayer, the donor father, acted in terms of
the standard of reasonable commercial practice, he would have charged the trust interest
on the outstanding purchase price of the shares. The failure to charge interest was a
benefit which resulted in the minor children, as trust beneficiaries, enjoying more in-
come than they would have done had interest been charged. Hence, the amount of that
additional income would be deemed, in terms of s 7(3), to accrue to the donor father.

The in duplum rule only applies in the real world of commerce and economic activity where
public policy requires the protection of borrowers against exploitation by lenders; the present
matter was not such a case
[102]
CIR v Woulidge
63 SATC 483 (SCA)
For the facts of this case, see extract [101].
The taxpayer conceded that section 7(3) applied to the interest that he could have charged the
trust on the outstanding purchase price of the shares which he had sold to the trust, but con-
tended that the income deemed to have accrued to him under s 7(3) could not legally exceed
the capital by virtue of the in duplum rule. The effect of the in duplum rule is that interest on a
debt stops accruing when the unpaid interest equals the outstanding capital.
In the judgment summarised below, the Supreme Court of Appeal held that the in duplum rule
did not apply in the circumstances of this case. The court held that –
(1) Section 7(3) applies to a disposition made wholly or to an appreciable extent gratuitously
out of liberality or generosity.
(2) In the present case, there was indeed an appreciable degree of gratuitousness as far as the
failure to charge interest was concerned, but there was no gratuitousness in relation to the
purchase price, which was market related.
(3) The in duplum rule only applies in the real world of commerce and economic activity where
public policy required the protection of borrowers against exploitation by lenders; the pre-
sent matter was not such a case; moreover, in the present case, there was neither such a
lender nor such a borrower. The mere element of gratuitousness does not trigger the in
duplum rule.
178 Income Tax in South Africa: Cases and Materials

(4) The appeal was therefore upheld to the extent that the application of the in duplum rule in
the courts below was wrong. The remainder of the judgment of the court below, was left
undisturbed.
Froneman AJA: Section 7(3) of the Income Tax Act 58 of 1962 (‘the Act’) provides that:
‘Income shall be deemed to have been received by the parent of any minor child, if by reason of any dona-
tion, settlement or other disposition made by that parent of that child –
(a) it has been received by or has accrued to or in favour of that child . . .’
. . . The respondent’s objection to the revised assessments was partially successful in the Cape
Special Court for Income Tax Appeals . . . The court held that the respondent should be taxed
. . . on the forsaken interest on the unpaid price of the shares sold to the trusts, but that such
interest would not exceed an amount equal to the price of the shares. This limitation on interest
was said to flow from the operation in the in duplum rule. On appeal the Full Court of the Cape
High Court in a majority decision upheld that finding . . .
On appeal, in the court below and in this court the appellant contended, however, that the sale
of the shares to the trust . . . at the very least, contained a considerable element of gratuitousness
and that, accordingly, all the income received or accrued by reason of that sale should have been
taxed in the hands of the respondent. There are a number of difficulties in this approach, both
procedural and substantive in nature.
. . . For its application s 7(3) requires a disposition made wholly or to an appreciable extent gra-
tuitously out of liberality or generosity (Ovenstone v SIR 172). Where the disposition contains both
appreciable elements of gratuitousness and of proper consideration an apportionment may be
made between the two elements for the purpose of determining the income deemed to have
accrued to, or received by, the parent under s 7(3) . . . As long as the capital remains unpaid the
failure to charge interest represents a continuing donation (CIR v Berold 173) The interest that
should have been charged (the extent of the donation) may then, depending on the circum-
stances, be regarded as that portion of the income deemed to be that of the parent within the
meaning of s 7(3). That is what happened in Joss v SIR 174 . . .
Appellant’s counsel submitted that in the present case the conduct of the parties to the sale of
the shares . . . established that there was an appreciable element of gratuitousness to the transac-
tion . . . There was indeed an appreciable degree of gratuitousness as far as the forbearance of
interest was concerned (in the form of annual donations of the interest not charged), but the
market-related purchase price, the terms of the deed of sale and the subsequent payment of that
purchase price constituted due consideration in respect of the sale itself . . . Respondent con-
ceded that forbearance of interest amounted to a donation under s 7(3); he quantified the ex-
tent of the donation by leading evidence on the applicable rate of interest that should have been
charged on the capital over the period that no interest was in fact charged; and then he at-
tempted to limit this quantification by relying on the in duplum rule in argument. The Commis-
sioner led no evidence in rebuttal . . . What remained was really only a legal issue, namely
whether the in duplum rule applied or not.
It is clear that the in duplum rule can only be applied in the real world of commerce and eco-
nomic activity where it serves considerations of public policy in the protection of borrowers
against exploitation by lenders175 . . . The respondent charged no interest on the loan that he
advanced to the trusts. No actual interest thus ever accumulated. A notional commercial arms-
length transaction on interest would assume a lender who would insist on payment of the inter-
est he charges and a borrower able to pay that interest. Here there is neither such a lender nor
such a borrower. To the extent that either one is absent the result is a gratuitous disposition. I
fail to see how that very element of gratuitousness can be said to trigger the working of the in
duplum rule.
The appeal must therefore be upheld to the extent that the application of the in duplum rule in
the courts below was wrong.
________________________

172 1980 (2) SA 721 (A) at 737G-H; 740A.

173 1962 (3) SA 748 (A) at 753F.
174 1980 (1) SA 674 (T).
175 LTA Construction Bpk v Administrateur, Transvaal 1992 (1) SA 473 (A) at 482F-G; Standard Bank of South
Africa v Oneanate Investments (Pty) Ltd (in liquidation) 1998 (1) SA 811 (SCA) at 828D).
 Receipts and accruals 179

Notes
In this case, SARS contended that the sales of the shares to the trust had been a sham or
simulated transaction, and that the taxpayer (the father of the minor children) had
actually donated the shares to the trust. If this argument had been successful, s 7(3)
would have been applicable to all the income derived by the trusts, and not just the
forsaken interest.
However, the Supreme Court of Appeal refused to allow SARS to contend that the sale
of the shares had been a sham, because this was a point not previously advanced, and
new issues cannot be argued for the first time on appeal. SARS was thus limited to argu-
ing that the forsaken interest was subject to s 7(3) and should be taxed in the hands of
the taxpayer.
The taxpayer conceded that s 7(3) applied to the forsaken interest, but tried to limit
the amount of the interest that would be deemed to be his income under this provision
by arguing, inter alia, that such interest could not legally exceed the capital by virtue of
the operation of the in duplum rule, and that only interest up to this ceiling amount
could be deemed to be his.
The effect of the in duplum rule is that interest on a debt stops accruing when the un-
paid interest equals the outstanding capital.
The court below (the Cape High Court) had held, by a majority, that the in duplum
rule did apply in the circumstances of this case.
The Supreme Court of Appeal held that the in duplum rule did not apply in the cir-
cumstances of this case. There was no lender and no borrower, and the public policy
considerations that underlay the in duplum rule, namely to prevent lenders from exploit-
ing borrowers, were not present. Hence, the in duplum rule did not apply, and thus did
not put a ceiling on the amount of interest income that could be deemed, under s 7(3),
to have accrued to the taxpayer.

§12.2 Donee’s or beneficiary’s income deemed to be donor’s income: s 7(5)

For discussion of s 7(5) see chapter 12.

§13 Application of income after receipt or accrual

An amount received by a taxpayer as a principal which he is obliged to remit to another person is
nonetheless received by the taxpayer beneficially and is included in his ‘gross income’.
[103]
CIR v Witwatersrand Association of Racing Clubs
1960 (3) SA 291 (A), 23 SATC 380
The taxpayer organised a race-meeting, the proceeds of which were to be divided be-
tween two charities, the South African National Tuberculosis Association and the Johan-
nesburg Coronation Foundation. The proceeds of the meeting amounted to £7 906,
which the respondent duly divided between these two charities. The Commissioner in-
cluded this sum in the taxpayer’s gross income.
Issue: did the amounts which the taxpayer had collected in order to pay over to chari-
ties, form part of its gross income?
Held: in the affirmative. The taxpayer conducted the race-meeting as principal, not as
agent, and the proceeds were received beneficially.
180 Income Tax in South Africa: Cases and Materials

Ogilvie-Thompson JA: [T]he decision to hold the race-meeting was respondent’s decision, and
not the decision of the clubs; and all the organisation which culminated in the race-meeting was
the work of respondent through its secretary, and not the work of the clubs . . . [I]t is clear that the
meeting was conducted by respondent itself as principal, and not as agent, either for the clubs or
the charities. It is, I think, equally plain that it was the respondent, and not anybody else, who was
liable to discharge the debts attendant upon the holding of the race-meeting . . . Conceivably the
holding of the race-meeting might have been so ordered, arranged and executed so as to avoid
attracting tax. I need express no opinion on that aspect of the matter. It is sufficient to say that
the method actually adopted failed, in my opinion, to relieve the respondent of liability to pay
tax on the proceeds of the race-meeting. On the procedure in fact followed, the proceeds of the
race-meeting in law accrued to respondent beneficially . . . Although it was throughout contem-
plated that no portion of the prospective profits would remain with respondent, and that all
profits should go to the two charities, respondent is not thereby relieved from liability for tax: a
moral obligation to hand over the proceeds to the charities does not destroy the beneficial char-
acter of the receipt of those proceeds by respondent . . . I accordingly hold that the £7 906 in
issue accrued to respondent as income and, consequently, attracted tax in respondent’s hands.

§14 Antecedent disposals of income

If income accrues to a taxpayer and he thereafter disposes of it, it nonetheless forms part
of his ‘gross income’. By contrast, where a taxpayer disposes of income before it accrues
to him, by ceding the right to future income (for brevity, where he ‘antecedently’ disposes
of the income), the income accrues to the cessionary, not the taxpayer, and it therefore
does not form part of the taxpayer’s ‘gross income’.
Examples of situations in which the taxpayer disposed of income after it accrued to
him are [103] Witwatersrand Assoc of Racing Clubs and [106] Smant. Examples of situ-
ations in which the taxpayer antecedently disposed of income are [104] Hiddingh and
[107] Holley.
If a taxpayer antecedently disposes of income (ie if he alienates the income before it is received by or
accrues to him) it does not form part of his ‘gross income’.

[104]
Hiddingh v CIR
1941 AD 111, 11 SATC 205
The late Dr Hiddingh left a will in which he bequeathed to the taxpayer certain immova-
ble property, subject to a fideicommissum in favour of certain persons for three gener-
ations. The taxpayer was thus, in terms of the will, entitled for the period of his life to the
income from that immovable property. The property was sold by order of court and the
proceeds paid to Hiddingh’s executor to hold and invest, with instructions to pay over
the net income to the taxpayer during his lifetime and on his death to deal with the
income and capital as directed by the will. On 29 September 1943 the taxpayer executed
a deed under which he assigned to certain relatives portion of the income from the trust
estate. The Commissioner included in the taxpayer’s income the amounts paid over to
the assignees under the deed of assignment. The taxpayer objected that the sums in
question were not part of his gross income.
Issue: did the income which the taxpayer had assigned to other parties, continue to
form part of his gross income?
Held: in the negative. The effect of the cession entered into by the taxpayer was to di-
vest himself of the right to the income before the income accrued to him.
Centlivres JA: The important point is that the appellant is not vested with the dominium [of
the trust funds] . . . If the view that I have expressed above is correct, viz that the appellant has
 Receipts and accruals 181

a right to claim from the Trust Company the net income derived from the investments, it
follows that the nature of that right is personal as against the Trust Company in its capacity as
executor.
The next question to determine is the effect of the Deed of 29 September 1934. In arriving at
the intention of the appellant, that deed must be construed as a whole, and if so construed I
have no doubt that it constitutes a valid assignment by the appellant of a portion of his right to
claim the net income from the Trust Company. It is true that the language of the deed is open
to the criticism that more appropriate words could have been used . . . But as remarked by
De Villiers CJ in Wright & Co v Colonial Government:176
‘The law of the Colony requires no particular form of words for the purpose of effecting a complete ces-
sion of action. What it does require is that the intention to effect the cession should be clear and beyond
177
doubt as was described in Fick v Bierman.’
See also National Bank of South Africa Ltd v Cohen’s Trustees.178 In the present case the intention to
effect the cession is, to my mind, clear . . . I may add that it was not contended that it was incom-
petent on the part of the appellant to cede only a portion of his rights to the donees. Had the
Trust Company not concurred by its conduct in the cession, there would have been the interest-
ing question whether a cession of portion of a right could be enforced – a question which is
discussed by Gregorowski J in Paiges v Van Ryn Gold Mines Estates.179 In the present case the
donees have accepted the transfer to them of the right ceded to them by the appellant to receive
part of the net income from the Trust Company . . . The donees have a right to claim the respec-
tive sums due to them from the Trust Company in so far as it has in its hands sufficient net in-
come from the investments of the proceeds of the sales. The right has been irrevocably
conferred on the donees by the appellant who has completely divested himself of the right to
claim during the respective lives of the donees that portion of the net income which is payable to
them. This being the legal position it follows that the several sums payable to the donees
amounting in all to £1 915 do not accrue to or in favour of the appellant and therefore do not
form portion of his ‘gross income’ as defined by s 7(1) of Act 40 of 1925.

Notes
The issue in this case was whether, on the facts, the income in question had accrued to
the taxpayer who then disposed of the income, or whether the taxpayer had ‘ante-
cedently’ disposed of the income, that is to say, had alienated the right to the income
before the income accrued to him. This was a question of the construction of the written
contract. The Appellate Division upheld the latter construction, with the result that the
income in question did not form part of the taxpayer’s gross income. For a case in which,
on a proper interpretation of the contract, the taxpayer did not achieve an antecedent
divesting of income, see [105] Rishworth.

The question whether the taxpayer has antecedently divested himself of income depends on the terms
of the particular contract. If, on a proper construction of the contract, the cession takes effect after the
income has accrued to the taxpayer, the income continues to form part of the taxpayer’s gross income.

[105]
Rishworth v SIR
1964 (4) SA 493 (A), 26 SATC 275
The taxpayer’s wife had executed an agreement of cession, granting the cessionary the
sum of £50 per month out of the rental payable to her under a certain lease. This sum
was to be paid directly to the cessionary. The Secretary included this sum in the taxpay-
er’s gross income.
________________________

176 8 SC 269.
177 2 SC 26.
178 1911 AD 235.
179 1920 AD at 604, 605.
182 Income Tax in South Africa: Cases and Materials

Issue: did the rental which the taxpayer’s wife had ceded continue to form part of her
gross income, ie did the cession take effect only after the rental had accrued to the
taxpayer?
Held: on a proper interpretation of the agreement of cession, the cession took effect
only after the rental had accrued to the taxpayer’s wife.
Holmes JA: The issue in this case is whether, in respect of the year ended 30 June 1961, the
twelve amounts of £50 which Leslie H Challenor received pursuant to the cession by the appel-
lant’s wife, had accrued to or in her favour. This depends upon whether the cession operated to
transfer such right only as and when the rent became payable each month, resulting in accrual
to and a transfer from her taking place pari passu.
Mr Leon, for the appellant, arguing against this concept, referred to Lief NO v Dettmann180 in
181
which Wessels JA referred to a cession as being
‘a transaction which in our law results in the cedent being divested of his rights and those rights vesting in
the cessionary.’
The learned Judge of Appeal was there referring to existing rights. Where a cession relates to
future rights, Mr Shearer, for the respondent, argued that, as a matter of law, the date of effective
operation of the cession is the date when the rights mature, for only then can there be a divest-
ing and transfer. I do not find it necessary to decide this as a matter of law, since it seems to me
that in each case the terms of the deed of cession must first be looked at.
Mr Leon also relied on CIR v King182 in which Watermeyer CJ said:183
‘a taxpayer can, while retaining the ownership of his capital, arrange for the fruits of that capital which are
in reality part of his income, to be received by someone else, and thus he can free himself from taxation in
184
respect of these moneys. (Compare Hiddingh’s case.)’
The learned Chief Justice was there giving an example, in the form of a general statement,
of a means of tax avoidance. His mind was not attuned to the particular form and contents
of the sort of arrangement which he envisaged. This is a matter which is now before this
Court; and the form and contents of the deed of cession must be looked at in order to decide
the question.
...
I come now to a consideration of the contents of the agreement of cession. The preamble in-
dicates that Leslie H Challenor should be entitled to a share of the rental payable in terms of the
lease. What was agreed and done in the paragraph which I have lettered (b) . . . was that the
appellant’s wife cede to him
‘the right to receive, out of the share of the rental payable to her under the said lease, the sum of £50 per
month.’
In other words she ceded the right to claim rent as and when it became payable to her, since if
she had divested herself in advance it could never become payable to her. This indicates a
monthly accrual to her upon which the cession would operate.
. . . In my view the foregoing aspects of the agreement of cession in this case, considered in their
cumulative effect, lead to the conclusion that the rent accrued to the appellant’s wife each
month, and in respect of such accrual the cession operated pari passu.
The appeal is dismissed with costs.
STEYN CJ, VAN BLERK JA, OGILVIE-THOMPSON JA and VAN WINSEN AJA concurred.

Notes
This decision accepts the principle that a taxpayer can antecedently divest himself of the
right to income, with the result that the income thereafter accrues to someone else. In
this case, the taxpayer failed to achieve an antecedent cession because the particular
________________________

180 1964 (2) SA 252 (A).

181 At 271E-F.
182 1947 (2) SA 196 (A), 14 SATC 184.
183 At 211-212.
184 1941 AD 111, 11 SATC 205.
 Receipts and accruals 183

words used in the contract had the result that the cession took effect only after each
month’s rent had accrued to the taxpayer. It is implicit in the judgment that a different
form of words could have achieved the taxpayer’s objective. The problems attaching to
the cession of portion of a debt (see [104] Hiddingh) were not addressed.

[106]
SIR v Smant
1973 (1) SA 754 (A), 35 SATC 1
Until 31 October 1966 the taxpayer was the managing director and sole shareholder of
Neaf (Pty) Ltd, and the company paid him a salary of R12 000 per annum. Thereafter
Media (Pty) Ltd acquired all the taxpayer’s shares in Neaf for an amount of R80 000 in
cash plus 133 331 shares in Media, and agreed to pay the taxpayer (a) a salary of R1 589
per annum plus (b) a monthly sum, in terms of clause 5(1) of the agreement, equal to
one hundred and twentieth of the aggregate nominal value of the taxpayer’s shares in
Media. On 13 July 1967 the taxpayer sold all his shares in Media to P for R100 000 and
the agreement provided that the taxpayer ceded to P his rights to the payments under
(b), above. The directors of Media refused to consent to the registration of transfer of
the shares to P, but the contract remained effective. The taxpayer retained the payments
made to him under (b) and applied them in reduction of the purchase price owed to
him by P. The Secretary of Inland Revenue included in the taxpayer’s income all the
payments under (b), above. The taxpayer objected on the grounds that, although he
received these amounts, he had previously ceded them to P, and they therefore accrued
to P and not to him.
Issue: whether the payments under (b) above had been received by or had accrued to
the taxpayer.
Held: the payments under (b) were not for services and, in terms of the agreement be-
tween the taxpayer and P, the payments made by the company to P after the sale were
not ‘received by’ nor did they ‘accrue to’ the taxpayer.
Holmes JA: The taxpayer lodged objection and appeal, on the ground that, in regard to the
period after 13 July 1967, ie when he sold his shares, the moneys which he continued to receive
under clause 5(1) of his service contract had accrued to Plank, and not to himself, since he had
already ceded them and was contractually obliged to transmit them to Plank even though, by
consent, he retained them against Plank’s liability to him under the agreement of sale.
The first submission on behalf of the Secretary was that all payments made to the taxpayer, in
terms of clause 5(1) of his service contract, represented ‘remuneration’ to which he was entitled
so long as he remained in the service of Media or Neaf; . . . I am unable to accept the contention
that the payments represented remuneration . . .
The second submission was that, even if the payments in question were not remuneration, never-
theless they formed part of the taxpayer’s income. It was argued that Media was contractually
obliged to pay the sum in question to the taxpayer and did so; and that the so-called cession by
the taxpayer was not binding on Media because he could not in law subdivide the company’s
obligation to him without its consent, and there is no evidence of such consent.
The answer is that the cession caused no subdivision of an obligation.
I proceed to consider the terms of the cession, in deciding whether the monthly payments after
13 July 1967 were received by or accrued to the taxpayer and were therefore taxable as part of
his gross income. It records in essence . . . that the taxpayer cedes to Plank his rights to payments
under clause 5(1); that the taxpayer shall thereafter have no rights to such payments; and that, if
Media does not recognize the cession, and pays any such amounts to the taxpayer, the latter shall
immediately transmit them to Plank . . . It must be remembered that this cession occurs in an
agreement whereby the taxpayer sold to Plank his shares in Media. It must also be borne in mind
that the taxpayer had received those shares, which were not expected to yield dividends immedi-
ately, in part exchange for his shares in Neaf; and that, as the stated case records, the object of
184 Income Tax in South Africa: Cases and Materials

clause 5(1) was to give the taxpayer something in the nature of a return on his investment . . . In
these circumstances it seems to me that the taxpayer was in effect disposing of his shares and the
fruits, the right to the latter being ceded before they accrued.
Counsel for the Secretary sought to argue that the taxpayer nevertheless received the payments
under clause 5(1) for his own benefit, since the facts showed that he did not transmit them to
Plank and did not fully account to the latter for them. As to that, the position was that, by con-
sent, the taxpayer could transmit the payments to Plank by crediting them to Plank’s indebted-
ness to him for the balance of the price of the shares sold. This he did.
At this stage I point out that clause 5(1) of the taxpayer’s service contract . . . provides for pay-
ments to be made to him in relation to the shares ‘beneficially owned’ by him. The question was
not raised, in the court a quo, whether the taxpayer, by selling the shares and handing over the
share certificates and the signed transfer deed, ceased to be the beneficial owner of the shares as
between himself and Media within the meaning of clause 5(1); and that thereby Media was no longer
obliged to make payments under that clause . . .
The point which I have italicized above not having been raised or ventilated in the court a quo,
or in the judgment or in the stated case, I do not consider that we can, on appeal, decide, on a
point of law in vacuo, that Media was not obliged to continue to make such payments.
...
On the foregoing position, and quite apart from any cession, the result would be that the pay-
ments under clause 5(1), being in the nature of a return on the taxpayer’s shareholding as the
court quo found, would be a benefit of the thing sold and would accrue to the buyer; compare
Mackeurtan on Sale.185 However, as the point was not raised or investigated in the court a quo, I
consider that we should not decide it . . .
It follows that, on appeal, we must assume that when the taxpayer disposed of his shares, Media
was obliged to continue to make the payments referred to in clause 5(1). As to the cession, in
the particular circumstances of this case I consider that it divested the taxpayer of his right to
receive future payments under clause 5(1) before they accrued to him, and vested that right in
Plank. This result is not frustrated by the fact that Media refused to register the shares in Plank’s
name, and continued to pay to the taxpayer the amounts referred to in clause 5(1). The position
is, therefore, that the latter payments (which are the ones in question in this case) never accrued
to the taxpayer, and he was antecedently obliged to transmit them to Plank if he received them
from Media, and he did not receive them for his own benefit. In the result, they never formed
part of his gross income, and are not taxable . . .
OGILVIE-THOMPSON CJ, TROLLIP JA and RABIE JA concurred.
[Botha JA, dissenting, held that, in terms of the parties’ contractual arrangements, the
purported cession was invalid and hence ineffective. Consequently, when the taxpayer
received the payments, he received them ‘on his own behalf and for his own benefit’ and
they therefore formed part of his gross income.]

Notes
The Appellate Division was bound by the factual finding of the court a quo that the
amounts payable under clause 5(1) represented a return on the taxpayer’s investment, and
were not ‘remuneration’ or ‘salary’. This made it unnecessary for the court to decide
whether a payment for services is capable of being antecedently ceded. The question of
whether a ‘spes’ or a ‘future right’ can be ceded was debated in Taxpayer v COT (Botswana).186
It is clear that income derived from property (eg rent) can be antecedently ceded. In
Smant it was held that the taxpayer was disposing of ‘his shares and the fruits’, in other
words, income from property. It is also significant that the court accepted that although
the taxpayer physically received and retained the payments in question, he was (in terms
of his agreement with Plank) receiving them on Plank’s behalf.
________________________

185 4 ed 170 in fin.

186 43 SATC 118.
 Receipts and accruals 185

[107]
Holley v CIR
1947 (3) SA 119 (A), 14 SATC 407
The taxpayer carried on business as a wattle farmer in partnership with his father. He
had inherited his share of the partnership assets, including the land, from his late uncle.
In terms of the latter’s will, the bequest was subject to conditions, one of which was that
the taxpayer pay an annuity to his aunt for her lifetime, consisting of a fixed sum (£750
per annum) plus a proportion of the profits of the business.
Issue: whether the £750 per annum and the share of the profits which the taxpayer was
obliged to pay over to the aunt, was ‘received’ by the taxpayer and hence had to be
included in his gross income.
Held: the taxpayer, in his will, had intended to create a fideicommissum over the whole
bequest, and had used words which were appropriate to give effect to that intention. The
money which the taxpayer received in his capacity as fiduciary were not beneficially
received by him and did not form part of his gross income.
Davis AJA: The sole question for decision in this case is whether the amounts paid as an annuity
to the widow were ‘received’ by the taxpayer in his personal capacity, in terms of s 7(1) of the
Income Tax Act, for no question of any deduction is raised. And the only way in which they
could not be said to have been ‘received’ by him as such is if they were burdened with a fideicom-
missum or trust – Pyott Ltd v CIR,187 Brookes Lemos Ltd v CIR.188 This question as to whether they
were so burdened depends first upon the construction to be placed upon the will.
...
I am satisfied that the testator intended to create a fideicommissum in favour of his wife over the whole
bequest, and that he has used words which were appropriate to give effect to that intention . . .
...
The last question to be considered is whether a fideicommissum of this nature will make the fidu-
ciary receive the annuity in that capacity and not in his personal capacity for the purposes of the
Income Tax Act – whether, in order words, he himself ‘receives’ the annuity in terms of s 7. In
my opinion, he does not do so. It is true that the fiduciary becomes the owner of the moneys he
receives, and that the claim of the fideicommissary heir would seem only to be personal (Estate
Kemp v McDonald’s Trustee).189 But that must always necessarily be the case wherever the fideicom-
missum is of an annuity or of any other payment of money; . . .
...
It follows that the appellant should not have been assessed in his personal capacity in respect of
the annuity payable to the testator’s widow, Mrs F A Holley, and the assessments must be amend-
ed accordingly.
WATERMEYER CJ and HATHORN AJA concurred.
Notes
The issue in this case was whether, on a proper interpretation of the will, the testator had
intended to create a fideicommissum.190
________________________

187 1945 AD 128 at 134.

188 1947 (2) SA 976 (A).
189 1915 AD 491, per Innes CJ and Solomon JA at 503 and 510 respectively.
190 In a fideicommissum, an interest is given to one person (usually as heir or legatee) subject to the interest
passing to another person on the fulfilment of a condition. The person to whom the interest is first given
is termed the ‘fiduciary’ and the person to whom the interest thereafter passes is the ‘fideicommissary’. A
simple fideicommissum would be where, in his will, a testator stipulates that, ‘I leave my farm to A and, on
A’s death, it is to go to B’. The effect of the fideicommissum is that, on the testator’s death, ownership in the
property vests in A, and B acquires only a contingent right, since B’s interest vests in him only when a con-
dition (a future uncertain event) is fulfilled, namely, if B is alive when A dies, in which event, the fideicom-
missum terminates and absolute ownership vests in B.
186 Income Tax in South Africa: Cases and Materials

Where, in the context of a fideicommissum, the taxpayer derives an amount, in his ca-
pacity as fiduciary, which he is required to pay over to the fideicommissary, that amount
does not form part of the fiduciary’s gross income and it is included in the gross income
of the fideicommissary191 – as in Holley’s case.
Where a testator bequeaths an amount to a person with a ‘direction’ that he must pay
over a certain amount thereof to another person, this is a bequest subject to a modus, as
distinct from a fideicommissum.
Where a bequest is made subject to a modus, there is no deferment of the dies cedit,
(that is to say, there is no deferment of the vesting of the property in the legatee) and,
on the death of the testator, the legatee forthwith acquires full ownership of the property
that is subject to the modus, and all the income from that property accrues to the latter.
Whether the legatee is entitled to a deduction in respect of monies he pays to another
person to give effect to the modus depends on whether the requirements of the general
deduction formula192 are fulfilled.193
As Sohm, Institutes of Roman Law,194 says –
‘Where a right is conveyed sub modo - as where A makes B a gift of property, requiring him at the
same time to give £10 to C – the effect is not the same as in a case of a condition. The modus has
no “real” effect on the right conveyed. That is to say, it does not impress the right with a particu-
lar character as against any one that acquires it; it does not encumber the right in the sense of
making it defeasible. The recipient (B) becomes absolute owner at once, subject to a personal
obligation to perform the act required of him.’
In cases of doubt or ambiguity, a provision in a will is construed as a modus, rather than a
fideicommissum.
Since the decision in Holley, doubts have been expressed as to whether, on the facts of
that case, there could have been a valid fideicommissum, given that, to some degree at
least, the profit that was supposedly subject to the fideicommissum was to be generated by
the personal labours of Holley. See the discussion of this point in Van der Merwe v Sekretaris
van Binnelandse Inkomste.195
A distinction must also be drawn between, on the one hand, the situation where a tes-
tator bequeaths an amount to a person with a ‘direction’ that he must pay over a certain
amount thereof to another person (in other words, a bequest subject to a modus) and, on
the other hand, a bequest to a person subject to a condition that he pay an amount to
another person.
There is a fundamental difference in principle between these two scenarios, and in their
respective legal and tax consequences. (See the discussion in KBI v van Blommestein.196)
Where a bequest is made subject to a suspensive condition (in other words, subject to
the occurrence of a future uncertain event), no right vests in the recipient unless and
until the condition is fulfilled.
There is thus a fundamental difference between the situation where a testator, for ex-
ample, bequeaths a farm to A, coupled with an obligation to pay R100 000 to B, and the
situation where A bequeaths a farm to A “if” (that is to say, subject to the condition that) A
pays R100 000 to B. The former scenario involves a modus in which, on the testator’s

________________________

191 KBI v van Blommestein 1999 (2) SA 367 (SCA) 378A.

192 Namely, s 11(a) read with s 23(g).
193 See KBI v van Blommestein 1999 (2) SA 367 (SCA) which concerned a legacy subject to the payment of a
bequest price.
194 Ledlie’s translation at 215.
195 1977 (1) SA 462 (A) 477A-C; see also Beinart, ‘Liability of a Deceased Estate for Maintenance’ in (1958)
Acta Juridica at 94 and 97l and also ‘Fideicommissum and Modus’ in (1968) Acta Juridica at 185.
196 1999 (2) SA 367 (SCA).
 Receipts and accruals 187

death, A (provided he accepts the bequest and the associated obligation) immediately
acquires a vested right to ownership of the farm. In the latter scenario, A acquires no
right to ownership of the farm unless and until he fulfils the suspensive condition relat-
ing to payment to B; in this regard, A is under no obligation to fulfil the condition, but if
he does not wish to do so, he must decline the bequest.

A cession of a right to income can have the effect of antecedently divesting the cessionary of the
income, such that the income no longer accrues to the cedent and is not taxable in his hands, but
accrues instead to the cessionary and is taxable in the latter’s hands. Whether a cession has this
result depends on whether, properly interpreted, the cession took effect before the income had accrued
to the cessionary. If a person cedes a right to income in securitatem debiti the income continues to
accrue to him.

[108]
Moodie v CIR, Transkei
1993 (2) SA 501 (TkA)
Goldin JA: The effect of a cession is to divest the cedent of the right or claims which he cedes to
the cessionary. The cedent’s liability for income tax in respect of any income of which he divests
himself depends on whether or not such income formed part of his gross income. ‘Gross in-
come’ consists of the ‘total amounts in cash or otherwise received by or accrued to or in favour
of the taxpayer during the year of assessment’ (s 1 of the Act). Receipt and accrual may occur in
different tax years. Thus income can accrue in one tax year and be received or become enforce-
able in a subsequent year. For an accrual in terms of the definition of ‘gross income’ it is only
necessary that the taxpayer has become entitled to the amount. As Hefer JA said in CIR v People’s
Stores (Walvis Bay) (Pty) Ltd 197 –
‘. . . no more is required for an accrual in terms of the definition of “gross income” than that the person
concerned has become entitled to the “amount” in question . . .
It follows that when a taxpayer disposes of or cedes his right to income after it has accrued to
him, it remains part of his gross income and therefore taxable in his hands. When however he
divests himself of his right to income before it accrues to him, such right to income accrues to
the recipient . . . There is thus a crucial distinction in determining liability for tax depending on
whether a right to income was ceded after it had accrued to the cedent or whether it was ceded
before it had accrued to the cedent . . .
. . . In this case the cession in favour of Concor . . . and the cession to Moodie . . . as well as the
cession by Concor to Moodie . . . were in respect of future income or claims before they accrued to
Jalc . . .
The cession to Nedbank of 9 July . . . was . . . a cession in securitatem debiti198 and consequently Jalc
had not divested itself of future income. In the case of National Bank of South Africa Ltd v Cohen’s
199
Trustee Lord De Villiers CJ said:
‘. . . if the cession is made with the avowed object of only securing a debt owing by the cedent to the ces-
sionary [ie a cession in securitatem debiti] it is, in my opinion, impossible to hold that the cession, whatev-
200
er its form, takes the dominium out of the cedent.’
Galgut AJA considered and followed this decision in Bank of Lisbon and South Africa Ltd v The
Master.201
Clause 4 of the cession to Nedbank further confirms that Jalc retained the dominium in the
claims it ceded . . .

________________________

197 1990 (2) SA 353 (A) at 365A-B.

198 A cession as security for a debt. When the debt has been paid, the right in question must be ceded back to
the person who gave the cession.
199 1911 AD 235 at 246.
200 Ownership of the right.
201 1987 (1) SA 276 (A) at 294.
188 Income Tax in South Africa: Cases and Materials

It is clear that Jalc, as cedent of its rights against the Government in securitatem debiti, retained
dominium in the rights concerned. In the words of Galgut AJA in the Bank of Lisbon and South
Africa case supra, ‘thus it cannot be said that by such a cession it was intended to pass ownership’.
Consequently the proceeds from the claim of which Jalc retained ownership accrued in favour of
Jalc and is taxable in its hands.

Notes
A right, being incorporeal and thus incapable of physical delivery, is transferred from
one person to another by cession. Cession is an agreement between two parties, the
cedent and the cessionary. The answer to the question whether the cedent continues,
after cession of a right to income, to be liable to income tax on that income depends on
whether, properly interpreted, the agreement of cession was such that the cession took
effect before the income in question had accrued to the cedent, in other words, before
he obtained a right to that income, or whether it took effect after the income had al-
ready accrued to the cedent.
It was held in Lategan’s case and confirmed by the Appellate Division in People’s Stores)
that income ‘accrues’ to a person when he ‘becomes entitled’ to that income, in other words,
when he acquires a ‘right’ to that income, even if he has not yet received the income.
If the cession of a right to income took effect after the income had already accrued to
the cedent (ie after he became ‘entitled to’ the income), then the income in question
remains part of the gross income of the cedent and is taxable in his hands.
There is a distinction between an out-and-out cession, in which the cedent transfers
ownership (dominium) in the right to the cessionary, and a cession in securitatem debiti. A
cession in securitatem debiti occurs where the cedent does not make an out-and-out cession
of the right (that is to say, a cession which is intended to be permanent) but merely
cedes it temporarily to the cessionary, as security for the due repayment of a debt owed
by the cedent to the cessionary. Once the cedent has repaid the debt, the cessionary
must re-cede the right to him.
It was held in this case that, where there is a cession in securitatem debiti of a right to
income, the income continues to accrue to the cedent.
 5
INCOME: THE GENERAL CONCEPT

§ Page
1 Introduction ............................................................................................................. 190
2 The definition of ‘gross income’............................................................................. 190
[109] A critical overview of the definition of ‘gross income’ ............................. 190
[110] Scott v COT ................................................................................................. 191
3 The characteristics of income at common law ....................................................... 191
3.1 A gain of a capital nature is not income ........................................................ 191
[111] CIR v George Forest Timber Company Ltd ....................................... 191
[112] Eisner v Macomber.............................................................................. 192
[113] Pyott Ltd v CIR .................................................................................... 192
[114] Matla Coal Ltd v CIR ........................................................................... 192
[115] Is there a third, innominate category of receipts and accruals
that is neither income nor capital? .................................................... 193
3.2 Income is a non-capital amount capable of being valued in money ............ 193
[116] Tennant v Smith .................................................................................. 193
[117] CIR v Delfos ......................................................................................... 195
[118] CIR v People’s Stores (Walvis Bay) (Pty) Ltd .................................... 195
3.3 A reward for services rendered or to be rendered is income ....................... 196
[119] CIR v Lunnon ...................................................................................... 196
[120] De Villiers v CIR .................................................................................. 198
[121] Brent v FCT ......................................................................................... 199
[122] ITC 702 ................................................................................................ 201
[123] CIR v Visser .......................................................................................... 201
[124] Moorhouse (Inspector of Taxes) v Dooland ..................................... 203
[125] Hayes v FCT ......................................................................................... 204
3.4 A testimonial gift or award (also called an accolade) is not income............ 206
[126] Moore v Griffiths (Inspector of Taxes) .............................................. 206
3.5 Money received on loan is not income .......................................................... 208
[127] CIR v Genn & Co (Pty) Ltd ................................................................ 208
[128] COT v G ............................................................................................... 209
3.6 The proceeds derived from the ordinary carrying on of a ‘business’
or ‘trade’ are income ...................................................................................... 209
[129] CIR v George Forest Timber Company Ltd ....................................... 209
[130] G v CIR (New Zealand) ....................................................................... 210
3.7 A gain made in an operation of business in carrying out a scheme
of profit-making is income.............................................................................. 211
[131] Overseas Trust Corporation Ltd v CIR .............................................. 211
[132] Elandsheuwel Farming (Edms) Bpk v SBI ......................................... 212
189
190 Income Tax in South Africa: Cases and Materials

§ Page
3.8 A gift simpliciter is not income ...................................................................... 212
[133] Scott v FCT........................................................................................... 213
3.9 The periodicity (recurrence, annuality) of a receipt is relevant
but not decisive in determining whether it is income .................................. 214
[134] SIR v Watermeyer ................................................................................ 214
[135] FCT v Dixon......................................................................................... 215
3.10 In determining whether an amount is ‘income’ it is irrelevant
that it was derived from an activity that is illegal, immoral or ultra vires .... 216
[136] CIR v Delagoa Bay Cigarette Co ......................................................... 216
[137] Griffiths (Inspector of Taxes) v J P Harrison (Watford) Ltd ............ 217
[138] COT v G ............................................................................................... 218

§1 Introduction
‘Gross income’ is a purely statutory concept. As defined in s 1 of the Act, it consists of two
categories. First, a general category consisting of all amounts which are not of a capital
nature. Secondly, an itemised list of amounts (paras (a) to (n) of the definition) which,
whether or not they are in reality of a capital nature, are declared to form part of ‘gross
income’.
This chapter deals with the first category. The issue of what constitutes ‘income’ in the
general sense has been neglected by the South African courts and, as a result, there is a
paucity of judicial analysis of this fundamental issue.
Generally on this issue, see RC Williams, Income Tax in South Africa: Law and Practice,
chap 6.

§2 The definition of ‘gross income’

[109]
A critical overview of the definition of ‘gross income’
Williams, Income Tax in South Africa: Law and Practice 1
The definition of ‘gross income’ in s 1 of the Income Tax Act is seriously flawed in its main pur-
pose, namely to define the nature and scope of ‘income’ for the purposes of the Act.
What, according to the definition, is ‘(gross) income’? The mechanics of the definition are
strange. Step one is to collate the ‘total amount’ of everything that was received by or accrued to
the taxpayer during the tax year in question; step two is to extract that which is ‘of a capital na-
ture’. ‘Income’ is defined as the residue – what is left after ‘capital’ has been removed.
A corollary of this definition is that ‘income’ and ‘capital’ are mutually exclusive categories that
cover the entire field. Whatever is not ‘capital’ is necessarily ‘income’. It is also important to note
that ‘gross income’ includes everything that is inherently of a non-capital nature – that is to say,
of an ‘income’ nature2 – plus those items which the definition goes on to deem, in paragraphs
(a) – (n), to be included in ‘gross income’, whatever their true nature may be.
The most serious flaw of the definition of ‘gross income’ is that it defines ‘income’ simply as that
which is not capital. Taken literally, this suggests that ‘income’ has no distinctive characteristics
of its own and is a mere amorphous residual category. The truth is that the characteristics of
income are well recognised in economics, accountancy and indeed in a wealth of judicial
________________________

1 At p 73.
2 In COT v Booysens Estates Ltd 1918 AD 576, 32 SATC 10 at 25 Innes CJ observed that the statutory definition
of ‘income’ in the Income Tax Act 1914 ‘covers practically the whole ground’.
 Income: The general concept 191

decisions on income tax.3 As Stratford JA said in Crowe v CIR:4 ‘Though the words of the defini-
tion [of ‘gross income’] direct attention only to the economic meaning of capital, in finding that
meaning it is at least helpful to consider whether the receipt in question can, from an economic
standpoint, possibly be regarded as income’. Regrettably, though, our courts have seldom sought
guidance from economics or accountancy on the meaning of fundamental concepts. Instead the
courts have, when confronted with tax questions, generally sought an answer via a narrow and lit-
eralistic focus on the ipsissima verba5 of the Income Tax Act6 – probably the most garbled, concep-
tually barren legislation on the statute book – instead of searching first for underlying concepts and
principles and then asking whether the statutory definitions compel a different conclusion.

The term ‘income’ is not a term of art and must be given its ordinary meaning, except where the
Income Tax Act requires otherwise.

[110]
Scott v COT
(1935) 35 SR (NSW)
Jordan CJ: The word ‘income’ is not a term of art, and what forms of receipts are comprehended
within it, and what principles are to be applied to ascertain how much of those receipts ought to
be treated as income must be determined in accordance with the ordinary concepts and usages
of mankind, except in so far as the statute states or indicates an intention that receipts which
are not income in ordinary parlance are to be treated as income, or that special rules are to be
applied for arriving at the taxable amount of such receipts.

Notes
This Australian dictum has never been cited in the South African courts but it is submit-
ted that the principle it expresses holds true in this country as well.7 In the context of our
Act, it is submitted that ‘gross income’ includes all those amounts which, ‘according to
the ordinary concepts and usages of mankind’ are income. In addition, ‘gross income’
includes those amounts which fall under paras (a)–(n) of the definition, even if they are
in reality of a capital nature.

§3 The characteristics of income at common law

The following characteristics of income have been recognised in judicial decisions.

§3.1 A gain of a capital nature is not income

[111]
CIR v George Forest Timber Company Ltd
1924 AD 516, 1 SATC 20
Innes CJ: There is no definition of capital; nor is the expression ‘of a capital nature’ anywhere
interpreted. We must fall back therefore upon the ordinary economic meaning of those terms.
________________________

3 This is not to say that economics, accountancy and law are in entire agreement as to the nature and scope
of the term income.
4 1930 AD 122 at 129; italics added.
5 The words themselves.
6 Particularly in regard to sub-paragraphs (a) to (n) of the definition of ‘gross income’. See for example CIR
v Cowley 1960 (2) SA 700 (A) which concerned a payment made to the taxpayer in consideration for enter-
ing his employer’s service. The court based its decision solely on the ipsissima verba of the statutory defini-
tion of ‘gross income’.
7 See Williams, Income Tax in South Africa: Law and Practice pp 74-75.
192 Income Tax in South Africa: Cases and Materials

[112]
Eisner v Macomber
(1919) 252 US 189 (United States Supreme Court)
Pitney J: The fundamental relation of ‘capital’ to ‘income’ has been much discussed by econo-
mists, the former being likened to the tree or the land, the latter to the fruit or the crop; the
former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be meas-
ured by its flow during a period of time.

[113]
Pyott Ltd v CIR
1945 AD 128, 13 SATC 121
For the facts of this case, see extract [90].
Davis AJA: . . . I do not understand how this £9 000 could be, to cite from counsel’s Heads of
Argument, ‘non-capital’, and yet ‘not income’. This is a half-way house of which I have no
knowledge . . .

[114]
Matla Coal Ltd v CIR
1987 (1) SA 108 (A), 48 SATC 223
The taxpayer company owned the coal rights in a coal field in the Eastern Transvaal.
Eskom had invited tenders for the supply of coal to a new power station in the Eastern
Transvaal. The taxpayer tendered to supply coal from its Eastern Transvaal coalfield on
the basis that Eskom pay the purchase price of coal supplied to it from time to time, plus
a royalty of 12.5 cents per ton. Eskom did not want to pay the royalty, and it offered to
purchase the taxpayer’s rights to the coal for R9 365 000, being the estimated amount of
the royalties, discounted to current values. An agreement was drawn up but was never
signed. The taxpayer realised that if it sold the rights to the coal, it would for tax purpos-
es cease to be treated as a mining company and would lose substantial tax benefits. After
lengthy correspondence Eskom sent the taxpayer a cheque for R9 365 000 on
20 February 1980 which was stated to be a payment in respect of the coal rights, and
requested that arrangements be made for the immediate transfer of those rights. Negoti-
ations culminated in a contract signed on 29 September 1980 in which the taxpayer
agreed not to extract or dispose of coal from the coalfield other than for the purposes of
supplying it to Eskom, and that in return for the ‘restraint imposed and the consequent
sterilisation’ of the taxpayer’s asset, Eskom agreed to pay and had already paid
R9 365 000.
Issue: was the amount received by the taxpayer for the sale of the coal rights of a reve-
nue or of a capital nature?
Held: it was of a capital nature. On a preponderance of probability, the coal rights in
question had been acquired by the taxpayer as income-producing capital assets and were
so held until they were sold to Eskom; hence the proceeds of the sale were of a capital
nature.
Corbett JA: There is no doubt that mining and mineral rights, like any other property, may be
acquired and held by a taxpayer with a view to exploiting the rights themselves as income-
producing capital assets or alternatively with a view to realisation as part of a profit-making
scheme, in which case they assume the character of trading stock. (See eg COT v Booysens Estates
Ltd;8 SIR v Smit;9 SIR v Struben Minerals (Pty) Ltd.10) When the rights are sold, then in the former

________________________

8 1918 AD 576.
9 1965 (3) SA 591 (A).
10 1966 (4) SA 582 (A).
 Income: The general concept 193

case the proceeds constitute a capital receipt in the hands of the taxpayer, in the latter case income.
In my view, the evidence in the present case establishes, upon a preponderance of probability,
that the coal rights in question were acquired by Alpha Coal (later Matla) as income-producing
capital assets and so held until it was agreed that they should be sold to Escom; and, with respect,
I cannot agree with the contrary finding of the Court a quo. It follows that the proceeds of the
sale, amounting to R9 365 000, was a capital receipt in Matla’s hands and that the Commissioner
erred in including this amount in Matla’s taxable income for the 1980 year of assessment.
The appeal is allowed with costs . . .
BOTHA JA, VAN HEERDEN JA, GALGUT AJA and NICHOLAS AJA concurred.

[115]
Is there a third, innominate category of receipts and accruals
that is neither income nor capital?
Williams, Income Tax in South Africa: Law and Practice 11
The statutory definition of ‘gross income’ implies that the categories of income and capital cover
12
the entire field and that there is no third category or half-way house. Judicial decisions in South
Africa have accepted this corollary of the definition13 but its intrinsic validity is suspect. It is argu-
able that there is indeed a third, innominate category which is neither income nor capital. Take
for example a ‘one-off’ gift made to the taxpayer out of affection, or a banknote picked up on
14
the street. It is clear that these are not income. It follows from the statutory definition of ‘gross
income’ that they must therefore be receipts of a capital nature. But what characteristic of ‘cap-
ital’ do they possess? The answer surely is none.15 The same applies to lottery prizes and legacies.16
The closest the courts have come to explicitly acknowledging the existence of a third category is
a dictum to the effect that, in the hands of a borrower, a loan is colourless, being neither income
nor capital.17

§3.2 Income is a non-capital amount capable of being valued in money

In [116] Tennant v Smith it was held that income is money or that which the taxpayer can convert
into money. (Note: the decision of the Supreme Court of Appeal in [84] CSARS v Brummeria
Renaissance (Pty) Ltd18 held that this principle does not hold true in South Africa and that
convertibility into money is not a requirement for an amount to constitute income.)

[116]
Tennant v Smith (Surveyor of Taxes)
[1892] AC 150 (HL)
The taxpayer was an agent for the Bank of Scotland. He received a salary from the bank
and was obliged to reside in a certain bank-owned house as custodian of the premises and
also to transact any special bank business after bank hours. He was not entitled to sub-let
________________________

11 Chapter 6 p 76.
12 This follows from the fact that ‘gross income’ is defined as the total amount received or accrued, exclud-
ing receipts or accruals of a capital nature.
13 Crowe v CIR 1930 AD 122, 4 SATC 133 at 136.
14 Of course a donee may use the gift to generate income; for example a gift of money may be invested, in
which event the interest will be income.
15 In Stephan v CIR 1919 WLD 1, 32 SATC 54 at 59 Mason J said: ‘Take for instance the case of a man winning
money at cards or at racing, who does not make his living in that manner but bets incidentally as a method
of diversion. The amounts he receives are certainly not of a capital nature.’ In SIR v Watermeyer 1965 (4) SA
431 (A), 27 SATC 117 at 124 Holmes JA said that, ‘Ordinarily, a gift does not have any of the hallmarks of
income which, considered in relation to capital, is revenue derived from capital productively employed’.
16 Australia by contrast recognises the existence of a third innominate category, neither income nor capital.
Gifts of a personal nature fall into this category; see Ryan, Manual of the Law of Income Tax, 6th ed, p 19.
17 CIR v General Motors SA (Pty) Ltd 1982 (1) SA 196 (T), 43 SATC 249 at 254.
18 [2007] SCA 99 (RSA).
194 Income Tax in South Africa: Cases and Materials

the house or to use it for business other than bank business. If he ceased to hold office, he
was obliged to quit the premises immediately. If bank officials in his position desired not to
occupy such a residence, their salary was not affected by the alternative arrangement.
Issue: whether the rental value of the bank-owned house in which the taxpayer resided
free of charge, was ‘income’ in his hands.
Held: an amount is not income if it cannot be turned into money. On the facts, the
taxpayer could not turn the benefit of free accommodation into money; hence it was not
income.
Halsbury LC: My Lords: To put this case very simply, the question depends upon what is Mr
Tennant’s income. This is an Income Tax Act, and what is intended to be taxed is income. Cases
. . . under the Taxing Acts always resolve themselves into a question whether or not the words of
the Act have reached the alleged subject of taxation . . . Now, it is certainly true that the occupa-
tion of a house rent free is not income . . . But the bald, dry proposition that the mere fact of
occupying a house . . . is not income in any sense, could, I think, hardly be disputed . . . Now, Mr
Tennant occupies this house without paying any rent for it. It may be conceded that, if he did
not occupy it under his contract with the bank rent free, he would be obliged to hire a house
elsewhere, pay rent for it, and pro tanto diminish his income . . . But, upon the principles to
which I at first referred, your Lordships are to ascertain not whether Mr Tenant has got ad-
vantages which enable him to spend more of his income than if he did not possess them, but
whether he has got that which any words in the statute point out as the subject on which it im-
poses taxation . . . I come to the conclusion that the Act refers to money payments made to the
person who receives them, though, of course, I do not deny that, if substantial things of money
value were capable of being turned into money, they might for that purpose represent money’s
worth and be therefore taxable . . . For these reasons, I am of opinion, in the words of Lord
Young, that the thing sought to be taxed is not income unless it can be turned into money.
Lord Macnaghten: I do not doubt that the occupation of the bank house rent free, though not
unattended by some conveniences is, on the whole a considerable advantage to the appellant. It
is a gain to him in the popular sense of the word. Whether such a benefit or gain comes under
the head of ‘profits or gains’ chargeable for income tax purposes is the question submitted to
your Lordships. I use the expression ‘profits or gains’ because that is the term which the Legis-
lature uses . . . In my opinion the answer to the claim of the Crown does not depend on any
minute criticism of the language of the different schedules [of the relevant taxing statute]. The real
answer is, that the thing which the Crown now seeks to charge is not income, nor is it required
to be taken into account as income . . . No doubt if the appellant had to find lodgings for him-
self he might have to pay for them . . . But a person is chargeable for income tax under schedule
D, as well as under schedule E, not on what saves his pocket, but on what goes into his pocket.

Notes
The narrow issue on which this decision turned was whether the value of rent-free ac-
commodation, made available to the taxpayer by his employer, fell within particular
provisions of the UK’s income tax legislation, namely those of schedule E to the Act
which required the inclusion of ‘perquisites, profits or emoluments’. However, the major
interest of the judgment is the dicta in which the law lords address themselves to the
wider question of the nature of ‘income’ for, as Lord McNaghten pointed out, the duty
imposed by those particular legislative provisions ‘is a tax on income in the proper sense
of the word’ and, as he went on to say, ‘the answer to the claim of the Crown does not
depend on any minute criticism of the language of the different schedules [to the taxing
Act]. The real answer is that the thing which the Crown now seeks to charge is not in-
come…’.
In essence, the principle that emerges from this decision is that a benefit to the taxpayer
does not possess the character of ‘income’ in his hands unless it accrues to the taxpayer
in the form of money or (if received in non-monetary form) the taxpayer would be able
to convert it into money if he chose to do so. For brevity, this can be called the converti-
bility principle.
 Income: The general concept 195

In South Africa, it was for many years (until the decision of the Supreme Court of Appeal
in [84] CSARS v Brummeria Renaissance, infra) widely believed that the convertibility
principle held true in this country except where it had been modified by the Act. Thus,
the taxpayer’s ‘gross income’ is defined as the total amount in cash or otherwise, received
by or accrued to the taxpayer, and it was believed that the word ‘amount’ in this defini-
tion meant that which is cash or convertible to cash. This, indeed was the ratio decidendi
in [130] Stander v CIR.19
In South Africa, a particularly significant statutory modification of the convertibility
principle is para (i) of the definition of ‘gross income’, read with the Seventh Schedule,
which now imposes tax on a wide range of non-monetary ‘fringe benefits’ whose value
(‘cash equivalent’) is determined according to the formulae laid down in the Seventh
Schedule, and not according to their convertible value.
In CSARS v Bummeria Renaissance (Pty) Ltd20 the Supreme Court of Appeal held that, in
determining whether an ‘amount’ has accrued to a taxpayer as contemplated in the
definition of ‘gross income’, it is irrelevant whether the taxpayer could turn it into mon-
ey;21 the sole question is whether it is of a non-capital nature and is capable of being
valued in money. The court explicitly held that the decision in [130] Stander v CIR,
which had held to the contrary, was wrong.
[117]
CIR v Delfos
1933 AD 242, 6 SATC 92
Wessels CJ: We therefore start by ascertaining the ‘gross income’ of the taxpayer. Section 7(1)
tells us how to arrive at this. We must find what the total amount is in cash or otherwise which
was received by or accrued to or in favour of the taxpayer in the year of assessment, not being re-
ceipts or accruals of a capital nature, from any source within the Union . . . The tax is to be assessed
in money on all receipts or accruals having a money value. If it is something which is not money’s
worth or cannot be turned into money, it is not to be regarded as income (Tennant v Smith).22

[118]
CIR v People’s Stores (Walvis Bay) (Pty) Ltd
1990 (2) SA 353 (A)
For the facts of this case, see extract [71].
Hefer JA: The first and basic proposition is that income, although expressed as an amount in the
definition, need ‘not be an actual amount of money but may be every form of property earned
by the taxpayer, whether corporeal or incorporeal, which has a money value . . . including debts
23
and rights of action’ (per Watermeyer J in Lategan v CIR ).

Notes
The basis of the decisions in [69] Lategan and [77] Peoples Stores is that the right to future
payment which accrued to the taxpayer in these cases was an ‘amount’ (of a non-monetary
kind) as contemplated in the definition of ‘gross income’24 which had accrued, and whose
value therefore had to be included in the taxpayer’s gross income in the year of accrual.
________________________

19 1997 (3) SA 617 (C), 59 SATC 212; see also Lategan v CIR 1926 CPD 203, 2 SATC 16 at 21; CIR v Butcher
Bros Ltd 1945 AD 301, 13 SATC 21 at 34; CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52
SATC 9 at 21.
20 [2007] SCA 99 (RSA).
21 Ibid at [15], [19].
22 1892 AC 150; St Lucia Usines Co v Treasurer of St Lucia 1924 93 LJPC 212.
23 1926 CPD 203 at 209.
24 Income Tax Act 58 of 1962 s 1 sv ‘gross income’.
196 Income Tax in South Africa: Cases and Materials

Until the decision in [84] CSARS v Brummeria Renaissance (Pty) Ltd25 it was widely
believed that, in South Africa, a receipt or accrual was not an ‘amount’ (and therefore
gave rise to no inclusion in gross income) unless the taxpayer would be able to convert it
into money if he chose to do so. (It is submitted that it would be more accurate to say
that it was believed that such items did not possess the quality of ‘income’.)
The word ‘amount’ in the context of the definition of “gross income” has been inter-
preted to mean ‘not . . . an actual amount of money but may be every form of property
earned by the taxpayer, whether corporeal or incorporeal, which has a money value’; see
People’s Stores, supra.
In CSARS v Brummeria Renaissance (Pty) Ltd26 the Supreme Court of Appeal held that –
“the question whether a receipt or accrual in a form other than money has a money value
is the primary question and the question whether such receipt or accrual can be turned
into money is but one of the ways in which it can be determined whether or not this is the
case; in other words, it does not follow that if a receipt or accrual cannot be turned into
money, it has no money value.”
27

This decision has therefore conclusively established that the convertibility principle does
not apply in South Africa and that, if a non-capital receipt or accrual has ‘a money value’,
such value must be included as gross income. The court did not lay down the criterion by
which such money value must be determined.
Certain statutory provisions override the common law principles as to what constitutes
‘income’ or what constitutes an ‘amount’ to be included in gross income. Of particular
note is that para (i) of the definition of ‘gross income’, read together with the Seventh
Schedule, imposes tax on a wide range of employee fringe benefits (that is to say, non-
monetary benefits granted to an employee by an employer), irrespective of whether or
not they are convertible to money. Even where they are convertible to money, the ‘cash
equivalent’ of fringe benefits falling under the Seventh Schedule is not their realisable
value, but their value as determined in accordance with the Schedule. Another instance
of the Act overriding the common law convertibility principle is para (h) of the defini-
tion of ‘gross income’ which provides for the inclusion in the lessor’s income of the value
of the right to have improvements effected on the leased premises by the lessee; the
method of valuing this right is laid down in para (h).
§3.3 A reward for services rendered or to be rendered is income
[119]
CIR v Lunnon
1924 AD 94, 1 SATC 7
The taxpayer, a company director, resigned from the board of directors in December
1920. In June 1921 the directors agreed to request the shareholders to grant the taxpayer
and another retired director gratuities of £1 000 and £500 respectively in recognition of
their valuable services on the board in previous years when directors’ fees were not
commensurate with the work involved, and as a solatium for the loss of their seats when
the head office was transferred to Johannesburg.
In September 1921 the shareholders of the company passed a resolution in the following
terms: ‘That the board be authorised to apply a sum of £1 500 by way of payment to certain
two former directors of the company for services rendered’. The amount was duly paid,
and the Commissioner included it in the taxpayer’s income. The Transvaal Provincial
Division held that the amount was not taxable.
________________________

25 [2007] SCA 99 (RSA).

26 [2007] SCA 99 (RSA).
27 Ibid at [15].
 Income: The general concept 197

Issue: did the gratuity paid to the taxpayer form part of his gross income?
Held: in the negative. The payment of the money was not the solutio of an obligatio. It
was therefore a gift and as such was capital, not income.
Innes CJ: The question is whether this amount of £1 000, voted to the respondent some months
after the termination of his services as a director, is liable to income tax. And the first thing to be
determined is the legal nature of the grant. What did it amount to in law? There is no reason to
question the bona fides of the transaction. Companies, no doubt, are not conspicuous for gener-
osity. Corporations, however easily they assimilate the more predatory human qualities, do not as
easily acquired the higher attributes; and gratitude is not a feeling which we generally associate
with joint stock activity. But there are exceptions to every rule, and I take these facts as they
stand. There is no reason for thinking that the transaction was in any way disguised, so that there
is no need to probe its real nature. We have simply to ask what legal relationship was established
between the parties on the face of the stated case. Lunnon having resigned from the board as
from 1 December 1920, the following entry appeared in the directors’ minutes of 21 June 1921 –
‘The chairman suggested that shareholders be asked at the next general meeting to consider the question
of granting Messrs Lunnon and Bramley gratuities of £1 000 and £500 respectively, in recognition of their
valuable services on the board in previous years when the directors’ fees were not commensurate with the
work involved, and as a solatium for the loss of their seats on transference of the head office to Johannes-
burg . . .’
The resolution adopted by the shareholders on the 16th September 1921 read as follows:
‘That the board be authorised to apply a sum of £1 500 by way of payment to certain two former directors
of the company for services rendered.’
. . . [T]he statement that the grant was made ‘by way of payment for services rendered’ could not
affect its legal character. For there was not, and could not have been payment in the legal sense.
Payment is in law the extinction of an obligation. Here there was no obligatio, and therefore
there could be no solutio. Lunnon had no claim against the company, and it was under no
indebtedness to him. He had been paid in full for his services which had terminated, and could
claim no more. So that all the essentials of a donation were present. And the fact that the motive
which actuated the donor was gratitude for past services in no way altered the legal nature of the
transaction . . . In law, therefore, the grant of £1 000 voted to Lunnon was a gift pure and simple.
. . . The test is plain; all receipts or accruals are taxable unless they are of a capital nature. Now
capital there is used in contradistinction to income in its economic sense . . . I should like to
refer to what was said in Booysen’s case; where it was pointed out that income was sometimes the
product of capital invested, and sometimes was earned by the labour or the wits of the recipient.
Now this gift has none of the attributes of income; it was not produced by the respondent’s capi-
tal, nor was it earned by his labour or his wits or in any other way. There is no recurrence about
it. What is sometimes called annuality is not necessarily a decisive test as to whether a receipt or
accrual is capital or income; but it is an important element to be taken into consideration. And
in the present instance it is wholly absent. This grant is a fortuitous addition to the capital of the
recipient and it appears to me to be of a capital nature; like any ordinary donation or legacy.
The appellant’s main argument to the contrary was that the transaction was covered by the latter
portion of s 6 . . . [W]hat is the meaning of ‘any other benefit or advantage of any kind granted
in respect of employment’ which are the words relied upon? Clearly the employment to which
they relate, and in respect of which the benefit is given must be employment the obligation for
which was undischarged at the date of the grant. They cannot refer to employment which had
already terminated, and all obligations arising from which had been wiped out . . . Looking
therefore at the provision of our Act, I am of opinion that the grant voted to respondent by the
shareholders constituted a receipt by him of a capital nature and does not fall within the defini-
tion of gross income in s 6 . . .
In my opinion the appeal fails and must be dismissed with costs.
SOLOMON JA, DE VILLIERS JA, KOTZE JA and WESSELS JA concurred.

Notes
It is submitted that Lunnon’s case was wrongly decided, and that the court ought to have
held that a quid pro quo for services is inherently ‘income’ in nature, whether or not it is
198 Income Tax in South Africa: Cases and Materials

gratuitous.28 Compare [120] De Villiers which involved a payment to the taxpayer in lieu
of leave, which he had earned through the rendering of services as an employee, and
note in particular the observation of Wessels JA that: ‘It makes no difference whether we
consider the money paid to him as a gratuity or as a moral obligation or as a contractual
right’. However, as a result of the decision in Lunnon, para (c) of the statutory definition
of ‘gross income’ was amended to include ‘any amount, including any voluntary award,
received or accrued in respect of services rendered or to be rendered’.

An amount paid to an employee, in terms of his contract of employment, in lieu of leave, is paid for
services rendered and is therefore income.

[120]
De Villiers v CIR
1929 AD 227, 4 SATC 86
The appellant, late Attorney-General of the Transvaal Province, retired from that office
on the statutory ground of the abolition of his office by a previous Act. At the date of his
retirement there was due to him under the Public Service Regulations 136 days accumu-
lated vacation leave for which he was entitled to and was paid a sum of £670 3s 3d. In
respect of this sum he was assessed for income tax on the ground that it accrued to him
‘in respect of services rendered’ within the meaning of s 7 of Act 40 of 1925. The Trans-
vaal Provincial Division upheld the assessment, and the matter was taken on appeal.
Issue: was the amount paid to the taxpayer for accumulated vacation leave due to him
on retirement an amount which accrued to him ‘in respect of services rendered’ and
therefore income?
Held: in the affirmative. The amount paid to the taxpayer was for work done. He was
entitled to the amount by virtue of having worked a specified number of days for which
he could have taken leave. The payment which he received was due to him in respect of
services just as much as was his salary.
Stratford JA: The appellant contended that the amount was paid to him not in respect of his
services but as a solatium for the abolition of his office, the termination of which prevented him
from enjoying the leave that otherwise he would have enjoyed. The argument was advanced with
considerable force and evident conviction and merits an examination of the exact nature of the
payment and the reasons which prompted it. The words ‘in respect of’ received judicial interpret-
ation in the case of CIR v Crown Mines29 in which Innes CJ said that a tax could not be said to be
imposed ‘in respect of a particular subject-matter, unless it had direct relationship to that mat-
ter,’ by which is meant, I think, ‘causal relationship’ . . . The question may be stated thus: Was
the sum paid to the appellant as remuneration for services rendered or as a solatium for the det-
riment he suffered by reason of the abolition of his office? . . . But if any principle is to be ex-
tracted from these decisions it is simply that when dual considerations are in play we must look
to the dominant one as affording the true reason for the payment. So that in each case it is a
question of drawing the correct inference from all the circumstances of the payment and infer-
ences drawn in other cases on different facts do not greatly assist us . . . It was for the work done
that the £670 3s 3d was paid . . . In my judgement, therefore, this amount accrued to the taxpay-
er ‘in respect of services rendered’ within the meaning of s 7 of Act 40 of 1925 . . . The appeal
must be dismissed with costs.
Wessels JA: I have read the judgment of my brother Stratford, with which I agree. It seems to me
that the terms of employment between the Government and the appellant were in effect that the
appellant was entitled to a salary, and was to have in addition the benefit of a period of leave in
each year, according to leave regulations, if the Government could spare his services. This leave
he could accumulate, and the Government had the right if it chose to commute this leave for a
money payment.
________________________

28 Further, see Williams, Income Tax in South Africa: Law and Practice at 78.
29 1923 AD 21.
 Income: The general concept 199

The leave, therefore, which the appellant had accumulated when his office was abolished was
due to him as much in respect of his services as was the money paid to him as salary. When his
office was abolished the Government calculated the amount of leave due to him on the basis of
his salary. Assuming that the Government was not bound to pay him a penny, but that it gave the
appellant the money as a solatium upon the abolition of his office, then it is still abundantly clear
that the Government did not intend to give him that money because his office had ceased to
exist, but because there stood to his credit 136 days leave which he did not enjoy, and this leave
was due to him as part and parcel of the benefits he was entitled to by virtue of his appointment
as Attorney-General.
It makes no difference whether we consider the money paid to him as a gratuity or as a moral
obligation or as a contractual right; its origin must be sought for in the fact that he served the
State as Attorney-General; that fact is the fountain from which the gratuity flows.

Notes
This decision is a classic example of the propensity of our courts to seek solutions to
income tax problems within the ipsissima verba of the Income Tax Act, instead of first
determining the applicable common law principle, and then asking whether the Act
compels a different conclusion. This approach would have seen the case decided in
terms of the common law principle that a quid pro quo for services rendered is ‘income’;
s 7 of the Income Tax Act, 1925 was merely declaratory of this common law principle.
Compare para (c) of the definition of ‘gross income’ in the current Act. Note also
that, in terms of the current Act, para (d) of the definition covers ‘any amount, including
any voluntary award, received or accrued in respect of the . . . termination . . . of any
office or employment’ and that s 10(1)(x) grants a limited exemption from tax to such
amounts.

Where the taxpayer is paid an amount under an agreement, professedly as consideration for the sale
of property, but in reality for services rendered, it will be a receipt of income.

[121]
Brent v FCT
(1971) 125 CLR 418 (High Court of Australia)
The taxpayer was the wife of Ronald Biggs, a notorious criminal. She accepted an offer
from the General Television Corporation (Pty) Ltd (‘the company’) which wanted to
publish an account of her life with Biggs. The written agreement recorded that the
taxpayer sold to the company the exclusive right to publish the story of her life, in return
for which the company agreed to pay her $65 250. The agreement provided that the
taxpayer assigned to the company her copyright in the story and agreed to make herself
available for interviewing by the company. On the day the agreement was signed,
two journalists employed by the company commenced questioning her about her life
with Biggs, and these discussions lasted about five days. The journalists took down in
shorthand what the taxpayer said and reproduced it in the form of a story. The taxpayer
was given the opportunity to read it and offer corrections, but she made few suggestions
and they were rarely or never acted on. She then signed each page of the story,
certifying that it was ‘reasonably authentic’. The Commissioner assessed her to income tax
on the $65 250. The taxpayer objected on the basis that the amount was not ‘income’.
Issue: was the payment received by the taxpayer of a capital nature, being consideration
for the sale of property, or was it a payment for services rendered, and therefore income?
Held: it was a payment for services rendered, and thus income.
Gibbs J: The question whether the amount payable under the agreement was income in my
opinion depends on whether it should properly be regarded as a sum earned by the appellant in
relation to services rendered by her for the company. If so, it would . . . be income within ordinary
200 Income Tax in South Africa: Cases and Materials

usages and concepts . . . If the moneys were, in truth, earnings from the performance of services
by the appellant, it would not matter that she carried on no business or vocation, or that the
moneys became payable as the result of an unexpected stroke of fortune or that there was no
element of regularity or periodicity about their receipt. The question, therefore, is whether the
moneys she received answer that description or whether they were rather, as the appellant con-
tended, the consideration for the sale of proprietary rights or of rights analogous to the rights of
property. That question must be answered by examining the agreement and the manner in
which the parties to it carried it out.
By cl 1 of the agreement the appellant purported to sell to the company the exclusive right to
publish and reproduce her life story and especially the story of her life with Biggs. This provision
was of doubtful value. At the time the agreement was signed no story had been written . . . If cl 1
purported to confer on the company an exclusive right to publish any account of the life of the
appellant, it would be quite illusory, for anyone who could obtain enough information to enable
him to do so would be entitled, subject to such restrictions as the law of copyright and defama-
tion might impose, to write a biography of the appellant. By cl 4 the appellant purported to
assign to the company her copyright in the manuscript which she intended to sign. It is clear,
however, that, in the events which happened, the appellant had no copyright to assign. The
stories were about her life but she did not write them, and they were not told in her words; the
journalists who made the notes were not mere amanuenses who took down and transcribed word
for word what she said, but they gave to the stories the form in which they finally appeared. In
those circumstances the appellant, who had provided the ideas but not the form in which they
were expressed, had no copyright. Donoghue v Allied Newspapers Ltd.30 Clauses 5 and 7 of the
agreement required the appellant to perform certain services for the company – to assist its
agents, to make herself available for interview and to give information and to sign the manu-
script. She, in fact, did these things . . .
In substance, the appellant earned the money payable under the agreement by devoting her
time to the interviews at which she was questioned, by disclosing all the facts about her life with
her husband that were thought worth printing and by lending her name to the stories which the
journalists produced. The agreement to make available, apparently on loan, the photographs
and tokens may rightly be regarded as a subsidiary matter and the negative covenant in cl 8 was
ancillary to the main purpose of the agreement. The purported grant of the exclusive right to
her life story and the purported assignment of the copyright were, in truth, inefficacious to con-
vey any rights to the company.
...
It is not possible speaking strictly to say that in communicating the information to the agents of
the company the appellant was parting with property. Neither knowledge nor information is
property in a strictly legal sense, although they can be said to be property in a loose metaphori-
cal sense and have been referred to as property in a number of cases . . .
I have not been referred to any case in which it has been held that information which was not
acquired or used in connection with a business should be treated as a capital asset whose dispos-
al would result in the receipt of a capital gain rather than of income . . . In the present case the
information which the appellant agreed to give related to matters which might properly be
called secret, being known only to herself and Biggs and possibly to their confederates . . . How-
ever, as Latham CJ pointed out in FCT v United Aircraft Corporation,31 knowledge does not become
property simply because it is secret . . .
In my opinion, the appellant’s arguments that the moneys received under the agreement are not
taxable cannot succeed. As a matter of law the agreement entitled the appellant to payment for
services rendered to the company in making herself available for interview, in communicating
information and in signing the manuscript which the journalists produced and which was not
her property. There is no special reason as a matter of fact to treat the information which she
possessed as equivalent to a right of property; it was not acquired in the conduct of a business,
and could not be described as property in a business sense, it did not relate to anything in which
copyright existed, and there was no other justification for regarding it as having in fact a character
________________________

30 [1938] Ch 106.
31 (1943) 68 CLR at 535.
 Income: The general concept 201

which the law denied it. The fact that the appellant had secret information made her services
more valuable but moneys paid as the consideration for services rendered are income notwith-
standing that the person rendering the services is employed only because of the special know-
ledge or information that he possesses. It is impossible to hold that the appellant sold any
property to the company. As I have said, the purported sale of the right to publish her life story
and the purported assignment of copyright were illusory and the agreement to make available
photographs and tokens and the negative covenant contained in cl 8 of the agreement were
subsidiary to the main objects of the agreement. In my opinion the consideration provided by
the agreement was for services rendered by the appellant to the company and was properly
treated as income.

All amounts, other than those of a capital nature, received or accrued during the tax year, must be
included in the taxpayer’s gross income, even if they are a consideration for services to be rendered in
the future.

[122]
ITC 702
(1950) 17 SATC 145
The taxpayer company carried on the business of technical consultants and advisers.
During the year of assessment under review, the taxpayer received payment of the sum of
£12 500 in the form of 12 500 fully paid shares, with a nominal value of £1 each, in a
company to which the taxpayer had rendered technical services during the tax year, and
had undertaken to render similar services for a further ten years. The Commissioner
included the full amount of £12 500 in its taxable income.
Issue: must an amount, paid in advance for services to be rendered in future years, be
included in full in the taxpayer’s gross income in the year of receipt or accrual?
Held: in the affirmative. All amounts received or accrued during the tax year, other
than amounts of a capital nature, form part of the taxpayer’s gross income.
Shaw AJ: It was not contended on behalf of the company that the 12 500 shares were not re-
ceived by it during the year of assessment, nor was it contended that they were not worth £12 500.
It was contended, however, that the two agreements in terms of which the shares were received
should be read together and that if this were done the £12 500 was to be regarded as a payment in
advance for technical services to be rendered for ten years as from 8th September 1947 . . .
Upon this basis it was submitted by Mr Bizzell, who appeared for the company, that as the sum of
£12 500 had been received for services to be rendered for a period of ten years as from 8 Sep-
tember 1947, it was not received for services rendered in terms of s 7(b); that the whole amount
was not proper for inclusion in the company’s income for the tax year in question and that only
a proportion of that amount, based upon the period of time that had elapsed prior to the end of
the year of assessment, should be so included . . .
Assuming, therefore, that . . . an amount is not of a capital nature, it falls within the definition,
because it is only amounts of a capital nature other than those referred to in paragraphs (a) to
(h) which are excluded from the definition, . . . As the sum of £12 500 was admittedly not of a
capital nature and was admittedly received by the appellant company during the year of assess-
ment it was properly included in the assessment for the year ended 30 June 1948.

The product of a man’s wits and energy is income.

[123]
CIR v Visser
1937 TPD 77, 8 SATC 271
The taxpayer had previously held two-year mining options over certain properties in the
Bethal district of the Transvaal, but he had allowed the options to lapse. Thereafter, he
had a meeting with B and K in which K informed him that he intended to form a company
202 Income Tax in South Africa: Cases and Materials

to acquire mining rights in the area where the taxpayer had previously held mining
options. An arrangement was reached whereby B and K would give the taxpayer shares in
the company to be formed if he would refrain from taking up options in competition
with K and if the taxpayer (who had great influence amongst the farmers in the district)
would instruct his attorney, M, to assist K in acquiring the options. The taxpayer duly did
so and, in terms of this arrangement, the taxpayer was allotted shares in the company,
and the rights to further shares.
The Commissioner assessed the taxpayer to tax on the basis that the shares and rights
he had acquired in terms of this arrangement were subject to income tax. The taxpayer
disputed the assessment, arguing that the accrual to him was of a capital nature (there
being no capital gains tax at the time) on the basis that he had not rendered any services
to K or B, nor had he been party to a scheme of profit-making. The Tax Court upheld
the taxpayer’s objection to the assessment, and the decision was taken on appeal to the
Transvaal Provincial Division.
Issue: Was the value of the shares allotted to the taxpayer a receipt of a capital or of a
revenue nature?
Held: The receipt was of a revenue nature. The product of a man’s wit and energy is
income. It was the taxpayer’s wit and energy that secured him the interest in the compa-
ny; hence the value of the shares must be included in his gross income.
Maritz J: In terms of [the Income Tax Act 1925] the burden of proof that any amount is not
liable to tax under this Act shall be upon the person claiming such non-liability. This means that
the consideration received by the respondent on which the assessment was made by the Com-
32
missioner is taxable unless the respondent shows that it was not income. (See Ochberg v CIR. )
Now although a man’s education, his energy, his personality, or his eloquence may have a poten-
tial value, such education, etc, only becomes a factor in the economic or income tax sense when
it acquires a real value. His education becomes of real value when he puts it to use, for example
by adopting a profession. His profession may then be likened to a tree, and his earnings from his
profession to the fruit of the tree. So, on the form of the transaction under review, it cannot be
said that the respondent sold his right to compete for the options to Kapnek. His bare right to
compete is something potential, something abstract, and the Income Tax Act is not concerned
with abstract rights. Now, if he had ceded these options to Kapnek when he acquired them, he
would have ceded something which he had gained by his energy, personality or eloquence, and
the profit he made from such cession would have been income, because it would have been a
gain made by an operation of business in carrying out a scheme of profit-making. . . .
Now it seems to me that although he had allowed these options to lapse and did not renew
them, he still had something tangible to show as a result of his energy, personality and elo-
quence, namely the influence he had acquired in the Bethal district. It cannot be denied that
the respondent went to the meeting of the 13 March 1933, armed with the knowledge that Kap-
nek and Bleloch were engaged in a profit-making scheme, and he came prepared to bargain
with them for a share in the profits they hoped to make. He knew that his influence in the Be-
thal district had a marketable value, and he bargained on the basis (1) that he had already been
in contact, either personally or through Marais [his attorney] with the farmers in the Bethal
district whom Kapnek decided to approach for options; (2) that he had great influence with
some of the farmers in the Bethal district who were well disposed toward him, and (3) that in
competition with Kapnek he would probably get the options himself. He bargained successfully;
and it seems to me that the profit he made was due, not to a sale of anything in the nature of a
capital right, but was due to his using his advantage in having been the first in the field. ‘Income’
may also be described as the product of a man’s wits and energy, and it seems to me impossible
to avoid the conclusion that, on the facts of this case, the consideration received by the respond-
ent was a product of his wits and energy.
________________________

32 1931 AD 215.
 Income: The general concept 203

I find myself therefore unable to agree with the conclusion arrived at by the special court that
this was a receipt of a capital nature. As it is not a receipt of a capital nature, it must be income
and as such is liable to tax . . .
GRINDLEY-FERRIS J concurred.
Notes
Kapnek’s letter to the taxpayer, recording their agreement, said that the taxpayer would
be given shares in the newly-formed company ‘in consideration of the services you have
already rendered, and will be rendering to me and my associates in the venture that we
are undertaking’. It is therefore surprising that the court chose to base its conclusion not
on the rendering of services, but on the more nebulous link between the consideration
received and the taxpayer’s ‘wits and energy’.
With a little knowledge and ingenuity, the taxpayer might have been able to avoid in-
come tax on the shares awarded to him. If he had restricted his involvement in the
procuring of options by Kapnek to a promise of mere inaction, that is to say, to a promise
that he would not compete with Kapnek for the options, the taxpayer would have had a
cogent argument that the quid pro quo for the shares was a restraint of trade undertak-
ing by him, in which event the shares awarded to him would have been of a capital
nature.33 Maritz J’s statement that the product of a man’s wit and energy is income is too
widely stated; a person may use his wits and energy to acquire a capital asset, as for ex-
ample where an investor in art purchases for his collection a painting at a bargain price
because his expertise enabled him to recognise its true value. The mere circumstance
that the taxpayer has acquired an asset through his wits and energy is, it is submitted, a
neutral fact which, of itself, is no guide to whether the asset (and the profit on its dispos-
al) is revenue or capital in his hands.
[124]
Moorhouse (Inspector of Taxes) v Dooland
[1955] Ch 284
The taxpayer, a professional cricketer, played under contract for the East Lancashire
Cricket Club for the 1950 and 1951 seasons. In terms of his contract, he was entitled to
be paid a salary and expenses plus the proceeds of certain collections ‘for any meritor-
ious performance’ in certain league or cup matches. These ‘collections’ represented vol-
untary and spontaneous monetary contributions from the public. There were eleven
such collections during the 1951 season. The question was whether these amounts were
‘income’ in his hands for the purpose of the Income Tax Act, 1918 as ‘fees, wages, per-
quisites or profits’ arising from his employment.
Issue: were the voluntary contributions from the public ‘income’ in the hands of the
taxpayer?
Held: in the affirmative. They were amounts to which he was entitled under his con-
tract of service, and were of a recurrent nature.
Jenkins LJ: If this had been the first case of its kind, there might have been something to be said
for the view that the proceeds of the collections were not in their nature taxable at all, for the
simple reason that these were not sums paid or provided by or at the expense of Mr Dooland’s
employers, but were contributed voluntarily by spectators under no obligation to make any such
payment, and were, accordingly, in the nature of casual profits as distinct from income derived
from a regular source.
But it has long been settled that payments voluntarily made by third parties to the holder of an
office or employment may, in some circumstances, be taxable as profits arising to such holder
therefrom, although the immediate source from which they proceed consists in the generosity of
persons on whom he has no legal claim.
________________________

33 Compare Tuck v CIR 1988 (3) SA 819 (A).

204 Income Tax in South Africa: Cases and Materials

...
The circumstances in which voluntary payments may be made to the holder of offices or employ-
ments are obviously capable of wide variation from case to case, and each case must be judged by
reference to its own facts; but the authorities indicate certain general principles to which regard
should be had in determining whether the circumstances of a particular case are or are not such
as to bring it within the line of tax liability. [The learned judge here examined a number of cases.]
...
From these citations I deduce the following principles:
(i) The test of liability to tax on a voluntary payment made to the holder of an office or employ-
ment is whether, from the standpoint of the person who receives it, it accrues to him by
virtue of his office or employment, or in other words by way of remuneration for his services.
(ii) If the recipient’s contract of employment entitles him to receive the voluntary payment,
whatever it may amount to, that is a ground, and I should say a strong ground, for holding
that, from the standpoint of the recipient, it does accrue to him by virtue of his employ-
ment, or in other words, by way of remuneration for his services.
(iii) The fact that the voluntary payment is of a periodic or recurrent character affords a
further, but I should say a less cogent, ground for the same conclusion.
(iv) On the other hand, a voluntary payment may be made in circumstances which show that it
is given by way of present or testimonial on grounds personal to the recipient, as, for ex-
ample, a collection made for the particular individual who is at the time vicar of a given
parish because he is in straitened circumstances, or a benefit held for a professional crick-
eter in recognition of his long and successful career in first-class cricket. In such cases the
proper conclusion is likely to be that the voluntary payment is not a profit accruing to the
recipient by virtue of his office or employment but a gift to him as an individual, paid and
received by reason of his personal needs . . .
Applying these principles to the facts of the present case, I find: (i) that under his contract of
service with the East Lancashire Cricket Club, Mr Dooland was entitled to make, or have made on
his behalf, collections from spectators on the ground, whenever he achieved one of the per-
formances in batting or bowling which carried the right to a collection according to the rules of
the Lancashire Cricket League; (ii) that occasions on which he attained one or other of the stip-
ulated performances, and enjoyed a collection accordingly, recurred with considerable frequen-
cy, there having been no fewer than eleven such occasions during the 1951 season. According to
the principles above stated, these facts afford cogent grounds for holding that the present case
falls within the line of tax liability . . .
. . . From the standpoint of Mr Dooland, the proceeds of the collections were by the very terms
of his contract of employment part of what he was to get under the contract by way of remuner-
ation or reward for what he was to do under the contract . . . I do not think that Mr Bucher’s
submission to the effect that sums paid voluntarily by third parties to the holder of an office or
employment are only taxable if there is some nexus between the payer and the recipient in the
shape of services rendered by the latter for the benefit of the former can be accepted.
[Held: on the evidence, the Commissioners were not entitled to hold that the collections in
questions were not a profit from the taxpayer’s employment within the meaning of the statutes.
Hence, the taxpayer was assessable on the amounts collected on his behalf.]

[125]
Hayes v FCT
(1956) 96 CLR 47, 11 ATD 68 (High Court of Australia)
The taxpayer was employed by R on a full-time basis from 1939 to 1942 as supervising
accountant and general adviser in his business. From 1942 he ceased to be a full-time
employee. In 1944, when R’s business was taken over by a proprietary company, the
taxpayer became a shareholder and a director and secretary of the company, for which
he received remuneration. By 1947 the business had deteriorated and it was considered
that R should resume control. He refused to do so unless he held all the shares in the
 Income: The general concept 205

company and the taxpayer reluctantly parted with his shares at a price he considered to
be much less than their potential value, R telling him that he would make it up to him
some day. The taxpayer then ceased to be a director of the company but remained
its secretary. In 1950 a public company took up the shares of the private company
which continued to be the operating organisation. The taxpayer was secretary of both
companies and received an adequate remuneration. After 1944 the taxpayer was at no
time engaged or employed as R’s private accountant, although from time to time he
performed services of a trifling nature for which he did not appear to have been paid.
The taxpayer and his wife were on terms of personal friendship with R and his wife.
R often discussed business matters with the taxpayer, asking for and receiving his advice
in an informal way on matters connected with the business of the companies. On the
incorporation of the public company R received a large number of shares therein, some
of which he gave to the taxpayer.
R in his evidence stated that he felt that he had ‘achieved an ambition and made a
success of things’ and in a spirit of generosity made gifts of shares not only to the taxpay-
er but also to his (R’s) sons, to one C, and to trustees of the employees.
Issue: did the value of the shares awarded to the taxpayer form part of his income?
Held: in the negative. The value of the shares was not income because it was impossible
to relate their receipt to any income-producing activity by the taxpayer.
Fullagar J: The view that what the appellant received in this case was income seems to rest on the
view that the gift of the shares was motivated, at least to a substantial extent, by gratitude for
services rendered, and advice and assistance given, by the donee to the donor in the past. But
this is clearly not enough to make what he received income in his hands. It may be conceded
that this motive of gratitude played a part in the donor’s decision to make the gift. But gratitude
for services rendered was by no means the sole or exclusive motive. It is clear that the donor was
moved very largely by a general feeling of goodwill arising from a close relationship which had
both a business aspect and a personal aspect. It is clear also that he was moved to no small extent
by the fact that Hayes had, some three years before, parted very much against his will with his
shares in the proprietary company. He had told Hayes that he ‘would make it up to him’, and he
was now ‘making it up to him’.
So much for the donor’s motives. But as I have said, motive as such cannot be a decisive factor in
cases of this kind. What is decisive, in my opinion, is the fact that it is impossible to relate the
receipt of the shares by Hayes to any income-producing activity on his part. It is impossible to
point to any employment or ‘personal exertion’, of which the receipt of the shares was in any
real sense an incident, or which can fairly be said to have produced that receipt. Hayes was only
employed by Richardson from 1939 to 1944, and it seems absurd to say that the shares rep-
resented additional remuneration for work done in that employment. From 1944 to 1950 he was
employed by the proprietary company, but it seems equally out of the question to say that the
shares represented additional remuneration for work done for the company during that period.
I accept, of course, what was said by Dixon CJ and Williams J in Dixon’s case.34 I agree that, ‘if
payments are really incidental to an employment, it is unimportant whether they come from the
35
employer or from somebody else’. It is perfectly consistent with this to say that, in determining
whether a payment is ‘really incidental to an employment’, the fact that it is not made by the
employer but by some third party may be a very relevant consideration. Its relevance in the pres-
ent case, however, need not be considered, for the position simply is that there is nothing what-
ever to suggest that the gift can properly be regarded as money earned by Hayes as director or
secretary of the proprietary company. It was not paid to him in any such capacity. It was in no
true sense a product or an incident of any employment in which Hayes had engaged or any
business which he had carried on.
The only other way, so far as I can see, in which the case can be put for the commissioner is to
say that the gift of the shares represented a reward or recompense for the general advice and
guidance given informally on a number of occasions to Richardson personally, and proving of
________________________

34 (1952) 86 CLR 540.

35 (1952) 86 CLR at 556.
206 Income Tax in South Africa: Cases and Materials

benefit in the long run to Richardson himself or to the company in which he had a controlling
interest. I think that the gift was intended in part, though only in part, as such reward or recom-
pense. But surely it is utterly unreal to say that, whenever Hayes expressed a particular opinion
or recommended a particular course, he was engaging in an activity capable of producing
income for him. Such an idea is foreign to the whole idea of what constitutes income from
personal exertion. If Hayes had been employed to give such advice or guidance, or if he had
carried on a business of giving such advice or guidance, the position might well have been
different. But he was doing neither of those things.

Notes
The criterion adopted in modern South African cases in determining whether an
amount received by or accrued to the taxpayer is capital or income is to ask what was the
quid pro quo given by the taxpayer. Thus, in Tuck v CIR Corbett JA said that:36 ‘. . . it
seems to me that most problems of characterisation could appropriately be dealt with by
applying the simple test indicated by Watermeyer CJ in the Lever Bros37 case . . . viz by
asking . . . what was the quid pro quo which [the taxpayer] gave for the receipt?’38 In
Hayes the High Court of Australia posed a similar question, and held, in effect, that the
shares awarded to the taxpayer were not a quid pro quo for services rendered by him, or
related to his employment. In short, said the court, Hayes was not awarded the shares as
a quid pro quo for any ‘income-producing activity’ on his part.

§3.4 A testimonial gift or award (also called an accolade) is not income

An amount that constitutes a testimonial (that is, an award in recognition of personal qualities, as
distinct from a reward for services), does not have the character of income

[126]
Moore v Griffiths (Inspector of Taxes)
[1972] 3 All ER 399, [1972] 1 WLR 1024, [1972] 48 Tax Cas 338
The taxpayer, a professional footballer, was under contract to play for a football club.
The World Cup championship was held every four years and in 1966 the taxpayer was
selected by the association to play for England in the championship and was made cap-
tain of the England team. After England won the World Cup that year the association
announced that its finance and general purpose committee had earlier resolved that
£22 000 should be paid to the members of the England team if they won the cup. The
England players decided that £22,000 should be divided equally among the 22 players of
the World Cup squad, although not all of them had played in the World Cup. The tax-
payer received a letter from the association enclosing £1,000 as his share of the £22 000.
After the termination of the World Cup championship the taxpayer also received from
the manufacturers of a toilet preparation sums of £500 and £250. The £500 was awarded
to him as ‘a prize’ for being the best player in the World Cup championship and the
£250 as a prize for being the best England player. The taxpayer was assessed to income
tax under Sch E of the (United Kingdom) Income Tax Act 1952 on the grounds that
these payments accrued to him by virtue of his employment and were ‘emoluments’
therefrom.
Issue: were these amounts ‘income’ in the hands of the taxpayer on the basis that they
accrued to him by virtue of his employment?

________________________

36 1988 (3) SA SA 819 (A), 50 SATC 98 at 113.

37 1946 AD 441, 14 SATC 1.
38 Similarly, see Matla Coal Ltd v CIR 1987 (1) SA 108 (A) at 126: ‘The first question to be decided is for what
the amount of R9 635 000 was paid as consideration’.
 Income: The general concept 207

Held: the £1 000 was not taxable as it was a gift or testimonial to the taxpayer to mark
his participation in an exceptional event and was not made as a reward for his services.
Neither the £500 or £250 were taxable as they were plainly offered in order to publicise
the manufacturers’ products and were not in the nature of a reward for services ren-
dered by the taxpayer to anyone.
Brightman J: In 1966 England won the association football World Cup for the first but not, one
hopes, the last time. The captain of the team was Mr Robert Frederick Moore (‘the taxpayer’),
better known to the sporting world as Mr Bobby Moore. After he had led his team to victory, he
received what were called a bonus and two prizes: first, from the Football Association, the sum of
£1,000, described by the association as a bonus; secondly, from the manufacturers of a toilet
preparation known as Radox bath salts, sums of £500 and £250, described by the manufacturers
as prizes for the best players in the World Cup competition. The question for decision is whether
these three sums are assessable to income tax.
At the relevant time, the taxpayer was under contract to the West Ham United Football Club,
which I will call ‘the club’. Under that contract, he agreed to play for the club during the foot-
ball season over a specified period of years . . .
39
Moorhouse (Inspector of Taxes) v Dooland was decided in 1954. It was the case of a cricketer. I read
from the headnote:
‘The Respondent was employed as professional to a cricket club. The terms of his employment were gov-
erned by a written agreement which provided, inter alia, that “collections shall be made for any meritor-
ious performance by the Professional with bat or ball . . . in accordance with the Rules for the time being
of the Lancashire Cricket League”. One of these rules directed that a collection was to be taken from spec-
tators for any player scoring 50 runs or more in any one innings and in certain other circumstances . . .
Held, that the collections were part of the earnings of the respondent’s employment and not mere per-
sonal presents distinct from his earnings’ . . .
From early days a distinction has been drawn between a payment which is a reward for services,
and is therefore taxable under Sch E, and a payment which is a testimonial, and is not so taxable
...
40
Again, in Mudd v Collins, decided in 1925, Rowlatt J said:
‘I ventured to throw out during the argument that there was a distinction between a testimonial and a
remuneration for services of this kind. When a man is given a testimonial because of his work in the past,
not directly remunerating him for that work, but recognising how high a regard has been held for him in
the association of people with him arising out of the performance of those services, and people recognise
the good qualities he has and how zealous and kind he has been, and how eager to advance the interests
of his employers or his parishioners or his constituents, or whoever they may be, and they say “We would
like to give you something as a mark of our esteem and regard,” that is a testimonial.’
Perhaps the most striking case which applied the testimonial principle was Seymour v Reed,41 de-
cided in 1927. The taxpayer was a professional cricketer who, for many years, had been under
contract to the Kent County Cricket Club. The staff regulations of the club empowered the
committee to grant a professional player a benefit match. A benefit match was held for the tax-
payer, and gate money and subscriptions were received. They were held not to be taxable.
Viscount Cave LC said this:
. . . I do not doubt that in the present case the net proceeds of the benefit match should be regarded as a
personal gift and not as income from the appellant’s employment. The terms of his employment did not
entitle him to a benefit, though they provided that if a benefit were granted the committee of the club
should have a voice in the application of the proceeds. A benefit is not usually given early in a cricketer’s
career, but rather towards its close, and in order to provide an endowment for him on retirement; and,
except in a very special case, is not granted more than once. Its purpose is not to encourage the cricketer
to further exertions, but to express the gratitude of his employers and of the cricket-loving public for what
he has already done and their appreciation of his personal qualities. It is usually associated, as in this case,
with a public subscription; and, just as those subscriptions, which are the spontaneous gift of members of
the public, are plainly not income or taxable as such, so the gate moneys taken at the benefit match, which
may be regarded as the contribution of the club to the subscription list, are (I think) in the same category.

________________________

39 [1955] 1 All ER 93, [1955] Ch 284.

40 (1925) 133 LT 186.
41 [1927] AC 554, [1927] All ER Rep 294.
208 Income Tax in South Africa: Cases and Materials

If the benefit had taken place after Seymour’s retirement, no one would have sought to tax the proceeds as
income; and the circumstance that it was given before but in contemplation of retirement does not alter
its quality. The whole sum -- gate money and subscriptions alike -- is a testimonial and not a perquisite. In
the end -- that is to say when all the facts have been considered -- it is not remuneration for services, but a
personal gift’ . . .
Then Sir Raymond Evershed MR added:
‘It follows, in my view, that a gift or present made either on some special occasion as a wedding, a century
at cricket, a birthday or at season of the year when it is customary to make presents, does not necessarily
cease to be non-taxable merely because the ties that link the recipient and the giver are, or are substantial-
ly, those of service and are not, or not exclusively, those of blood or friendship; and this may still be so alt-
hough the present is (for example, whenever another century is made or according to custom at
Christmas) repeated’ . . .
I now have to seek to apply the principle of the decided cases to the facts before me, and
decide whether the money was paid by way of a reward or remuneration for services or, as
Lord Radcliffe put it, given ‘in return for acting as or being an employee’. Counsel for the
taxpayer [submitted] that the true nature of the payment was not a reward for services but a
testimonial to mark what she correctly described as a proud event in the football story of this
country.
Counsel for the Crown . . . submitted [that the question was] was whether the taxpayer was paid
what he received because of the way in which he performed his duties under his contract. If so,
then the relevant test was satisfied, and the payment was taxable. The payment in this case, he
submitted, was precisely on account of the highly successful manner in which the taxpayer per-
formed his contractual duties, and was therefore taxable . . .
In my judgment, the taxpayer’s submission is correct. I think it would be wrong to regard the
payment to the taxpayer as being something in the nature of a reward or remuneration for ser-
vices. The true purpose of the payment was to mark his participation in an exceptional event;
namely, the winning of the World Cup Championship – exceptional because the cup is open for
competition only every four years and has never before been won by this country. In other
words, the payment had the quality of a testimonial or accolade rather than the quality of remu-
neration for services rendered . . .
In the result, in my judgment the commissioners were wrong in finding that the £1,000 received
from the association was taxable, but were correct in finding that the sums of £500 and £250
received from Nicholas Products Ltd were not taxable.

Notes
The issue, in cases such as the above, is to distinguish between an amount derived by a
person from ‘employment’ or ‘services’ (which will be taxable either in terms of the
general concept of income or in terms of para (c) of the definition of gross income)
from an amount given by way of a gift or award that is in the nature of a testimonial; the
latter is of a capital nature, and not subject to income tax. The essential distinguishing
feature is that a testimonial is given in recognition of personal qualities – for example,
kindness, courage, public-spiritedness, community-mindedness, etc.
§3.5 Money received on loan is not income
[127]
CIR v Genn & Co (Pty) Ltd
1955 (3) SA 293 (A), 20 SATC 113
Schreiner JA: . . . borrowed money is not received nor does it accrue within the meaning . . .
of the definition of ‘gross income’. It is difficult to see how money obtained on loan can,
even for the purposes of the wide definition of ‘gross income’ be part of the income of the bor-
rower, any more than the value of the tractor which a farmer borrows is to be regarded as being
income received otherwise than in cash . . . Neither in the case of the borrowed or hired tractor
nor in the cases of the borrowed or ‘hired’ money does it seem to accord with ordinary usage
to treat what is borrowed or hired as a receipt within the meaning of the definition of ‘gross
income’ . . .
 Income: The general concept 209

Notes
It is submitted that, quite apart from whether a loan results in any receipt or accrual,
moneys received on loan do not have the character of income and therefore do not
form part of the taxpayer’s ‘gross income’. Of course, if what professes to be a loan is
not in fact a loan, because there is an understanding that it will not be repaid, the
court will have regard to the real transaction and not the simulated or disguised transac-
tion. If for example, the sham loan is in fact a quid pro quo for services rendered, then it
will be income in the hands of the recipient. However, as is made clear by the decision in
[84] CSARS v Brummeria Renaissance (Pty) Ltd42 where a person, in the course of a
business, receives an interest-free loan, the monetary value of the interest-free use of the
money (as distinct from the capital amount of the loan itself) will be included in the
borrower’s gross income.
[128]
COT v G
1981 (4) SA 167 (ZA), 43 SATC 159
For the facts of this case, see extract [138].
Fieldsend CJ: It was common cause that the word ‘received’ was not to be given its ordinary wide
meaning and that it had to be limited at least to meaning ‘received as part of the recipient’s
patrimony’. This concession, if it can be rightly so called, by the Commissioner is obviously cor-
rect. A person who borrows a lawnmower from his neighbour receives it from him in the broad-
est sense of the term, but would clearly not receive it within the meaning of the word in the
definition. The same is the case in regard to a person who obtains from another a sum of money
as a loan, . . . This conclusion is reinforced by a case such as Geldenhuys v CIR 43 in which it was
held that a usufructuary did not receive the money as part of his ‘gross income’ for the purpose
of the equivalent South African tax legislation. Steyn J . . . held that ‘received by’ must mean
‘received by the taxpayer on his own behalf and for his own benefit’.

§3.6 The proceeds derived from the ordinary carrying on of a ‘business’

or ‘trade’ are income
[129]
CIR v George Forest Timber Company Ltd
1924 AD 516, 1 SATC 20
Innes CJ: It could never have been intended that money received by a merchant in the course,
and as the result of his trading, should not form part of his gross income.
The proceeds of fixed capital stand in a different position. The sale of such capital would, gen-
erally speaking, represent a mere realisation, which ought from its nature to be excluded, and
which I think the section intended to exclude from the calculation of income.
The Legislature could never have meant to split up the ordinary gross receipts of a trading busi-
ness, and the debts owed to such business for the purchase of good, into two parts – one capital
and other income . . .
De Villiers JA: The fact to remember in these questions is that whatever a person receives in the
way of his trade, business or profession is income . . . The same applies where a person engages
44
in an isolated adventure for the purpose of making profit (Stephan’s case). The income may
result from his own personal exertions, or it may be the result of capital productively employed
and, in the latter case, it may be the produce of either fixed or of floating capital. In any of these
cases it is income pure and simple. When, therefore, a shopkeeper sells an article at fifteen shil-
lings which cost him five, the fifteen shillings is all income, in the language of the Act it is a
________________________

42 [2007] SCA 99 (RSA).

43 1974 (3) SA 256 (C).
44 Stephan v CIR 1919 WLD 1 at 17.
210 Income Tax in South Africa: Cases and Materials

receipt or accrual which is not of a capital nature, the five shillings being considered as current
expenditure. If, on the other hand, that same shopkeeper were to sell a piece of land which he
happens to own, the purchase price of such land would remain a portion of his capital. In that
case no income has been earned within the meaning of the Act. All that has happened is that the
capital has taken on another form, the land has been converted into money. But, if that same
shopkeeper also deals in land, then the sale of the land by him would be on the same footing as
the sale of any article in his shop. He may have used a portion of his capital to buy the land. But
as he bought and sold it in the say of business, ie in order to earn an income, the proceeds
resulting from the sale, would again be income pure and simple.

Notes
The simple principle, expressed by de Villiers JA in this case, that, ‘whatever a person
receives in the way of his trade, business or profession is income’ is now subject to a
significant gloss, imposed by the majority judgment of the Appellate Division in [165]
CIR v Pick ’n Pay Employee Share Purchase Trust.45 In the latter case it was held that,
(italics added) ‘a distinction is drawn between the carrying on of a business and the
pursuance of a profit-making scheme. The basis for such distinction is that it is more
appropriate to refer to a profit-making scheme where a single transaction is involved. . . .
[A] a series of transactions is characteristic of the carrying on of a business. But, irrespec-
tive of the number of transactions, whether the receipts that flow from the carrying on of a business
are revenue still depends on whether the business was conducted with a profit-making purpose, ie as
part of a profit-making venture or scheme.’
In other words, it is no longer true to say that the proceeds of any business are income;
it is only if the business constituted a ‘scheme of profit-making’ that the proceeds thereof
will be income.

[130]
G v CIR (New Zealand)
[1961] NZLR 994 (Supreme Court of New Zealand)
From 1944 the taxpayer was a full-time evangelist, operating entirely or substantially
amongst the Open Brethren Assemblies. He was not an employee nor under contract to
any of these Assemblies. He supported himself and his family entirely from voluntary,
unsolicited donations from Assemblies and individual persons.
The Commissioner claimed that the moneys received by the taxpayer in this way from
1 April 1952 to 31 March 1957 were assessable to income tax. The issues before the court
was whether his activities as an evangelist constituted the carrying on of a business in terms
of s 88(a) of the Land and Income Tax Act 1954, and whether the donations he received,
apart from purely personal gifts, were income.
McCarthy J: The word ‘business’ as used in common speech has a wide coverage. It is commonly
used to refer to a person’s occupation. According to the Shorter Oxford it may be appropriately
used in relation to any serious occupation or work. Funk and Wagnall gives its primary meaning
as ‘a pursuit or occupation that employs or requires energy, time and thought; trade; profession;
calling’. Sir George Jessell MR in Smith v Anderson46 after considering many dictionary definitions,
speaks of it as a word of extensive use and indefinite signification. It had, he thought, a more
extensive signification than trade. Anything which occupied the time or attention or labour of a
man for the purpose of profit was a business. The word has been weighed in a great number of
cases since Smith v Anderson (supra) and I doubt whether it can be maintained in these days that,
where the word is unaffected by statutory definition, the purpose of producing profits must nec-
essarily be present, though, of course, the existence or otherwise of an intention of that nature

________________________

45 1992 (4) SA 39 (A).

46 (1880) 15 ChD 247 at 258.
 Income: The general concept 211

must be a material factor in deciding whether any particular undertaking does, in fact, amount
to a business. ‘It is not essential to the carrying on of a trade that the persons engaged in it
should make, or desire to make, a profit by it’: Lord Coleridge CJ in In re Duty on Estate of Incor-
porated Council of Law Reporting for England and Wales.47 ‘It does not prevent operations amounting
to a trade if they are not undertaken with the intention of making profits . . . If you do the ope-
ration of trading and make a profit . . . you are carrying on a trade . . . and you are carrying on a
trade whether you make a profit or not and whether you want to make a profit or not because it
is not a mere question of motive’: Rowlatt J in Royal Agricultural Society of England v Wilson.48 These
observations though they refer specifically to a trade can also be applied, I consider, to a profes-
sion or calling where money is shown to have been received, but I would think that where the activ-
ities of the taxpayer may not strictly be described as trading, the inferences to be drawn from an
absence of a profit motive or intention may be very much stronger in favour of that taxpayer.
Up to this stage I have been discussing the term business in its general sense, disregarding any
particular connotation which it may bear in our taxing statutes. It is now necessary to turn to s 2
of the Land and Income Tax Act 1954, the interpretation section . . . But . . . a study of the defini-
tion itself forces the view that it does not add anything to the common meaning of the word;
does not catch anything which would not otherwise be caught . . . I agree with the authors of
Gunn’s Commonwealth Income Tax Law and Practice, 6th ed, that the essential test as to whether a
business exists is the intention of the taxpayer as evidenced by his conduct, and that the various
tests discussed in the decided cases are merely tests to ascertain the existence of that intention
. . . The question then in this case, as I see it, is whether the conduct of the appellant can fairly
be said to disclose an intention to carry out his evangelistic activities in the material years with
the intention of making a profit. It is at this stage that I must return to the facts, for the question
is now, at least substantially, a question of fact; of compound fact made up of a variety of things.
I remind myself that I am concerned only with the tax years 1953-57 inclusive. I have some
considerable doubt whether it could be said that when the appellant commenced his life as a
preacher in 1944, he then knew a great deal of the manner in which contributions might come
to him; or that he then intended that his activities should lead to contributions being made
to him; or even perhaps that he then had given any thought to the financial aspect of his
future, but by the beginning of the tax year ended March 1953 the pattern of his income was
well established. He knew from the experience of some seven or eight years that contributions
or gifts – call them what you will – would in all probability come to him in quantities by no
means insubstantial and he must have anticipated that those contributions would provide, in
a large measure at least, for his maintenance and that of his family. I do not suggest that the
appellant was motivated by the thought of the money which he expected to flow to him; I accept
that his motives were of a higher order, but I think it would be unreal to believe that after some
seven or eight years of this activity and these means of livelihood, he did not intend that his
work should lead to gifts being made to him, gifts which he knew he would accept and use
for his support. This, of course, was not the only purpose or intention of his activity; but
intention to make a profit is commonly only one of the intentions of those in business. The true
artist rarely paints for monetary reasons only; but even a Picasso intends to sell sufficient of his
work to keep body and soul together. For these reasons, I am of the view that it can and should be
said that the appellant was, over the years in question, carrying on business for pecuniary profit . . .

§3.7 A gain made in an operation of business in carrying out a scheme

of profit-making is income
[131]
Overseas Trust Corporation Ltd v CIR
1926 AD 444, 2 SATC 71
For the facts of this case, see extract [46].
Innes CJ: It was pointed out in COT v Booysens Estates49 that the profit resulting from the sale of
an asset might be either capital or income, according to circumstances. If the transaction were a
________________________

47 (1888) 22 QBD 279 at 293.

48 (1924) 132 LT 258 at 261.
49 1918 AD 576.
212 Income Tax in South Africa: Cases and Materials

mere realisation of capital at an enhanced value, the entire proceeds would remain capital; but if
it were an act done in the ordinary course of the vendor’s business, then the resulting gain
would be income. The reason for the distinction is clear. Where an asset is realised at a profit as
a mere change of investment there is no difference in character between the amount of enhance-
ment and the balance of the proceeds. But where the profit is, in the words of an eminent
Scotch Judge, see Californian Copper Syndicate v Inland Revenue,50 ‘a gain made by an operation of
business in carrying out a scheme for profit making’, then it is revenue derived from capital
productively employed, and must be income.

Notes
For detailed discussion of what is meant by a ‘scheme of profit-making’ and how the con-
cept has been developed in subsequent cases, see chapter 5, below.

[132]
Elandsheuwel Farming (Edms) Bpk v SBI
1978 (1) SA 101 (A), 39 SATC 163
For the facts of this case, see extract [182].
Corbett JA: Where a taxpayer sells property, the question as to whether the profits derived from
the sale are taxable in his hands by reason of the proceeds constituting gross income or are not
subject to tax because the proceeds constitute receipts or accruals of a capital nature, turns on
the further enquiry as to whether the sale amounted to the realization of a capital asset or
whether it was the sale of an asset in the course of carrying on a business or in pursuance of a
profit-making scheme. Where a single transaction is involved it is usually more appropriate to
limit the enquiry to the simple alternatives of a capital realization or a profit-making scheme. In
its normal and most straightforward form, the latter connotes the acquisition of an asset for the
purpose of reselling it at a profit. This profit is then the result of the productive turn-over of the
capital represented by the asset and consequently falls into the category of income. The asset
constitutes in effect the taxpayer’s stock-in-trade or floating capital. In contrast to this the sale of
an asset acquired with a view to holding it, either in a non-productive state or in order to derive
income from the productive use thereof, and in fact so held, constitutes a realization of fixed
capital and the proceeds an accrual of a capital nature.

Notes
This dictum seems to suggest that the concept of a ‘scheme of profit-making’ is applic-
able only to isolated transactions, and that a ‘scheme of profit-making’ is conceptually
distinct from that of ‘trading’ or ‘carrying on business’. Such an interpretation can no
longer be regarded as correct, following the decision in [165] CIR v Pick ’n Pay Employ-
ee Share Purchase Trust.51 In the latter case, the majority judgment held that, (italics
added) ‘a distinction is drawn between the carrying on of a business and the pursuance
of a profit-making scheme. The basis for such distinction is that it is more appropriate to
refer to a profit-making scheme where a single transaction is involved. I accept that a
series of transactions is characteristic of the carrying on of a business. But irrespective of the
number of transactions, whether the receipts that flow from the carrying on of a business are revenue
still depends on whether the business was conducted with a profit-making purpose, ie as part of a
profit-making venture or scheme.’

§3.8 A gift simpliciter is not income

________________________

50 41 Sc LR p 694.
51 1992 (4) SA 39 (A).
 Income: The general concept 213

[133]
Scott v FCT
(1966) 117 CLR 514 (High Court of Australia)
The taxpayer, a solicitor, received a gift of £10 000 from a client, Mrs Freestone. He had
previously acted for her in relation to her husband’s deceased estate for which she had
paid him separately and in full.
Issue: was the amount given to the taxpayer by his client ‘income’?
Held: in the negative. The amount was a gift made out of friendship, and was not a
recompense for services rendered.
Windeyer J: I return to the general concept of income. Whether or not a particular receipt is
income depends upon its quality in the hands of the recipient. It does not depend upon whether
it was a payment or provision that the payer or provider was lawfully obliged to make. The ordi-
nary illustrations of this are gratuities regularly received as an incident of a particular employ-
ment. On the other hand, gifts of an exceptional kind, not such as are a common incident of a
man’s calling or occupation, do not ordinarily form part of his income. Whether or not a gratui-
tous payment is income in the hands of the recipient is thus a question of mixed law and fact.
The motives of the donor do not determine the answer. They are, however, a relevant circum-
stance. It is apposite to quote here a passage from the judgment of Kitto J in The Squatting
Investment Co Ltd v FCT.52 His Honour said: ‘. . . it is a commonplace that a gift may or may not
possess an income character in the hands of the recipient. The question whether a receipt
comes in as income must always depend for its answer upon a consideration of the whole of the
circumstances; and even in respect of a true gift it is necessary to inquire how and why it came
about that the gift was made.’ An unsolicited gift does not, in my opinion, become part of the
income of the recipient merely because generosity was inspired by goodwill and the goodwill can
be traced to gratitude engendered by some service rendered. It was said for the Commissioner
that if a service was such as the recipient was ordinarily employed to give in the way of his calling,
and the gift was a consequence, however indirect, of the donor’s gratitude and appreciation of
that service, then it must necessarily be part of the donee’s income derived from the practice of
his calling . . . But as thus expressed, this proposition is, I think, a mistaken simplification. It was
based upon the fact that in Hayes v FCT Fullagar J regarded as decisive that it was impossible to
relate the receipt of the shares there given to any income-producing activity on the part of the
recipient. In the present case the taxpayer was engaged in an income-producing activity, his
practice as a solicitor, to which it was said the gift could be related. But because the absence of a
particular element was decisive in favour of the taxpayer in one case it does not follow that the
presence of that element is decisive in favour of the Commissioner in another case. The relation
between the gift and the taxpayer’s activities must be such that the receipt is in a relevant sense a
product of them.
I was referred to sentences and phrases in judgments in other cases. I do not think that much is
gained by this . . . I respectfully think that a passage in the judgment of Kitto J, to which I have
already referred, is a wholly accurate and sufficient statement of the general principle which
must govern this case and that I need do no more than quote it and adopt it. His Honour, speak-
ing of the English cases, said: ‘The distinction those decisions have drawn between taxable and
non-taxable gifts is the distinction between, on the one hand, gifts made in relation to some
activity or occupation of the donee of an income-producing character . . . and, on the other hand,
gifts referable to the attitude of the donor personally to the donee personally, . . .’ Here, as in Eng-
land, the words of the statute must be read against the background of the same general idea.
To analyse motives and seek the ultimate causes of conduct can seldom yield any single or sim-
ple result. Mrs Freestone, I assume, would not have made her gift to the taxpayer if she had not
appreciated his help to her and his friendship. If he had not acted for her as he did in relation
to her husband’s estate, if he had not been a friend of her husband, it probably would not have
occurred to her to make him a beneficiary in her distribution of part of the moneys that she got
________________________

52 (1953) 85 CLR 570 at pp 627, 628.

214 Income Tax in South Africa: Cases and Materials

from the estate. He no doubt was aware of this. Nevertheless I do not think that her gift to him
was in a relevant sense given or received as a remuneration or recompense for services rendered
so as to form part of his assessable income.

Notes
This case usefully illustrates that a ‘gift’ in the sense of a payment made in the absence of
a legal obligation is sometimes income in the hands of the recipient and is sometimes
not. The word ‘gift’ is ambiguous. In Roman-Dutch law, a gift prompted by sheer liber-
ality or inspired by disinterested benevolence on the part of a donor was called a donatio
propria or a donatio mera. This category of gift would, it is submitted, never be ‘income’ in
the hands of the recipient. On the other hand, a gift which is, as Windeyer J in Scott puts
it, ‘a gratuity regularly received as an incident of a particular employment’ will be in-
come for the recipient. An example of the latter would be the gifts in [130] G v CIR
(New Zealand) or, presumably, a ‘tip’ given by a customer to a waiter in a restaurant.
It is submitted that in South African tax law no less than in Australia, the principle
holds true that, as Windeyer J said in Scott, ‘whether or not a particular receipt is income
. . . does not depend upon whether it was a payment or provision that the payer or pro-
vider was lawfully obliged to make’. It is therefore submitted that our Appellate Division
in [119] CIR v Lunnon was wrong in holding that an amount which the payer was under
no obligation to pay cannot be ‘for services rendered’ and therefore must be a gift which
is not ‘income’ in the recipient’s hands.
After the decision in Lunnon, para (c) of the definition of ‘gross income’ was amended
to include ‘any voluntary award . . . for services rendered’. It is submitted that this formu-
lation does no more than restate the common law principle, which was recognised in
Scott and misconstrued in Lunnon. Even after the enactment of para (c), the crucial
question will remain whether the payment was given ‘for services rendered’ or for some
other reason.
In Scott the court held, in essence, that the fact that the taxpayer had, in the past, ren-
dered services to the donor, did not suffice to make the gift ‘income’ in his hands, even
if the gratitude which inspired the gift had been engendered by the rendering of those
services. It is submitted that this would hold true in South Africa, both at common law
and in terms of para (c) of the definition of ‘gross income’. On the facts of Scott our
courts would probably apply the test laid down by Corbett JA in [146] Tuck v CIR and
ask what the quid pro quo was for the payment; was it for services or was it given out of
friendship?
It was obviously important that the taxpayer in Scott had been paid for the services
which he had rendered to the donor. This is a significant consideration in the inquiry as
to whether the causal link between the services and the payment has been broken.

§3.9 The periodicity (recurrence, annuality) of a receipt is relevant but not

decisive in determining whether it is income

[134]
SIR v Watermeyer
1965 (4) SA 431 (A), 27 SATC 117
Holmes JA: . . . where ex gratia yearly amounts are payable at will, de jure each payment is a sep-
arate individual gift. The most that the recipient has, in regard to continuance or regularity, is
the spes of recurrence year by year.
 Income: The general concept 215

Notes
An ‘annuity’ is included in the taxpayer’s gross income in terms of para (a) of the defini-
tion of ‘gross income’. The Act does not define ‘annuity’. It was held in Watermeyer that
an amount cannot be an annuity unless the taxpayer has a legal right to more than one
annual payment, hence ex gratia payments, such as were in issue in that case, could not
be an annuity. But where an amount is received on a recurrent basis, can the mere factor
of recurrence bring it within the general concept of ‘income’? In Modderfontein B Gold
Mining Co Ltd v CIR 53 Innes CJ said that ‘annuality of accrual must always be an important
factor in the determination of the nature of money received – though it may not invariably
be decisive’. In CIR v Lunnon54 the same judge observed that ‘[w]hat is sometimes called
annuality is not necessarily a decisive test as to whether a receipt or accrual is capital or
income; but it is an important element to be taken into consideration’. These dicta
suggest that de facto recurrence may, indeed, sometimes be decisive of the income
nature of the amount, even though it is not an ‘annuity’. In Australia, de facto recur-
rence was an important but not of itself a decisive factor in FCT v Dixon, below.

[135]
FCT v Dixon
[1952] 86 CLR 540 (High Court of Australia)
Dixon was employed as a clerk in a shipping company in Australia. On the outbreak of
World War II he resigned in order to enlist in the armed forces, where he served until
discharged in 1945. Prior to his enlistment the shipping company circulated a memor-
andum to its staff which said that, for staff who enlisted for military service, the company
would endeavour to make up the difference between their current wages and their
military pay.
When he enlisted, Dixon gave no undertaking that he would return to the employ of
the company after the war, nor did the company agree to re-employ him.
During 1941 the company paid Dixon the sum of £104, being the difference between
his military pay and the wages he would have received had he remained in the company’s
employ.
Issue: were the amounts paid to the taxpayer by his former employer ‘income’ in his
hands?
Held: in the affirmative. They were expected periodical payments on which the taxpay-
er depended for the maintenance of himself and his dependants and therefore had the
character of ‘income’.
Dixon CJ and Williams J: In the present case we think the total situation of the taxpayer must be
looked at to see whether the receipts of the taxpayer from Macdonald, Hamilton & Co are of an
income character. He was employed at a salary. The war placed him, in common with many oth-
ers, in a position in which he felt it was incumbent upon him to enlist. At the same time to do so
meant that the earnings upon which he and possibly his dependants subsisted would be much
reduced. His employers recognized this fact and intimated that they would do their best to see
that if he decided to join the fighting forces his military pay and allowances would be supple-
mented so that it would not mean a financial loss . . . From the taxpayer’s point of view, it is not
unlikely that when he decided to enlist in the armed services, he relied to some extent upon the
intimation he received from his employers. The result was to keep his income up to the standard
that would have been maintained had he not enlisted. We have advisedly used the word ‘income’
because, from his point of view, the contribution made by his employers meant that the periodi-
cal receipts upon which he depended for the maintenance of himself and his dependants
________________________

53 1923 AD 34, 32 SDATC 202 at 208.

54 1924 AD 94 at 98.
216 Income Tax in South Africa: Cases and Materials

remained at the same level as his civilian employment would have given. From his point of view
therefore the word ‘income’ would be clearly applicable to the total receipts from his military
pay and allowances and from his civilian employers. It does not seem to matter whether these
employers are regarded as his former employers, as his future employers or as the other party to
a suspended employment . . . [I]t is clear that if payments are really incidental to an employ-
ment, it is unimportant whether they come from the employer or from somebody else and are
obtained as of right or merely as a recognized incident of the employment or work . . .
In the present case the employment or service, as we would emphasise, is as a soldier. The
circumstances in which the taxpayer entered into that service were such as to enable him to rely
with more or less confidence on the periodical payments from Macdonald Hamilton & Co
as well as from his military pay, making up an ‘income’ of the level appropriate to civilian service
. . . Because the £104 was an expected periodical payment arising out of circumstances which at-
tended the war service undertaken by the taxpayer and because it formed part of the receipts upon
which he depended for the regular expenditure upon himself and his dependants and was paid to
him for that purpose, it appears to us to have the character of income and therefore to form part
of the gross income within the meaning of s 25 of the Income Tax Assessment Act 1936 – 1943.
Fullagar J: It seems to me that the appellant’s receipts from Macdonald, Hamilton & Co must be
regarded as having the character of income. They were regular periodical payments – a matter
which has been regarded in the cases as having some importance in determining whether particu-
lar receipts possess the character of income or capital in the hands of the recipient, see eg Seymour
v Reed 55 and Atkinson v FCT.56 This consideration, while not unimportant, is not decisive. What is, to
my mind, decisive is that the expressed object and the actual effect of the payments made was to
make an addition to the earnings, the undoubted income, of the respondent . . . What is paid is not
salary or remuneration, and it is not paid in respect of or in relation to any employment of the
recipient. But it is intended to be, and is in fact, a substitute for – the equivalent pro tanto of – the
salary or wages which would have been earned and paid if the enlistment had not taken place. As
such, it must be income, even though it is paid voluntarily and there is not even a moral obligation
to continue making the payments. It acquires the character of that for which it is substituted and
that to which it is added.

§3.10 In determining whether an amount is ‘income’ it is irrelevant that it was

derived from an activity that is illegal, immoral or ultra vires
[136]
CIR v Delagoa Bay Cigarette Co
1918 TPD 391, 32 SATC 47
The company advertised packets of cigarettes worth sixpence for sale at ten shillings.
Each packet contained a numbered coupon. The advertisement stated that the company
would set aside two-thirds of its revenue from sales to a fund from which monthly
prizes would be awarded to the holders of the winning numbers. Two such monthly
distributions were made and in the meantime criminal proceedings were instituted
against the company’s officials for running an illegal lottery. The Commissioner
argued that the distribution of prizes was a disposal of the company’s profits after
they had been earned and was not deductible expenditure, and applied for an inter-
dict to prevent the payment of further prizes on the grounds that this would disable
the company from paying the tax due. The court held that the payment of prizes
in accordance with the contractual terms on which the cigarettes were sold was an out-
going incurred in earning the company’s income, and did not constitute the distri-
bution of income after it had been earned. It was further held that the legality or
illegality of the business which produced the income was irrelevant to liability for income
tax.
________________________

55 (1927) AC 554 at 570.

56 (1951) 84 CLR 298.
 Income: The general concept 217

Bristowe J: I do not think it is material for the purpose of this case whether the business carried
on by the company is legal or illegal. Excess profits duty, like income tax, is leviable on all in-
comes exceeding the specified minimum . . . The source of the income is immaterial. This was so
held in Partridge v Mallandaine57 where the profits of a betting business was held to be taxable to
income tax; Denman J saying that ‘even the fact of a vocation being unlawful could not be set up
against the demand for income tax’. If the income itself is taxable, it follows I think that if the
prizes had been a legitimate deduction had the business been legal, they would equally be a
legitimate deduction if the business is illegal.

Notes
Compare the remarks of Lord Denning in [137] Griffiths v Harrison (Watford) Ltd and
of Fieldsend CJ in [138] COT v G. Can a distinction in this context be drawn between
the proceeds of one kind of crime and those of another, or between a trade involving
incidental breaches of the criminal law (such as trading without the requisite licence)
and a trade which is per se illegal, such as professional robbery, drug-dealing or prostitu-
tion? These are issues which have not yet been decided by the South African courts.

[137]
Griffiths (Inspector of Taxes) v J P Harrison (Watford) Ltd
1963 AC 1
Lord Denning: . . . take a gang of burglars. Are they engaged in trade or an adventure in the
nature of trade? They have an organisation. They spend money on equipment. They acquire
goods by their efforts. They sell the goods. They make a profit. What detail is lacking in their
adventure? You may say it lacks legality, but it has been held that legality is not an essential
characteristic of a trade. You cannot point to any detail that it lacks. But still it is not a trade, nor
an adventure in the nature of trade. And how does it help to ask the question: If it is not a trade,
what is it? It is burglary and that is all there is to say about it.”

Notes
There is no judicial precedent or statutory provision in South Africa which endorses (or
contradicts) Lord Denning’s proposition. As a matter of practice, SARS taxes moneys
derived from prostitution and drug-dealing, and presumably other unlawful trades.
There is currently a debate on whether bribes should be taxable or deductible, and
legislation on this point may follow.
On occasion, the principle that the proceeds of crime are not taxable has been indi-
rectly accepted by the courts on the basis suggested in [138] COT v G, that stolen prop-
erty is not ‘received’ by the thief – but that proposition, it seems, is inconsistent with the
decision in [68] MP Finance Group CC (in liquidation) v CSARS. Compare The ABC
Trust v CSARS 58 in which moneys were contributed by gullible members of the public in a
fraudulent pyramid scheme which promised extravagant returns by way of ‘dividends’.
Those contributions were then misappropriated – in effect stolen – by the promoters,
and were held to be part of the promoter’s gross income on the basis that the moneys
were ‘received’ as contemplated in the definition of gross income. (The court, in what
seems to have been a fundamental oversight, failed to consider whether those receipts
were of a capital nature.) Lord Denning’s proposition, above, is grounded in unarticu-
lated public policy considerations, such as that it is abhorrent for the state to become, in
a sense, complicit in crime by taking a share of the proceeds by way of tax. There would
be other distasteful corollaries to taxing the proceeds of crime. If a gang of burglars is
taxable on what they steal, are they then entitled to deduct the cost of the dynamite they
________________________

57 18 QBD 276.
58 (2005) TPD (unreported).
218 Income Tax in South Africa: Cases and Materials

use to blow open the safe, and the cost of the petrol used by their getaway car? Would a
professional assassin be entitled to a depreciation allowance on the murder weapon and
a deduction for the cost of the bullets?
Some commentators suggest that a more sensible and ethical course of action is to
allow the criminal justice system to deal with the proceeds of crime, inter alia by way of
fines and forfeiture to the state of property used in the commission of crime, and to
ignore, for tax purposes, the expenditure incurred in the commission of crime and the
proceeds of crime. But is such a blanket solution sensible? Would it mean that SARS
cannot tax the proceeds of a business that is being conducted without a licence or by an
illegal immigrant?

[138]
COT v G
1981 (4) SA 167 (ZA), 43 SATC 159
Over a period of four years the taxpayer was in a position of responsibility with the
Government in which he was entrusted with funds for secret operations. He took ad-
vantage of his position to obtain from the Government from time to time more money
than was legitimately required for official purposes and to appropriate this for himself,
either by putting it in his own bank account or by using it to buy goods for himself. Over
the period he stole some $58 000. He was convicted and sentenced to imprisonment, a
part of which was suspended on condition of repayment. The whole amount was repaid
by him.
Issue: was the taxpayer assessable to income tax on the moneys which he had stolen?
Held: in the negative. The money which the taxpayer stole was not ‘received’ by him
within the meaning of that word in the definition of ‘gross income’.
Fieldsend CJ: This appeal concerns the novel and interesting question whether amounts stolen
by a person during a year of assessment form part of his gross income and so become assessable
to tax.
...
The respondent was assessed to tax on the amounts he stole, and to penalties in terms of s 35 of
the Income Tax Act Chap 181 (Z) . . .
The argument for the appellant is simple. He contends that gross income as defined by s 8(1) of
the Act means every amount received by or accrued to or in favour of a person in any year of
assessment, and that what the respondent stole he received in terms of that definition.
The respondent’s argument is equally simple. It is that the money the respondent took never
became his, despite his intention to treat it as his own, and was therefore never received by him
within the meaning of that word as used in the definition of gross income in s 8.
...
The essential issue in this appeal is whether the respondent received the money he stole within
the meaning of that word in s 8(1) of the Act.
The section reads:
‘“Gross income” means the total amount received by or accrued to or in favour of a person . . .’
...
I can see no warrant on the face of the statute for construing the word ‘received’ in s 8 in any but
its ordinary meaning. To extend it to cover a unilateral taking such as theft, which in any event
confers no right upon the taker to the things taken, would be to give the word a meaning that
could not be justified on any rational construction of the Act as a whole. In short a thief takes, he
does not receive, and that is what the respondent in this case did.
The Commissioner’s contentions may superficially appear to have substance in them when what
is stolen is money, but they must be tested on the basis of whether they are sound if what is sto-
len is a corporeal thing. In short, is a burglar taxable on what he steals?
 Income: The general concept 219

I appreciate that the relevant English tax legislation is based upon taxation of the profits of
trade, but the remarks, albeit obiter, of Lord Denning in Griffiths v J P Harrison (Watford) Ltd 59 are
of interest in showing the need for a common sense approach. He said:
‘. . . take a gang of burglars. Are they engaged in trade or an adventure in the nature of trade? They have
an organisation. They spend money on equipment. They acquire goods by their efforts. They sell the
goods. They make a profit. What detail is lacking in their adventure? You may say it lacks legality, but it has
been held that legality is not an essential characteristic of a trade. You cannot point to any detail that it
lacks. But still it is not a trade, nor an adventure in the nature of trade. And how does it help to ask the
question: If it is not a trade, what is it? It is burglary and that is all there is to say about it.’
In my view the taxpayer in the appeal before us did not receive the money, he stole it.
This I think is a sufficient basis upon which to decide the appeal, but I would not be doing jus-
tice to the argument if I were to leave the matter there.
It was common cause that the word ‘received’ was not to be given its ordinary wide meaning and
that it had to be limited at least to meaning ‘received as part of the recipient’s patrimony’. This
concession, if it can be rightly so called, by the Commissioner is obviously correct. A person who
borrows a lawnmower from his neighbour receives it from him in the broadest sense of the term,
but would clearly not receive it within the meaning of the word in the definition. The same is the
case in regard to a person who obtains from another a sum of money as a loan, . . . This conclu-
sion is reinforced by a case such as Geldenhuys v CIR 60 in which it was held that a usufructuary did
not receive the money as part of his ‘gross income’ for the purpose of the equivalent South Afri-
can tax legislation. Steyn J 61 held that ‘received by’ must mean ‘received by the taxpayer on his
own behalf and for his own benefit’.
Whether or not the respondent in this appeal received the money on his own behalf and for his
own benefit must depend not only on his own intention but on the intention of the person who
passed the money on to him. To return for the moment to the lawnmower, the person who ob-
tains a lawnmower from his neighbour genuinely intending to return it does not receive the
mower in his own right; nor does a person who fraudulently induces his neighbour to lend him
his mower intending to keep it for himself. The intention of the taker cannot of itself result in
him receiving the thing in his own right. He can only receive the thing in his own right if the
giver intends that result as well.
Applying this to the present appeal, the Government never intended that any of the money it
paid to the respondent should be his to do with it as he liked. It was all paid to him to be applied
to a specific Government purpose. Accordingly at no time did the respondent receive it on his
own behalf and for his own benefit. In my view, therefore, it did not fall within his gross income
and he should not have been taxed on it.

Notes
The broad principle underlying this decision that stolen property is not ‘re-
ceived’ by a thief who is therefore not taxable on the amount as it does not
form part of his ‘gross income’ is no longer good law as it is inconsistent with
the decision in [68] MP Finance Group CC (in liquidation) v CSARS.

________________________

59 1963 AC 1 at 20.
60 1947 (3) SA 256 (C).
61 At 260.
 6
TRADING OR CARRYING ON BUSINESS
AND SCHEMES OF PROFIT-MAKING

§ Page
1 Introduction ............................................................................................................. 223
[139] The nature and relevance of ‘trading’ ...................................................... 223
2 Badges of trade ........................................................................................................ 224
[140] UK Royal Commission on Taxation of Profits and Income ..................... 224
3 The concept of trading in South African tax law ................................................... 226
[141] The approach of the South African courts ............................................... 226
[142] Burgess v CIR .............................................................................................. 227
[143] Natal Estates Ltd v SIR ................................................................................ 232
[144] ITC 1185 ...................................................................................................... 233
[145] De Beers Holdings v CIR ............................................................................ 234
3.1 Payments in restraint of trade ........................................................................ 235
[146] Tuck v CIR ........................................................................................... 236
[147] ITC 1549 .............................................................................................. 238
4 Sales in the course of a trade or scheme of profit-making contrasted
with mere realisation of a capital asset ................................................................... 240
[148] CIR v Niko ................................................................................................... 240
[149] Natal Estates Ltd v SIR ................................................................................ 242
[150] Realisation Company v COT ...................................................................... 243
[151] Berea West Estates (Pty) Ltd v SIR............................................................. 244
[152] CSARS v Founders Hill (Pty) Ltd ............................................................... 249
[153] Elandsheuwel Farming (Edms) Bpk v SBI ................................................ 256
[154] Berea Park Avenue Properties (Pty) Ltd v CIR ......................................... 256
[155] CIR v Volkswagen of SA (Pty) Ltd.............................................................. 260
5 Isolated and recurrent transactions ........................................................................ 262
[156] CIR v Strathmore Exploration Ltd ............................................................ 262
[157] Stephan v CIR ............................................................................................. 263
[158] Natal Estates Ltd v SIR ................................................................................ 264
[159] Oryx Mining and Exploration (Pty) Ltd v Secretary for Finance ............ 266
6 A hobby contrasted with a trade or scheme of profit-making ............................... 266
[160] ITC 1510 ...................................................................................................... 266
7 Schemes of profit-making ....................................................................................... 267
7.1 General principles ........................................................................................... 267
[161] Overseas Trust Corporation Ltd v CIR .............................................. 268
[162] Elandsheuwel Farming (Edms) Bpk v SBI ......................................... 269
[163] ITC 1379 .............................................................................................. 269
221
222 Income Tax in South Africa: Cases and Materials

§ Page
[164] ITC 1222 .............................................................................................. 271
[165] CIR v Pick ’n Pay Employee Share Purchase Trust ........................... 272
7.2 The intention of a company ........................................................................... 277
[166] CIR v Richmond Estates (Pty) Ltd ..................................................... 277
[167] SIR v Trust Bank of Africa Ltd............................................................ 277
7.3 Dominant intention, dual intention, and alternative intentions ................. 278
[168] COT Southern Rhodesia v Levy ......................................................... 278
[169] CIR v Leydenburg Platinum Ltd ........................................................ 280
[170] Ropty (Edms) Bpk v SIR ..................................................................... 283
[171] Ropty (Edms) Bpk v SIR ..................................................................... 284
7.4 Changes of intention ...................................................................................... 286
[172] CIR v Richmond Estates (Pty) Ltd ..................................................... 286
[173] John Bell and Co (Pty) Ltd v SIR ....................................................... 287
[174] Natal Estates Ltd v SIR ........................................................................ 288
[175] Elandsheuwel Farming (Edms) Bpk v SBI ......................................... 290
[176] CIR v Modified Investments (Pty) Ltd ............................................... 291
[177] SIR v Rile Investments (Pty) Ltd ........................................................ 293
[178] Greenband Properties (Pty) Ltd v CIR .............................................. 293
8 Immovable property transactions ........................................................................... 295
[179] CIR v Stott ................................................................................................... 295
[180] CIR v Richmond Estates (Pty) Ltd ............................................................. 299
[181] Natal Estates Ltd v SIR ................................................................................ 302
[182] Elandsheuwel Farming (Edms) Bpk v SBI ................................................ 307
[183] CIR v Strathmore Exploration Ltd ............................................................ 314
[184] CIR v Wyner ................................................................................................ 315
9 Share dealing and schemes of profit-making involving shares ............................. 319
[185] African Life Investment Corporation (Pty) Ltd v Secretary for Inland
Revenue ..................................................................................................................... 319
[186] CIR v Tod .................................................................................................... 324
[187] SIR v Trust Bank of Africa Ltd ................................................................... 328
[188] Barnato Holdings Ltd v SIR ....................................................................... 333
[189] Bloch v SIR .................................................................................................. 336
[190] CIR v Nussbaum .......................................................................................... 340
10 Gambling profits and losses .................................................................................... 344
[191] Brajkovich v FCT ......................................................................................... 344
11 Trading stock ........................................................................................................... 346
[192] Richards Bay Iron & Titanium (Pty) Ltd v CIR ......................................... 346
 Trading or Carrying on Business and Schemes of Profit-Making 223

§1 Introduction
[139]
The nature and relevance of ‘trading’
RC Williams, Income Tax in South Africa: Law and Practice, chap 7 (revised and updated)
In CIR v George Forest Timber Company Ltd 1 de Villiers JA said,
‘The fact to remember . . . is that whatever a person receives in the way of his trade, business, or profession
is income – Stevens v Hudson Bay Company (101 LJ 96).’
For many years, this simple principle held true in South Africa. However, a significant
gloss was introduced by the majority judgment of the Appellate Division in [165] CIR v
Pick ’n Pay Employee Share Purchase Trust.2 In the latter case it was held that, (italics
added) ‘a distinction is drawn between the carrying on of a business and the pursuance
of a profit-making scheme. The basis for such distinction is that it is more appropriate to
refer to a profit-making scheme where a single transaction is involved. I accept that a
series of transactions is characteristic of the carrying on of a business. But irrespective of the
number of transactions, whether the receipts that flow from the carrying on of a business are revenue
still depends on whether the business was conducted with a profit-making purpose, ie as part of a
profit-making venture or scheme.’
In other words, it is no longer true to say that the proceeds of any business are income;
it is only if the business constituted a ‘scheme of profit-making’ that the proceeds thereof
will be income.
Nonetheless, the concepts of a ‘trade’ and ‘trading’ are still important at common law
and in terms of the Income Tax Act. For example, the opening words of s 11 refer to
‘carrying on a trade’ and the deductions available under the various sub-sections of s 11
are available only if the taxpayer is trading. And s 23(g) states that no deduction from
trading income is permitted ‘to the extent to which such moneys were not laid out or
expended for the purposes of trade’.
The Act3 defines ‘trade’ as including every profession, trade, business, employment,
calling, occupation or venture, including the letting of any property and including the
use or grant of permission to use any patent, or any design, or any trade mark or any
copyright, (as defined in the Patents Act,4 Trade Marks Act5 or Copyright Act6) or any
other property which in the opinion of the Commissioner is of a similar nature. Strictly
speaking, therefore, a ‘trade’ is wider than and includes a ‘business’. In practice the
courts and the literature use the terms ‘trade’ and ‘business’ (and ‘trading’ and ‘carrying
on business’) as synonyms.
The largely circular statutory definition of ‘trade’ adds little to the ordinary meaning
of the word. Hence the question whether the transactions or activity engaged in by the
taxpayer constitute a trade depends on ‘whether the operations involved in it are of the
________________________

1 1924 AD 516 at 529, 1 SATC 20. See also COT v Booysens Estates Ltd 1918 AD 576. In the latter case the
taxpayer company had been formed in 1899 to acquire certain mining claims and property and to mine
for gold and other minerals. Its articles of association also empowered it to sell and lease its property. In
1915 the company sold all its mining property and went into liquidation. The question was whether the
profit on the sale of its assets was assessable to income tax. Both Innes CJ (at 594) and Maasdorp JA (at
601) said that, as in England, the taxability of such profits depended on whether they had been made in
respect of a trade or business. If so, tax would be payable, but if the transaction was merely a realisation or
change of investment, it would not be subject to tax. The present Income Tax Act still contains no refer-
ence, in its definition of ‘gross income’, to trade or business.
2 1992 (4) SA 39 (A).
3 S 1 sv ‘trade’.
4 Act 37 of 1952.
5 Act 62 of 1963.
6 Act 63 of 1965.
224 Income Tax in South Africa: Cases and Materials

same kind, and carried on in the same way, as those which are characteristic of ordinary
trading in the line of business in which the venture was made’.7
The fact that a taxpayer is ‘trading’ is relevant to the tax treatment of both incomings
and outgoings. Non-capital receipts and accruals arising out of the trade are included in
the taxpayer’s ‘gross income’,8 (provided that the trade constituted a ‘scheme of profit-
making – see the principle laid down in CIR v Pick ’n Pay Employee Share Purchase Trust, as
summarised supra) while non-capital trading expenditure qualifies as a deduction in the
determination of ‘taxable income’.9 Expenditure incurred before a taxpayer commences
trading is ‘preliminary expenditure’ and is not deductible.10 The question of whether the
taxpayer is ‘trading’ is also relevant to his entitlement to set off an assessed loss in one
trade against income from another trade11 and in regard to his entitlement to carry
forward the balance of an assessed loss into the following year of assessment.12
The cases use a variety of terms to connote the activity of ‘trading’ in property or ‘car-
rying on business’ with property as distinct from holding it as a capital asset. In the
context of shares the cases speak of ‘share-dealing’ or ‘investment-dealing’ as opposed to
‘investment-holding’. In the context of fixed property, the expression ‘land-jobber’ or
‘land-dealer’ means a trader in land. The term ‘stock-in-trade’ or ‘trading stock’ con-
notes the property in which the taxpayer deals in the course of a business or trade, such
as the food on a supermarket shelf, shares held by a dealer in shares, or land held by a
dealer in land.13
A person can carry on any number of trades simultaneously. Thus for example the fact
that the taxpayer is a medical doctor and spends his working days in a hospital does not
preclude the possibility that he is simultaneously carrying on business as a farmer, a
dealer in land, shares, stamps, antiques, etc.

§2 Badges of trade
[140]
UK Royal Commission on Taxation of Profits and Income
(Cmd 9474)
109. If the law is not to be altered in any such radical fashion, it is necessary to enquire whether
the existing treatment of what, for convenience, we will call capital profits rests on a satis-
factory basis. All profits that arise from the utilization of property are made in a sense out
of capital; but, as we have explained above, the law has established a distinction between
the profit that arises when property has been committed to a trade or ‘an adventure or
concern in the nature of trade’ as part of its merchantable stock and is then realised in
the course of trading operations and the profit that arises from a realization of property
not so committed. The one is taxable income, the other not . . . The conception causes no
difficulty in the case of profits from ordinary trading: but it is evident that it requires the
drawing of a very fine line when it has to be applied to the case of the isolated transaction
which may be on the one hand the product of a trading venture or on the other hand a
mere change of investment.
...
________________________

7 IRC v Livingston (1927) 11 TC 538 at 542.

8 See the definition of ‘gross income’ in s 1.
9 S 11(a) read with s 23(g).
10 Borstlap v SBI 1981 (4) SA 836 (A), 43 SATC 195. But expenditure which satisfies s 11(bA) will be deducti-
ble, being a statutory exception to this principle.
11 S 20(1)(b).
12 S 20(1)(a).
13 See s 1 sv ‘trading stock’.
 Trading or Carrying on Business and Schemes of Profit-Making 225

111. . . . [W]e set ourselves to enquire whether there was any general rule that could advanta-
geously be propounded as a simple test that would separate the taxable case from the non-
taxable one. Two suggestions seemed worthy of detailed consideration.
112. One was that the profit arising from any realization of property should be declared by law
to be taxable income if the property had been acquired with a view to profit seeking. This
seems to have been the kind of test envisaged by the 1920 Commission where they speak
of ‘any profit made on a transaction recognizable as a business transaction, ie, a transaction
in which the subject matter was acquired with a view to profit-seeking’ [Cmd 615, para 91].
The difficulty about applying this is that, in any normal sense of the words, a ‘view to prof-
it-seeking’ may accompany many transactions that would not be called business transac-
tions. Since few investors can expect that their investment will remain exactly stable in value in
their hands they are bound to contemplate the probabilities of rise or fall and it is hardly to
be expected that they will not choose one for which they hope or expect a rise. Yet hitherto
the law has refused to treat the presence of this expectation as conclusively identifying a
taxable profit. ‘An accretion to capital’, said Lord Buckmaster in the House of Lords
[Leeming v Jones (1930) 15 TC 333 at 357] ‘does not become income merely because the
original capital was invested in the hope and expectation that it would rise in value’.
113. Lord Buckmaster’s dictum is perhaps too frequently invoked, since it is expressed in very
guarded form. But we regard a test that depends on the motive or view of a person at the
date of acquisition (which may have occurred years before the question comes under re-
view) as a bad general test for the purpose that we have in mind. There are many fields in
which the law has to concern itself with ascertaining motive, but a tax appeal is not well
suited for this kind of enquiry . . .
114. If, as we conclude, the only useful test must be one of an objective kind, there is much to
be said for a rule that treats as taxable income every profit that arises from a realization
made within some fixed period after the acquisition. It is natural to think of a period of 12
months. Such a rule would go a very long way towards identifying the ‘deal’, which is just
the ‘adventure in the nature of trade’ that we have in mind . . .
115. But, on the whole the drawbacks of such a fixed rule seem to us to outweigh its ad-
vantages. If all profitable realizations achieved within the period are income then unprof-
itable realizations are losses which according to our present conceptions would be
allowable against other income: and this would amount to an invitation to take the losses
within the 12 months and to defer the gains. If on the other hand the scheme was to be
that a profit made after the close of the period might still be, though would not necessari-
ly be, a taxable profit, depending on its circumstances, there would be no simple general
rule for deciding such cases and the position as a whole would not be much advanced . . .
116. We concluded that it was better that there should be no single fixed rule. This means that
each case must be decided according to its own circumstances. The general line of en-
quiry that has been favoured by appeal Commissioners and encouraged by the courts is to
see whether a transaction that is said to have given rise to a taxable profit bears any of the
‘badges of trade’. This seems to us the right line, and it has the advantage that it bases it-
self on objective tests of what is a trading adventure instead of concerning itself directly
with the unravelling of motive. At the same time we have noticed that there has been
some lack of uniformity in the treatment of different cases according to the tribunals be-
fore which they have been brought. This seems to us unfortunate and, for the sake of clar-
ity, we have drawn up and set out below a summary of what we regard as the major
relevant considerations that bear upon the identification of these ‘badges of trade’.
(1) The subject matter of the realization. While almost any form of property can be acquired
to be dealt in, those forms of property, such as commodities or manufactured arti-
cles, which are normally the subject of trading are only very exceptionally the subject
of investment. Again property which does not yield to its owner an income or per-
sonal enjoyment merely by virtue of its ownership is more likely to have been ac-
quired with the object of a deal than property that does.
(2) The length of the period of ownership. Generally speaking, property meant to be dealt in
is realized within a short time after acquisition. But there are many exceptions from
this as a universal rule.
226 Income Tax in South Africa: Cases and Materials

(3) The frequency or number of similar transactions by the same person. If realizations of the
same sort of property occur in succession over a period of years or there are several
such realizations at about the same date a presumption arises that there has been
dealing in respect of each.
(4) Supplementary work on or in connection with the property realized. If the property is worked
up in any way during the ownership so as to bring it into a more marketable condi-
tion; or if any special exertions are made to find or attract purchasers, such as the
opening of an office or large-scale advertising, there is some evidence of dealing. For
when there is an organized effort to obtain profit there is a source of taxable income.
but if nothing at all is done, the suggestion tends the other way.
(5) The circumstances that were responsible for the realization. There may be some explanation,
such as a sudden emergency or opportunity calling for ready money, that negatives
the idea that any plan of dealing prompted the original purchase.
(6) Motive. There are cases in which the purpose of the transaction of purchase and sale
is clearly discernible. Motive is never irrelevant in any of these cases. What is desira-
ble is that it should be realised clearly that it can be inferred from surrounding cir-
cumstances in the absence of direct evidence of the seller’s intentions and even, if
necessary, in the face of his own evidence.

§3 The concept of trading in South African tax law

[141]
The approach of the South African courts
14
Williams, Income Tax in South Africa: Law and Practice
The courts of the United Kingdom rely heavily on the so-called ‘badges of trade’ in determining
whether a particular transaction by a particular taxpayer constituted ‘trading’.15 . . .
The courts in the Republic do not recognise ‘badges of trade’ as such, and the Margo Commission
expressly disapproved using them as criteria of trading.16 In the Republic many judicial decisions
have regarded the taxpayer’s intention vis-à-vis the property in question as the decisive or at least
the dominant factor in determining whether his actions amount to trading.17 Thus, if he acquired
the property intending to hold it as a capital asset, then (unless he has, in the interim, had a
‘change of intention’ or unless his original intention incorporated a secondary purpose of trading)
its sale yields capital, not income. On the other hand, if he acquired the property with the inten-
tion of selling it at a profit using the property as stock-in-trade,18 then a sale thereof will be a
trading transaction (unless he has in the interim changed his intention to one of holding the
property as a capital investment).
In CIR v Pick ’n Pay Employee Share Purchase Trust 19 the Appellate Division held in its majority judg-
ment that:

________________________

14Chap 7 at pp 90-91.
15See the Final Report of the Royal Commission on Profits and Income, Cmd 9474.
16Margo Report 12.28.
17Thus in CIR v Stott 1928 AD 252, 3 SATC 253 Wessels CJ said at 264 (and his dictum was cited with approv-
al in CIR v Lydenburg Platinum Ltd 1929 AD 137, 4 SATC 8 at 19) that: ‘It is unnecessary to go so far as to
say that the intention with which an article or land is bought is conclusive as to whether the proceeds de-
rived from a sale are taxable or not. It is sufficient to say that the intention is an important factor and un-
less some other factor intervenes to show that when the article was sold it was sold in pursuance of a
scheme of profit-making, it is conclusive in determining whether it is capital or gross income. (Italics add-
ed.) In SIR v Trust Bank of Africa Ltd 1975 (2) SA 652 (A), 37 SATC 87 at 104, Botha JA approved of the
approach of the court a quo in regarding the taxpayer’s intention on acquisition of the property in ques-
tion as ‘of the utmost importance though not necessarily decisive’; see also at SATC 105.
18 This was the formulation expressed in Natal Estates Ltd v SIR 1975 (4) SA 177 (A), 37 SATC 193 at 220.
19 (1992) 54 SATC 271 (A) at 281.
 Trading or Carrying on Business and Schemes of Profit-Making 227

‘Contemplation is not to be confused with intention . . . In a tax case one is not concerned with what possi-
bilities, apart from his actual purpose, the taxpayer foresaw and with which he reconciled himself. One is solely
concerned with his object, his aim, his actual purpose.’
Recent decisions have not accorded the taxpayer’s intention the same degree of importance. The
Appellate Division held recently that, in deciding whether a receipt is income or capital:
‘A variety of circumstances come into play, eg the nature of the investment asset, the character of the investor,
the intention with which the asset had been acquired, any change in such intention and the circumstances
surrounding disposals. And it is inherent in the very nature of the exercise that no single circumstance can be
20
elevated to decisive pre-eminence.’
By ‘change of intention’ in this context is meant not merely a subjective change of mind by the
taxpayer in relation to the property; it has been held that ‘something more is required’.21 This
‘something more’, it seems, means the manifestation of the subjective change of mind in an external
way. ‘For example, the taxpayer must already be trading in the same or similar kinds of assets, or he
then and there starts some trade or business or embarks on some scheme for selling such assets for
profit and, in either case, the asset in question is taken into or used as his stock-in-trade’.22
23
The Appellate Division has held that:
‘If a taxpayer pursues a course of conduct which, standing on its own, constitutes the carrying on of a
trade, he would not, in my view, cease to be carrying on a trade merely because one of his purposes, or
even his main purpose, in doing what he does is to obtain some tax advantage. If he carries on a trade, his
motive for doing so is irrelevant . . . Of course the position might be different if a transaction ‘is so affect-
ed or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a
24
trading transaction’.
The badges of trade of English law are useful in South Africa as indiciae of the circumstances that
are typical of trading.

If a taxpayer pursues a course of conduct which, standing on its own, constitutes the carrying on of
a trade, he does not cease to be carrying on a trade merely because one of his purposes, or even his
main purpose, in doing what he does, is to obtain a tax advantage; if he carries on a trade, his
motive for doing so is irrelevant. It is well-established that the definition of ‘trade’ should be given a
wide interpretation and includes a ‘venture’, being a transaction in which a person risks something
with the object of making a profit
[142]
Burgess v CIR
(1993) 55 SATC 185 (Appellate Division)
The taxpayer (with other investors, as partners in a partnership en commandite) em-
barked on a scheme, the essence of which was that the partnership borrowed money
from a bank and invested it for a short period (one or two years) in assets such as shares
via a single-premium pure endowment policy, on terms which limited the taxpayer’s
potential losses but would entitle him to 90% of any increase in the value of the assets. In
other words, the taxpayer would not purchase the shares directly, but would take out a
single premium pure endowment policy with an insurance company, and the insurance
company would acquire the shares. The policy would be ceded to the bank as security for
the borrowed money.
The investment would be entered into not by the taxpayer individually, but by a part-
nership en commandite25 of which he was a member.
________________________

20 CIR v Guardian Assurance Co South Africa Ltd 1991 (3) SA 1 (A) at 19B.
21 John Bell & Co (Pty) Ltd v SIR 1976 (4) SA 415 (A) at 429C, 38 SATC 87.
22 Ibid.
23 Burgess v CIR (1993) 55 SATC 185 at 194.
24 The quotation is from FA & AB Ltd v Lupton (Inspector of Taxes) [1972] AC 634 at 644E.
25 Unlike an ordinary partner, a partner en commandite is not jointly and severally liable to creditors of the
partnership for partnership debts, he is liable only to his co-partners and his liability to them is limited to
the capital amount contributed by him to the partnership. In this case, the partnership deed provided that
the taxpayer would be liable only for an amount equal to the amount of the bank guarantee.
228 Income Tax in South Africa: Cases and Materials

The investment in the form of such an endowment policy limited the risk to the inves-
tor, since the insurance company would issue a policy with a surrender value that was
guaranteed if the policy was surrendered after the defined period of one or two years,
such surrender value being equivalent to the amount invested plus four per cent. The
investors were to borrow money at 12.5% interest, which limited the investors’ potential
loss to eight and a half per cent.
To cover this potential loss, the investor paid the bank to issue a bank guarantee. This
was the only outlay by the investor, and represented the maximum amount he could
lose. If the shares rose in value, the partnership deed provided that he would receive
90% of the profits made by the partnership. Since the policy taken out by the investor
was a non-standard policy in terms of the Sixth Schedule, any such gain would form part of
the investor’s gross income in terms of paragraph (eA) of the definition of ‘gross income’.
It was suggested to the taxpayer that, with the stock then market booming, he could
achieve a return of 15% to 20% return on his investment.
As a partner in an en commandite partnership, the investor would not be liable for
partnership debts except to the extent of the bank guarantee.
The insurance company was to manage the money contributed in this way by the en
commandite partnership by investing the funds in shares.
The proposers of the scheme suggested that the arrangement held certain tax ad-
vantages to investors, inter alia that the interest payable by them on the bank loan taken
out by their partnership would be tax-deductible.
Five months after the taxpayer entered into the scheme, the stock market crashed and
the value of the shares plummeted. The insurance company was consequently unable to
pay more than the minimum amount guaranteed by it.
The partnership accounts reflected a loss of R477 740 in respect of loan interest paya-
ble to the bank, and this loss was allocated to the taxpayer. The taxpayer claimed this
interest as a deduction in terms of s 11(a). (Later, it was realised that this figure was
erroneous, and that the correct amount was R425 000.)
Issue: was this interest deductible in terms of s 11(a) of the Income Tax Act? In particu-
lar, was the Special Court correct in holding that the taxpayer had not shown that the
expenditure had been incurred in the production of income derived by him ‘from
carrying on any trade’ within the meaning of s 11(a)?
Held: the incurral of the interest satisfied the requirements for deductibility in s 11(a),
and the interest was therefore deductible.
Held, further: the scheme was designed to achieve the commercial results of a short-
term gain on the investment of borrowed money with some limitation on the extent of
possible losses, and no part of the structures could be described as artificial. Each part of
the scheme was designed for a commercial purpose.
Held, further: if a taxpayer pursues a course of conduct which, standing on its own,
constitutes the carrying on of a trade, he does not cease to be carrying on a trade merely
because one of his purposes, or even his main purpose, in doing what he does, is to
obtain a tax advantage; if he carries on a trade, his motive for doing so is irrelevant. The
taxpayer’s evidence is that his main purpose in making the investment was to make a
profit; had to be accepted.
Held, further: it is well-established that the definition of ‘trade’ should be given a wide
interpretation and includes a ‘venture’, being a transaction in which a person risks
something with the object of making a profit. The appellant clearly undertook a venture
in that sense, in that he laid out the money required to obtain a bank guarantee, and
stood to lose that money, in the hope of making a profit; it was a speculative enterprise
par excellence.
 Trading or Carrying on Business and Schemes of Profit-Making 229

Held further: the insurance policy in issue did not constitute a capital asset.
Held accordingly that interest expenditure in respect of the loan from the bank quali-
fied for deduction in terms of s 11(a) of the Income Tax Act.
EM Grosskopf JA: (CORBETT CJ, VIVIER JA, KUMLEBEN JA AND NIENABER JA CONCURRING)
. . . The point in issue is whether the Commissioner for Inland Revenue was correct in holding
that a liability for interest which had accrued was, in the circumstances of the case, not a permis-
sible deduction in terms of s 11(a) of the Act. The Special Court held in favour of the Commis-
sioner, dismissed the appellant’s appeal and confirmed the assessment in which the claim for a
deduction was disallowed. . .
Although the loss in question was suffered by the partnership, it was common cause that, in
principle, the appellant was entitled to deduct his share of the loss from his personal income.
26
See Sacks v CIR . Section 24H of the Act was not yet in force in the relevant tax year and need
not be considered. The only question in issue in this appeal is whether the deduction of interest
claimed by the appellant is permissible in terms of the general deduction formula laid down in s
11(a) of the Act.
This provision reads as follows:
‘For the purpose of determining the taxable income derived by any person from carrying on any trade
within the Republic, there shall be allowed as deductions from the income of such person so derived–
(a) expenditure and losses actually incurred in the Republic in the production of the income, provided
such expenditure and losses are not of a capital nature;’
The Special Court held that the deduction for interest had rightly been disallowed because the
appellant had not shown that the expenditure had been incurred in the production of income
derived by him ‘from carrying on any trade’. The first main issue on appeal was whether the
Special Court was correct in this view.
In terms of s 1 of the Act ‘“trade” includes–
‘every profession, trade, business, employment, calling, occupation or venture, including the letting of any
property and the use of or the grant of permission to use any patent . . . or any design . . . or any trade
mark . . . or any copyright . . . or any property which is of a similar nature.’
Mr Levin, who appeared for the Commissioner in this appeal, argued that there were two reasons
why the appellant’s activities could not be regarded as the carrying on of a trade. The first was
that the appellant’s actual purpose in making the investment was to reap the reward flowing
from the fiscal advantages. The possibility of the scheme generating a commercial return, he
contended, was contemplated, but was merely incidental. In short, he contended that, on the
facts properly construed, the appellant did not engage in a trade, the scheme being nothing
more than a tax engineering device. The fiscal advantage to which he referred was the tax de-
ferment, which I mentioned earlier, arising from the difference in time between the accrual of
the liability to pay interest to [the bank] and the accrual of the benefits under the policy. . .
At the outset it should be emphasised that we are not here dealing with an attack by the Com-
missioner on an alleged tax avoidance scheme in terms of [the general anti-avoidance provision
in] s 103 of the Act. The sole question before us is whether the appellant was carrying on a trade
within the meaning of s 11(a). . . On a proper analysis of the facts the partnership existed only
as a part of the structure through which the appellant participated in the scheme. It is the legal
effect of his participation that has to be determined. . .
Mr Levin’s argument on this aspect of the case was based purely on the appellant’s supposed
purpose in entering into the transaction, namely, on the proposition that, although it was a part of
the appellant’s purpose to make a profit out of the transaction, his main purpose was to secure the
fiscal advantage of a tax deferment. This argument postulates that, but for the appellant’s purpose
to secure a tax advantage from the scheme, he would have been carrying on a trade.
I do not think that this argument is sound in law, even if the facts supported it. If a taxpayer
pursues a course of conduct which, standing on its own, constitutes the carrying on of a trade, he
would not, in my view, cease to be carrying on a trade merely because one of his purposes, or

________________________

26 1946 AD 31.
230 Income Tax in South Africa: Cases and Materials

even his main purpose, in doing what he does is to obtain some tax advantage. If he carries on a
trade, his motive for doing so is irrelevant . . . Of course the position might be different if a
transaction ‘is so affected or inspired by fiscal considerations that the shape and character of the
27
transaction is no longer that of a trading transaction’ (Lupton’s case. ). That is clearly not the
case here. As I have pointed out, the shape and character of the transaction in the present case
were inspired entirely by commercial considerations. . .
[The judgment analysed the evidence in regard to whether the taxpayer had entered into the
scheme to secure a fiscal advantage and continued:]
In my view the appellant’s evidence that his main purpose in making the investment was to make
a profit from it has not been impaired in any way, and must stand.
I turn now to the second ground advanced by Mr Levin in support of the proposition that the
appellant was not carrying on a trade. This argument presupposes that the appellant’s main
purpose in entering into the scheme was to earn a profit. Nevertheless, it is contended, ‘an “in-
vestment” of the nature in question will not, as a matter of law, and on the common cause facts
amount . . . to the carrying out of a trade’ (I quote from the heads of argument).
It is well-established that the definition of trade, which I have quoted above, should be given a
28
wide interpretation. In ITC 770 Dowling J said, dealing with the similar definition of ‘trade’ in
29
Act 31 of 1941, that it was ‘obviously intended to embrace every profitable activity and . . . I
think should be given the widest possible interpretation.’
In the present case the appellant argued that its participation in the scheme amounted to a ‘ven-
30
ture’ which is included in the definition of ‘trade’. In ITC 368 ‘venture’ is defined as ‘a transac-
tion in which a person risks something with the object of making a profit’. This is borne out by
dictionary definitions. Thus, The Oxford English Dictionary gives us the appropriate definition ‘an
enterprise of a business nature in which there is considerable risk of loss as well as chance of
gain; a commercial speculation.’ Webster’s Third New International Dictionary gives ‘a business en-
terprise of speculative nature.’ See also the definitions quoted in ITC 1476 (1989) 52 SATC 141
at p 148. In the Afrikaans text of the Act s 11 speaks of a bedryf which is defined to include, inter
alia, elke professie, handelsaak, besigheid, diens, beroep, vak of onderneming’. The word onderneming,
which corresponds to venture in the English text, seems in general somewhat wider although it is
capable of bearing the same meaning. Thus, it is translated in Bosman, Van der Merwe and Hi-
emstra, Tweetalige Woordeboek, as, inter alia, ‘venture, risky undertaking’.
Now, in the present case, the appellant clearly, in my view, undertook a venture in the above
sense. He laid out the money required to obtain a bank guarantee, and risked the amount of the
guarantee, in the hope of making a profit. It was a speculative enterprise par excellence.
In the judgment of the Special Court and the argument on behalf of the Commissioner some
doubt was cast on whether the appellant himself realised the risks inherent in the scheme. In my
view this does not matter. An undertaking does not in my view cease to be a venture merely be-
cause the person pursuing it is of a sanguine temperament.
In conclusion on this point I must make it clear that although an element of risk is included in
the concept of a ‘venture’ in its ordinary meaning, I must not be taken to suggest that a scheme
like the present would only constitute a ‘trade’ if it is risky. Whether it would or not would de-
pend on its own facts. If there is no risk involved, it might still be covered by giving an extended
meaning to ‘venture’ or by applying the rest of the definition, which is in any event not neces-
sarily exhaustive. See Meyerowitz and Spiro on Income Tax para 610.
Thus in argument Mr Levin accepted that a person who borrowed money at a low rate of interest
and invested it at a higher rate, would be engaged in a trade even if his investment was a safe
one. For present purposes it is not, however, necessary to pursue this matter further.
The scheme does not in its nature differ from the speculative purchase of land or shares with the
intention of re-selling at a profit. An asset so held is not a capital asset and a profit made on its
________________________

27 FA & AB Ltd v Lupton (Inspector of Taxes) [1972] AC 634 at 647G.

28 (1953) 19 SATC 216 at 217.
29 Repealed by the Income Tax Act 58 of 1962.
30 (1936) 9 SATC 211 at 212.
 Trading or Carrying on Business and Schemes of Profit-Making 231

realisation does not constitute a capital gain. I do not think authority is needed for this conclu-
sion. And the mere fact that the vehicle used for the speculation was an insurance policy cannot,
in my view, make any difference.
For all these reasons I consider that the appellant’s claim for a deduction in respect of his liabil-
ity for interest should have been allowed.
The appeal is allowed . . . The order of the Special Court is set aside and the second revised
assessment is remitted to the Commissioner for Inland Revenue for re-assessment on the basis
that a deduction of R425 000 be allowed for the year ended 29 February 1988.

Notes
In this case, SARS did not attack the scheme as falling foul of the general anti-avoidance
provisions of the Income Tax Act. This judgment is therefore authority on the concept of
a ‘trade’ and ‘trading’, but not on the scope of the general anti-avoidance provisions of
the Act.
The question whether the taxpayer was carrying on a ‘trade’ is relevant both in deter-
mining whether a received or accrued amount must be included in gross income, and in
determining whether an item of expenditure or loss is deductible in terms of s 11.
Thus, although the definition of ‘gross income’ contains no reference to trade or trad-
ing, or to carrying on business, it was held in CIR v George Forest Timber Company Ltd31 per
de Villiers JA that–
‘The fact to remember . . . is that whatever a person receives in the way of his trade, business, or
profession is income – Stevens v Hudson Bay Company (101 LJ 96).’
Where the taxpayer claims expenditure as a deduction in terms of s 11(a) or any of the
sub-sections of s 11, the question whether that taxpayer was engaged in trading is of
immediate importance, since the opening words of s 11 read as follows (emphasis added)–
‘For the purpose of determining the taxable income derived by any person from carrying on any
trade, there shall be allowed as deductions from the income of the person so derived–’
Consequently, for expenditure to qualify for deduction in terms of any of the sub-
sections of s 11, the taxpayer must show affirmatively that he incurred the expenditure in
the course of ‘carrying on a trade’.
In other words, ‘carrying on a trade’ is a threshold requirement for the deductibility of
expenditure in terms of s 11(a) and all of the further sub-sections of s 11.
Section 23(g) imposes a negative or disqualifying criterion by providing that no deduc-
tion is available in respect of–
‘any moneys claimed as a deduction from income derived from trade to the extent to which such
moneys were not laid out or expended for the purposes of trade’.
What constitutes a ‘trade’?
The opening words of the definition of ‘trade’ provides that it includes–
‘every profession, trade, business, employment, calling, occupation or venture, including the
letting of any property . . . ’
The significance of the decision in Burgess is that it contains the clearest exposition yet
given by the Appellate Division or the Supreme Court of Appeal of the defining charac-
teristics of a ‘trade’ as envisaged in this definition.
Over the years, the courts have added the occasional gloss to the statutory definition of
a ‘trade’. Notably, the courts have held that, although a receipt or accrual of interest is
clearly ‘income’, it is not income from ‘trading’, unless the taxpayer carries on the busi-
ness of investing.
________________________

31 1924 AD 516 at 529, 1 SATC 20.

232 Income Tax in South Africa: Cases and Materials

Thus, it was held in [271] CSARS v Megs Investments (Pty) Ltd32 that–
‘It is settled that in ordinary circumstances income in the form of interest on an investment is
income derived from carrying on a trade within the meaning of the Act.’
The rationale of this dictum, it seems, is that ‘trading’ requires some degree of activity
and that interest is passive income. However, other activities which involve the passive
receipt of income, such as being a sleeping partner in a trading partnership, or a proper-
ty-owner in a managed property syndicate deriving rental, constitute the carrying on of a
trade.
In Burgess the passive nature of the taxpayer’s role in the partnership – on which Mel-
amet J had dwelt at some length in his judgment in the Tax Court33 (unreported, but
quoted in the Appellate Division judgment) – did not elicit any comment in the Appel-
late Division judgment.
Until the decision in Burgess it was not clear whether ‘trading’ necessarily connotes a
venture with some degree of risk for the taxpayer. In Burgess, Grosskopf JA held that–
‘I must make it clear that although an element of risk is included in the concept of a ‘venture’ in
its ordinary meaning, I must not be taken to suggest that a scheme like the present would only
constitute a ‘trade’ if it is risky.’
The dicta in Burgess in regard to whether a venture entered into with a ‘fiscal motive’ can
nonetheless constitute ‘carrying on a trade’ remain relevant on that issue.
However, sight must not be lost in this regard of the impact of the new general anti-
avoidance rule, introduced with effect from 2 November 200634 as Part IIA of Chapter III
of the Income Tax Act, which applies to any arrangement or any steps in or part of an
arrangement entered into on or after that date.35
The mere fact that, in terms of dicta in Burgess, a taxpayer was ‘carrying on a trade’ will
not impede the application to that person of those anti-avoidance provisions where the
criteria for the latter are satisfied.

The fact that a company’s objects empower it to trade does not mean that any disposition of property
is necessarily trading. There is no single, definitive test to determine whether a taxpayer’s activities
constitute a trade.

[143]
Natal Estates Ltd v SIR
1975 (4) SA 177 (A), 37 SATC 193
For the facts of this case, see extract [174].
Holmes JA: Continuing with his contention in regard to an initial dual intention, counsel for the
respondent referred to the fact that the appellant’s memorandum authorizes it to carry on the
business of dealing in property for gain. As to that, I agree with the reply by counsel for the
appellant to the effect that it is not the law that where a company has among its objects both
dealing and holding, a profit made on the realization of assets will necessarily be income; that the
mere fact that a company has power to sell a particular asset or all of its assets does not imply that it
is part of the business of the company to sell that particular asset or its assets; that most people of
________________________

32 2005 (4) SA 328 (SCA) at [11].

33 Melamet J is reported as saying of the taxpayer’s role in the partnership: ‘He exercised no skill or ingenui-
ty in finding or choosing the investments or in administrating or maintaining it. The appellant is, in fact,
precluded from participating in the management of the partnership. The partnership, itself, has no say in
the management and control of the portfolio selected for the partnership by the insurance company. Its
role, at the most, is that of watching the investment made by it.’
34 See the Revenue Laws Amendment Act 20 of 2006 s 34(1).
35 Ibid s 34(2).
 Trading or Carrying on Business and Schemes of Profit-Making 233

sound mind and understanding have power to dispose of their property, but it does not follow from
that that they carry on the business of dealing if they sell any property which they possess. In African Life
Investment Corporation (Pty) Ltd v Secretary for Inland Revenue 36 it was said that ‘the mere fact that the
appellant is . . . empowered to realize its assets by sale or otherwise – a power ordinarily inherent in
ownership – does not imply that dealing in shares is part of its business’ . . .
In deciding whether a case is one of realizing a capital asset or of carrying on a business or
embarking upon a scheme of selling land for profit, one must think one’s way through all of the
particular facts of each case. Important considerations include, inter alia, the intention of the
owner, both at the time of buying the land and when selling it (for his intention may have changed
in the interim); the objects of the owner, if a company; the activities of the owner in relation to his
land up to the time of deciding to sell it in whole or in part; the light which such activities throw on
the owner’s ipse dixit as to intention; where the owner subdivides the land, the planning, extent,
duration, nature, degree, organization and marketing operations of the enterprise; and the rela-
tionship of all this to the ordinary commercial concept of carrying on a business or embarking on a
scheme for profit. Those considerations are not individually decisive and the list is not exhaustive.
From the totality of the facts one enquires whether it can be said that the owner had crossed the
Rubicon and gone over to the business, or embarked upon a scheme, of selling such land for
profit, using the land as his stock-in-trade.
Finally, one does not lose sight of the incidence of the onus of proving non-liability, imposed by s
82 of the Act, on the person claiming such non-liability, in this case the appellant.

The essential element in the inquiry as to the existence of a trade is the intention of the taxpayer as
evidenced by his conduct.

[144]
ITC 1185
(1972) 35 SATC 122
Miller J: There are probably few, if any, questions arising out of income tax legislation which have
been considered and discussed in the judgments of the courts as frequently as the question now
before us. The test to be applied when it is necessary to determine whether profit made on the sale
of property by a taxpayer represents revenue or a receipt of a capital nature has been formulated
in many ways but there is no essential difference to be found between any one formulation and
another in so far as the general approach to the problem is concerned. The fundamental inquiry is
whether, in buying and selling the property and thus earning the profit which is the subject of the
inquiry, the taxpayer was engaged in carrying on a trade or business or profit-making scheme. If
that is what he was doing, the profits are income and taxable in his hands. If, however, he held the
property as an investment of capital the realization of the asset would simply be a conversion of the
capital asset to cash, which he would receive and hold as capital, not as revenue. Perhaps the most
important test in considering whether it is the one or the other of these, is the intention with
which or the object for which the property was acquired (see CIR v Strathmore Consolidated Invest-
ments Ltd 37). But it is clear that the application of that test will not in all cases produce the true
answer to the fundamental question; a taxpayer might have bought property with the intention of
holding it as an investment of capital for the purpose of earning income but have changed his
mind at a later stage and resolved to merge that asset with his ordinary stock-in-trade, as it were,
and thenceforth to hold it available to be dealt with in the course of his profit-making business or
trade. In such a case, the profit made on realization of the property would be revenue despite the
initial intention with which it was acquired (cf CIR v Stott;38 CIR v Lydenburg Platinum Ltd 39). Where
the taxpayer had not one clear purpose or intention in acquiring the property but was alive to
more than one use to which he might put it, the inquiry will be to determine, if possible, whether
one particular purpose was dominant in his mind. If the court is able to find that there was a
________________________

36 1969 (4) SA 259 (A) at 270C.

37 1959 (1) SA 469 (A) at 477.
38 1928 AD 252.
39 1929 AD 137.
234 Income Tax in South Africa: Cases and Materials

dominant purpose, which operated decisively or very substantially in the processes which led to the
decision to acquire the property, the court will give effect to that dominant purpose or intention
(see COT v Levy;40 COT v Glass 41).
The difficulty in these cases lies not so much in the formulation of approach but in the application
of the principles which must necessarily guide the court. It is no difficult matter to say that an
important factor is: what was the taxpayer’s intention when he bought the property? It is often very
difficult, however, to discover what his true intention was. It is necessary to bear in mind in that
regard that the ipse dixit of the taxpayer as to his intent and purpose should not lightly be regard-
ed as decisive. It is the function of the court to determine on an objective review of
all the relevant facts and circumstances what the motive, purpose and intention of the tax-
payer were. Not the least important of the facts will be the course of conduct of the taxpayer
in relation to the transactions in issue, the nature of his business or occupation and the frequency
or otherwise of his past involvement or participation in similar transactions. The facts
in regard to those matters will form an important part of the material from which the court
will draw its own inferences against the background of the general human and business probabili-
ties. This is not to say that the court will give little or no weight to what the taxpayer says
his intention was, as is sometimes contended in argument on behalf of the Secretary in cases of this
nature. The taxpayer’s evidence under oath and that of his witnesses must necessarily be given full
consideration and the credibility of the witnesses must be assessed as in any other
case which comes before the court. But direct evidence of intent and purpose must be weighed
and tested against the probabilities and the inferences normally to be drawn from the
established facts. It would certainly be more difficult for one whose business it is to buy and sell
properties for profit to persuade the court that in the particular instance which is in issue his
intent was to make a capital investment, than it would be for one whose occupation was in no way
concerned with dealing in properties and had never before bought or sold property. But
just as proof that the taxpayer is normally a dealer in property is no absolute bar to his establishing
that a particular acquisition was made as an investment, so proof that a transaction was isolated and
far removed from the taxpayer’s normal business activities will not necessarily cause the court to
accept that the profits of that isolated transaction must therefore be a receipt of a capital nature.

Notes
The weakness of this judgment is that (as do many other judgments of our courts) it
blurs the distinction between a trade and a scheme of profit-making. It speaks of the two
concepts in the same breath and goes so far as to claim that ‘there is no essential differ-
ence to be found between any one formulation and another’. If this were so, then the
concept of a scheme of profit-making would be tautologous and unnecessary.

Trading usually, but not necessarily, involves an intention to make a profit.

[145]
De Beers Holdings v CIR
1986 (1) SA 8 (A)
Corbett JA: [T]he attainment of a profit is not necessarily the hallmark of a trading transaction. A
trader may for commercial reasons be compelled to resell goods at a loss. Conceivably also he may
elect to resell goods at a loss in order to gain some other commercial advantage for his business.
The practice of putting on sale the so-called ‘loss leaders’ by some merchants would fall into this
category; and there seems little doubt that merchandise so sold would constitute stock-in-trade and
the proceeds thereof gross income.
...

________________________

40 1952 (2) SA 413 (A) at 421.

41 1962 (1) SA 872 (FC) at 880-881.
 Trading or Carrying on Business and Schemes of Profit-Making 235

The present case is in fact closer to an English case, Petrotim Securities Ltd v Ayres 42 distinguished by
Beadle CJ in his judgment . . . The Commissioners, having referred to a dictum of Lord
Simonds in a previous case to the effect that a trader’s job is to make profits, said:43
‘In the present case it appears, in the absence of evidence to the contrary, that the company deliberately set out
to make a very substantial loss. We, of course, recognise that, in the course of his trade, a trader may make sales
at much less than cost or even make free gifts of the goods in which he deals: eg when advertising. We have no
evidence that the transactions in the present case in any way resemble such sales or gifts. The agreements
relating to the X transactions support the fact of a purchase or sale, but not the quality of the sale. The profit-
seeking motive, which is normally important, was absent, and in its place there appears to have been an
intention to make a loss for a reason which was not explained. It therefore seems a fair inference to draw that
in relation to those transactions the company, at the time of the sales, was no longer acting as a dealer or
financier and accordingly the sales were not made in the course of the company’s trade . . .’
The decision of the Commissioners was upheld in successive appeals to the Chancery Division and
the Court of Appeal. In the Chancery Division Ungoed-Thomas J remarked that;44
‘All these transactions were completely out of character with the rest of the company’s trading operations and
the way in which it conducted its trade . . . These transactions, when seen in their context of the company’s
trading operations, cry aloud for an explanation.’
. . . [T]he absence of a profit does not necessarily exclude a transaction from being part of the
taxpayer’s trade; and correspondingly moneys laid out in a non-profitable transaction may never-
theless be wholly or exclusively expended for the purposes of trade within the terms of s 23(g).
Such moneys may well be disbursed on grounds of commercial expediency or in order indirectly to
facilitate the carrying on of the taxpayer’s trade (see in this regard the remarks of Jenkins LJ in
Morgan v Tate & Lyle Ltd 45 and Boarland v Kramat Pulai Ltd.46 Where, however, a trader normally
carries on business by buying goods and selling them at a profit, then as a general rule a transac-
tion entered into with the purpose of not making a profit, or in fact registering a loss, must, in
order to satisfy s 23(g), be shown to have been so connected with the pursuit of the taxpayer’s
trade, eg on ground of commercial expediency or indirect facilitation of the trade, as to justify the
conclusion that, despite the lack of profit motive, the moneys paid out under the transaction were
wholly and exclusively expended for the purposes of trade (cf Nemojim’s case supra47). Generally,
unless the facts speak for themselves, this will call for an explanation from the taxpayer.

§3.1 Payments in restraint of trade

A taxpayer’s right to trade is regarded as a capital asset. If he is given compensation in
return for undertaking not to exercise his right to trade, such compensation is of a
capital nature. However, in terms of para (cA) of the definition of ‘gross income’ in s 1 of
the Act, compensation for a restraint of trade is included in the gross income of certain
categories of taxpayer, namely, a natural person, a labour broker (other than a labour
broker to whom an exemption certificate has been issued), and a personal service pro-
vider as defined in the Fourth Schedule. Thus, it is only where compensation for a re-
straint of trade is received by or accrues to a person outside these categories that it will
be of a capital nature and hence not subject to income tax.

Consideration awarded to a taxpayer as a quid pro quo for a restraint of trade undertaking is of a
capital nature (but see now para (cA) of the definition of ‘gross income’). By contrast, deferred
remuneration for services rendered is income.

________________________

42 [1964] 41 TC 389.
43 At 395.
44 A 400.
45 1953 Ch 601 at 637-638.
46 [1953] 2 All ER 1122.
47 At 947H-948A.
236 Income Tax in South Africa: Cases and Materials

[146]
Tuck v CIR
1988 (3) SA 819 (A)
In 1979, the taxpayer, a registered pharmacist, retired after 30 years in the employ of
Wyeth Laboratories (Pty) Ltd (‘Wyeth’). In 1957 he had become its managing director
and general manager. The company was a subsidiary of an American company, American
Home Products Corporation ‘(American Home’). In 1967 the latter established a manage-
ment incentive plan, the purpose being to provide awards to selected employees who had
contributed substantially to the success of the company, to allow them to participate in
that success and provide an incentive to contribute further. The awards took the form of
cash, contingent cash and contingent stock. A contingent stock award operated as fol-
lows. The amount of the award was converted into shares in American Home. After the
employee retired, the shares were delivered to him in ten annual instalments. The terms
of the plan provided that the shares would not be delivered to an employee after his
retirement unless he had, inter alia, refrained from entering into competition with the
company. (This provision was referred to as the ‘restraint’).
It was common cause that the taxpayer had made a major contribution to Wyeth’s pros-
perity. He had served on a number of pharmaceutical commissions and committees, and
was described in evidence as an ‘outstanding personality’ in the industry. His particular
strengths were his knowledge and experience in marketing and the good relationships
he had built up with various public authorities concerned with the pharmaceutical
industry.
During the 1981 tax year, the taxpayer received an initial instalment of shares worth
R14 251. During the 1982 tax year he received a further instalment of shares worth
R20 997.
Issue: was the consideration paid to the taxpayer in terms of the management incentive
plan income, or was it of a capital nature?
Held: to the extent that the consideration was compensation for agreeing not to compete
with the taxpayer’s former employer, it was of a capital nature. To the extent that it was a
consideration for services rendered, it was income.
Corbett JA: The question of causation, especially in the field of delict, has been considered by this
court in a number of recent cases . . . I do not propose to canvass fully the discussion of this ques-
tion in these judgments. Suffice it to say that it is generally recognized that causation in the law of
delict gives rise to two distinct enquiries. The first, often termed ‘causation in fact’ or ‘factual
causation’, is whether there is a factual link of cause and effect between the act or omission of the
party concerned and the harm for which he is sought to be held liable; and in this sphere the
generally recognized test is that of the conditio sine qua non or the ‘but for’ test. This is essentially a
factual enquiry. Generally speaking no act or omission can be regarded as a cause in fact unless it
passes this test. The second enquiry postulates that the act or omission is a conditio sine qua non and
raises the question as to whether the link between the act or omission and the harm is sufficiently
close or direct for legal liability to ensue; or whether the harm is, as it is said, ‘too remote’. This
enquiry (sometimes called ‘causation in law’ or ‘legal causation’) is concerned basically with a
juridical problem in which considerations of legal policy may play a part . . .
I am not sure that it is appropriate to apply the principles of causation, as developed particularly
in the criminal law and the delictual field, when considering the problem as to how, from the
income tax point of view, a taxpayer’s receipt should be characterized, ie whether as income
or as capital . . . In a case such as the present, however, it seems to me that most problems of
characterization could appropriately be dealt with by applying the simple test indicated by
Watermeyer CJ in the passage quoted from his judgment in the Lever Bros case (supra) viz by
asking what work, if any, did the taxpayer do in order to earn the receipt in question, what was
the quid pro quo which he gave for the receipt?
 Trading or Carrying on Business and Schemes of Profit-Making 237

The quid pro quo given by appellant in this case is to be found in the Plan. In my opinion, it has two
main elements. Firstly, there is the element of service given to the company, Wyeth, over the years
. . . It is conceded by Mr Welsh that this element is of a revenue nature. Secondly, there is the
element of restraint of trade, flowing from condition (i) in para VI(4)(d) of the Plan, compliance
with which is a pre-requisite to appellant receiving his annual instalments of shares over a ten-year
period . . . It is conceded by Mr Marais, who appeared on behalf of the respondent, that the
restraint of trade element is of a capital nature.
It seems to me that it would be totally unrealistic to say that in this case the quid pro quo given by the
appellant for the receipt of the shares was solely his compliance with condition (i) of para
VI(4)(d). It is true that had he failed to comply with condition (i) appellant would have received
nothing. But equally had he not given service of a particular quality over the years he would have
received nothing . . .
In my opinion, it would be equally unrealistic to say that the quid pro quo given by appellant was
solely his excellent service during the years of his employment . . .
I am of the view that even if one applies the principles of legal causation referred to above, one
reaches the same conclusion. Appellant’s excellent service was obviously a conditio sine qua non of
the ultimate receipt of the shares and thus qualifies as a cause in fact. Appellant’s compliance with
condition (i) was obviously a contributory cause in fact, but in my view it did not introduce an
independent, unconnected and extraneous causative factor of such significance as to relegate the
excellent service to the status of a mere historical antecedent or background feature. The service
and the restraint condition were part and parcel of the same scheme and it rested with appellant as
to whether the restraint condition was complied with or not. Both were, in my opinion, causally
relevant factors . . .
Counsel contended that there was no reason why the principle of apportionment should not be
extended to the case where a receipt, having regard to its quid pro quo, contained both an income
element and an element of a capital nature. Counsel for the respondent did not appear to dispute
this as a proposition of law.
There is, so far as I am aware, no authority for this proposition in our case law. Nevertheless, for
reasons similar to those stated in the cases quoted in the previous paragraph, it seems to me that in
a proper case apportionment provides a sensible and practical solution to the problem which arises
when a taxpayer receives a single receipt and the quid pro quo contains two or more separate
elements, one or more of which would characterize it as capital. It could hardly have been the
intention of the legislature that in such circumstances the receipt be regarded wholly as an income
receipt, to the disadvantage of the taxpayer, or wholly as a capital receipt, to the detriment of the
fiscus . . .
The problem in this case is to establish an acceptable basis of apportionment. The appellant has all
along suggested apportionment on a 50/50 basis; and this was Mr Welsh’s suggestion to us. Having
regard to the inherent nature of the receipt and its origin in the Plan, it is not possible to find an
arithmetical basis for apportionment . . . but I do not think that this should constitute an insupera-
ble obstacle. Mr Marais submitted in argument that appellant had failed to adduce all relevant
evidence in this regard . . . I do not think that this submission is sound. The Plan and the actions of
the company speak for themselves . . .
It is obvious from the Plan that both elements are important factors in the quid pro quo which
the employee provides in return for receiving the shares. If the employee does not provide the
requisite service, he does not qualify for an award; if he fails to comply with the restraint, he forfeits
the award . . . [I]n all the circumstances I consider that a 50/50 apportionment would be fair and
reasonable.

Notes
The definition of ‘gross income’ was amended in 2000 to provide that compensation for
‘any restraint of trade imposed on’ a natural person, a labour broker, a personal service
company or a personal service trust must be included in gross income; see para (cA) of
the definition.
238 Income Tax in South Africa: Cases and Materials

In determining whether consideration, which is ostensibly for a restraint of trade undertaking, is of a

capital nature, the real nature of the transaction must be ascertained.

[147]
ITC 1549
(1993) 55 SATC 31
The taxpayer company derived its income from renting 21 shops situated on its property.
During the tax years 1985 to 1988 the taxpayer had excluded certain amounts from its
gross income on the grounds that they were of a capital nature, being payments received
from its tenants in respect of restraint of trade agreements. The Commissioner regarded
these payments as income and included them in the taxpayer’s gross income
Issue: whether, in the circumstances, the payments in issue were received in respect of
restraint of trade agreements and were therefore of a capital nature.
Held: the onus was on the taxpayer to show that the payments were received as
compensation for its loss of potential income. In the contract in question, the taxpayer
did not give up any of his earning capacity, and there was no real danger of competition
from other traders. The whole plan was a mere smoke-screen to escape tax.
Leveson J: Gedurende die jare van aanslag 1965 tot 1988, het die appellant die bedrae van:
(a) R44 400 vir 1985
(b) R54 066 vir 1986
(c) R66 784 vir 1987
(d) R66 370 vir 1988
van sy bruto inkomste vir die onderskeie jare uitgesluit as synde ontvangste van sy huurders vir
beperking van handelsvryheid.
Die Kommissaris het nie met gemelde uitsluitings saamgestem nie. Hy het genoemde bedrae by die
bruto inkomste van appellant bygereken en op die basisse van aanslae en gewysigde aanslae
onderskeidelik die inkomste as normaal gekategoriseer.
Appellant het teen die aanslae beswaar gemaak en appèl aangeteken op grond daarvan dat die
onderskeie bedrae ontvangstes is vir beperkings van handelsvryheid en gevolglik kapitaal van aard is.
Betalings ontvang vir beperking van handelsvryheid, byvoorbeeld waar ’n persoon onderneem om
nie vir ’n bepaalde tydperk in ’n bepaalde gebied handel te dryf nie, gewoonlik teen ’n geldelike
vergoeding, word beskou as kapitaal omdat die vergoeding ontvang is vir die afstanddoening van
kapitale bates.
Silke on South African Income Tax48 sê dat hierdie beginsel
‘applies as much to an individual as to a company, and that an “employee who by means of a convenant in
restraint of trade surrenders a portion of his income-earning capacity in return for a payment of money, is
parting with a capital asset and the payment is of a capital nature’.
Nevertheless, a
‘court must not merely look at the form of the relevant transaction, but also at its real nature (see eg per
49
Wessels JA in Ochberg v CIR). Thus if the court is satisfied from the relevant agreement (whatever its form) and
the surrounding circumstances that the real nature of the transaction was to remunerate the employee for his
services, it will be held that the payment concerned is part of the employee’s income’.
Die gesag waarop die skrywer steun is ITC 1338.50
Klaarblyklik het die appellant in hierdie saak met elk van sy huurders ’n afsonderlike ooreenkoms
gehad met presies dieselfde inhoud.
Klousule 4.01 van die kontrakte lees soos volg:
‘The rent payable by the lessee to the lessor hereunder for the hire of the leased premises shall be:
________________________

48 11de uitgawe at 3.40.

49 1931 AD 215 at 239, 5 SATC 93 at 111.
50 (1980) 43 SATC 171 te 174.
 Trading or Carrying on Business and Schemes of Profit-Making 239

From To Amount per month

1.4.84 31.3.85 R4 400
1.4.85 ens
Two thirds of the said amount will be allocated to rental and one third allocated as monthly payments to the
lessor for the restraint of trade contained under clause 3.01 below’.
Klousule 3.01 is aanpasbaar by elke besondere huurder se omstandighede. Byvoorbeeld:
‘The lessee shall use the leased premises only for cafe and take away and fresh produce dealer and such
business is (sic) generally associated therewith, such as coin operated games’.
Op die grondslag van die aanhaling uit Silke moet die appellant kan aantoon dat die betalings
ontvang is as vergoeding van sy verlies aan potensiële inkomste.
Na my mening is dit duidelik dat die aangehaalde klousule 3.01 geen beperking aan die appellant
se handelsvryheid daarstel nie. Daar is geen beperking op die appellant se reg om sy perseel te
verhuur in die bewoording van die klousule nie. Inteendeel, dit beperk slegs die huurders onder
die ooreenkoms ten opsigte van sy gebruik van die perseel. Inderdaad is dit ’n beperking waartoe
die huurder net homself verbind. In teenstelling met die inhoud van klousule 4.01 is daar geen
beperking in klousule 3.01 wat die aktiwiteite van die verhuurder beperk nie.
...
Dit was moontlik as gevolg van die appellant se bewustheid van die probleme wat 3.01 vir hom skep
dat die aandag van die hof gevestig is op klousule 12 (bl 74). Laasgenoemde lees soos volg:
‘The lessor undertakes not to lease a cafe or take away from the initial period and the option period of this
lease on the property.
The lessor is free to let to any other party who may be in competition with the lessee who is conducting another
business but not a cafe, take away’.
Die eerste sin van die aanhaling maak eenvoudig geen sin nie. Die bedoeling daarmee was moont-
lik om die verhuurder se onderneming om nie enige ander perseel in die gebou vir die gebruik
van ’n kafee of dergelike besigheid te verhuur nie op skrif te stel. Dit word egter nie gesê nie, en
dit sal nie sinvol wees om dit hier uit te lê nie.
Die tweede sin is nie veel duideliker nie, maar dit blyk darem dat die appellant geregtig is om
persele aan die huurder se mededingers te verhuur.
...
Op die grondslag van die aanhaling uit Silke, vroeër, moet die appellant kan aantoon dat hy ’n
gedeelte van sy verdienstevermoë prysgegee het vir ’n betaling in geld.
Dit stem ooreen met die toets wat gebruik in Taeuber and Corssen (Pty) Ltd v SIR.51 In die huidige
saak is die vraag wat ons onsself moet afvra of die beperking op die appellant se vryheid om ander
persele in die gebou te verhuur aan handelaars wat met bestaande huurders kompeteer, sy ver-
dienvermoë of die aard van sy besigheid nadelig beïnvloed het.
Na my mening is daar geen getuienis aan ons gebied om aan te toon dat die appellant enige
gedeelte van sy verdienstevermoë moes prysgee nie. Dit skyn my gesonde besigheidspraktyk te
wees, veral in ’n relatiewe klein geboutjie soos die onderhewige, dat geen redelike besigheidsman
’n perseel sal huur waar daar reeds gevestigde kompetisie teen hom is nie. Normaalweg, dus, hoef
’n handelaar wat ’n perseel huur waar daar nie kompetisie van hom is nie geen vrees te hê dat ’n
kompeterende handelaar toegelaat sal word nadat hy die perseel in besit geneem het nie. Uit ’n
besigheidsoogpunt dink ek dit word algemeen aanvaar dat om die optimuminkomste uit ’n perseel
te verkry die verhuurder die grootste verskeidenheid handelaars moontlik onder een dak wil lok.
Hoe groter die verskeidenheid – hoe groter sal die getal kliënte in die gebou wees. Onder hierdie
omstandighede is dit moontlik dat ’n handelaar wat onderhandel oor ’n huurkontrak, ex abundante
cautela voorsiening sal maak vir ’n klousule wat die verhuurder sal beperk om ander persele aan ’n
mededinger te verhuur. Dit is egter in die algemeen in die lig van die voorgaande onwaarskynlik.
Waar ’n verhuurder onderneem om sy vryheid om te verhuur aan ’n handelaar se mededingers in
________________________

51 1975 (3) SA 649 (A), 37 SATC 129.

240 Income Tax in South Africa: Cases and Materials

te perk doen hy dit – in die meeste gevalle – met die wete dat dit in elk geval onwaarskynlik is dat
’n mededinger belang sal stel in ’n perseel in die gebou en in ieder geval gee hy die bestaande
huurders die meeste waarde vir hulle besetting want deur die beperking word ’n wye verskei-
denheid handel verseker.
Daar het dus na my mening ’n plig op die appellant gerus om afdoende bewys te lewer dat (a) daar ’n
werklike gevaar bestaan het van mededingende handelaars, wat besig was met onderhandelinge ten
einde persele as kompetisie in die gebou te beset; en dat (b) dit nie vir die verhuurder groter voor-
deel sou inhou indien die gebou deur ’n groot verskeidenheid huurders beset is nie. Daar was
geen getuienis hoegenaamd van hierdie aard deur A, die appellant se direkteur nie.
Niks kan my oortuig dat die blote beperking van hierdie aard op ’n verhuurder in ’n huurkontrak
enigiets meer as ’n fiksie is nie of dat ’n werklike gevaar van mededinging/kompetisie van ander
handelaars bestaan het nie. Ten einde te bewys dat so ’n klousule eg is, sou ek verwag om getuienis
te hoor van deskundige huuragente wat sou bewys wat in dieselfde gebou kompeteer, dat daar ’n
wesenlike aanvraag vanaf ’n menigte handelaars vir persele in die appellant se gebou is. Die
invoeging van so ’n klousule in die huurkontrakte in die huidige saak is niks anders as ’n voor-
wendsel nie . . . Na my mening is die hele plan ’n rookskerm om belastingpligtigheid vry te spring
. . . Die appel moet van die hand gewys word.

Notes
In the wake of the [146] Tuck decision, many taxpayers tried to make a contractual
payment tax-free by labelling it compensation for a restraint of trade undertaking. In ITC
1549 the court held that the whole plan involved in that case was a fiction, and a smoke-
screen to avoid tax. That finding was sufficient to deprive the taxpayer of the fiscal ad-
vantage he had sought. The decision goes considerably further, however, and suggests
that in cases such as this the onus is on the taxpayer to prove, inter alia, that there was
a real danger of competition. If the judge intended to suggest that this is a separate
requirement, over and above the need to prove that the agreement is bona fide, then it is
a doubtful proposition, for which no authority is cited.

§4 Sales in the course of a trade or scheme of profit-making

contrasted with mere realisation of a capital asset
The proceeds of the sale of stock-in-trade realised in the course of selling the business as a going
concern are income, not capital.

[148]
CIR v Niko
1940 AD 416, 11 SATC 124
The taxpayer, who carried on business as a contractor, scrap-iron merchant and second-
hand dealer entered into a contract to sell his business as a going concern to a company
formed for the purpose of acquiring it. The Commissioner included the value of the
trading stock, as per the contract of sale, in the taxpayer’s gross income. The taxpayer
objected on the grounds that the sale of the trading stock yielded an amount of a capital
nature, since the sale did not take place in the ordinary course of business.
Issue: whether the profit on the sale of the stock-in-trade was of a capital nature.
Held: although the stock-in-trade had been sold by the taxpayer simultaneously with all
his other assets, the amount realised by the sale formed part of his gross income.
Centlivres JA: In order to determine this question one must consider the provisions of the Income
Tax Act and in this connection it is necessary to approach the problem by considering the defini-
tion of ‘gross income’ in s 7 of the Act. The definition of that term is, as far as is relevant to this
enquiry, as follows:–
‘Gross income’ means the total amount whether in cash or otherwise received by or accrued to or in favour of
any person, other than receipts or accruals of a capital nature’.
 Trading or Carrying on Business and Schemes of Profit-Making 241

In the present case the amount realised by the sale of the stock-in-trade to the company was clearly
a receipt or accrual and the question to be considered is whether it is or is not a receipt or accrual
of a capital nature. On this point there are several decisions of this Court which make it clear that
the receipt or accrual was not of a capital nature and that the whole amount realised by the sale of
the stock-in-trade formed portion of the ‘gross income’ of the respondent.
The stock-in-trade which belonged to the respondent represented his floating capital and the
proceeds resulting from a sale of the stock-in-trade form part of the respondent’s ‘gross income’.
See CIR v George Forest Timber Co Ltd.52 The stock-in-trade was, to put it in another way, capital
productively used to earn profits, seeing that here can be no doubt that the respondent’s object in
acquiring it was to re-sell it at a profit. See Lace Proprietary Mines Ltd v CIR.53
In order to arrive at the ‘taxable income’ the respondent is entitled to deduct from his ‘gross
income’, in terms of s 11(2), expenditure and losses actually incurred in the Union in the
production of his income, provided such expenditure and losses are not of a capital nature. Under
this provision he is entitled to deduct, inter alia, the moneys he spent in purchasing his stock-in-
trade. See Baikie v CIR.54 . . .
It was, however, contended by Mr Henochsberg for the respondent that the cases I have referred to
do not apply to the present case, inasmuch as the sale to the company was not in the ordinary
course of respondent’s business but was a ‘slump’ or ‘lock-stock-and-barrel’ sale and that the
decision in Doughty v COT 55 and a number of cases decided in the Special Court for hearing In-
come Tax Appeals are applicable to the present case . . .
Doughty’s case was relied on by the appellant in Rhodesia Metals Ltd v COT 56 which was a case arising
under the Southern Rhodesian Ordinance No 20 of 1918 and in which a company sold its whole
undertaking . . . In the present case the respondent acquired his stock-in-trade for the purpose of
selling it and making a profit thereon, just as, in the case quoted, the purpose of the company in
acquiring certain mining claims was to sell them at a profit. In both cases there was a sale of the
whole undertaking. In the Rhodesia Metals case the purchase price was not allocated to the various
assets included in the undertaking and yet the Court held that, as there were no difficulties of
apportionment, it was possible to ascertain the profit made on the sale of the mining claims . . .
. . . Lord Phillimore in his judgment57 was careful to make the following observations:–
‘Where, however, a business consists, as in the present case, entirely in buying and selling, it is more difficult to
distinguish between an ordinary and a realisation sale, the object in either case being to dispose of goods at a
higher price than that given for them, and thus to make a profit out of the business . . . Even in the case of a
realisation sale, if there was an item which could be traced as representing the stock, the profit obtained by that
sale, though made in conjunction with a sale of the whole concern, might conceivably be treated as taxable
income.’
I am therefore of opinion that the answer to the question I am now considering must be in the
negative.

Notes
The taxpayer argued that the sale of trading stock yields income only where it is sold
in the ordinary course of business. In COT v Newman58 an Australian court had upheld
this principle. But the court in Niko based its decision on the fact that the taxpayer had
acquired the trading stock for the purpose of selling it and had done so, albeit in a sale
of the entire business.59 In terms of a 1996 amendment to s 22(8), where a taxpayer
disposes of trading stock ‘otherwise than in the ordinary course of his trade for a consid-
eration less than the market value thereof’ he will be deemed to have recouped an
________________________

52 1924 AD 516 at 524 and 525.

53 1938 AD 267 at 277.
54 1931 AD 496 499.
55 1927 AC 327.
56 1938 AD 282.
57 At 331-332.
58 (1921) 29 CLR 484.
59 See also Forest v COT (SR) 1944 SR 1, 13 SATC 139 (High Court of Southern Rhodesia).
242 Income Tax in South Africa: Cases and Materials

amount equivalent to its market value.60 This provision, it is submitted, will now in the
given circumstances override the decision in Niko. It is submitted that the sale of trading
stock in the course of sale of an entire business is indeed ‘other than in the ordinary course
of trade’; and that consequently s 22(8)(b)(ii) will apply where the trading stock was dis-
posed of for less than market value61 with the result that the taxpayer will be deemed to
have recouped the market value of the trading stock, less the amount which was actually
received by or accrued to him,62 in other words, the price of the trading stock as laid down
in the agreement. If the agreement stipulates a globular selling price for the business as a
whole without allocating a particular price to the trading stock, it is not clear whether the
court will assign a consideration to it.63

A distinction must be drawn between (a) a sale that forms an integral part of a trade and (b) the
realisation of a capital asset or a change of investment; the proceeds of the former are income, of the
latter, capital.

[149]
Natal Estates Ltd v SIR
1975 (4) SA 177 (A), 37 SATC 193
For the facts of this case see extract [174].
Holmes JA: It is undoubtedly correct that if, on the facts of a given case, the most that can be
said is that the taxpayer was merely realizing a capital asset to the best advantage, the proceeds
do not become part of his gross income.
...
The general rule approved by the Privy Council in COT v Melbourne Trust 64 was thus stated in the
Californian Copper Syndicate v Inland Revenue.65 . . .
‘It is quite a well-settled principle in dealing with questions of income tax, that where the owner of an or-
dinary investment chooses to realize it, and obtains a greater price than he originally acquired it at, the
enhanced price is not profit . . . assessable to income tax. But it is equally well established that enhanced
values obtained from realization or conversion of securities may be so assessable where what is done is not
merely a realization or change of investment, but an act done in what is truly the carrying on or carrying out of a
business’ (my italics).
The words italicized appear to be the genesis of the distinction consistently drawn by this court
under our subsequent Income Tax Acts (despite some change in wording in the relevant provi-
sions since the 1914 Act) between –
(a) Realizing a capital asset. A simple example would be that of a manufacturer selling a redun-
dant warehouse; or a pensioner selling his family house to live in a flat; or a farmer selling a
portion of his land which has become isolated from the farm by the construction of a rail-
way line. In such cases the gain will not be income and is not taxable.
(b) Selling an asset in the course of carrying on a business or embarking on a scheme for profit.
A simple example would be that of a speculative builder buying plots for the purpose of
erecting houses thereon and selling them at a profit. The latter would be income, and sub-
ject to tax.
...
The foregoing principle has been followed and developed in this court over the years . . .
________________________

60 Section 22(8)(b)(ii) read with s 22(8)(B).

61 It is common for an agreement in these circumstances to provide that the trading stock will be valued at
cost.
62 Section 22(8)(B)(b).
63 Cf Rhodesia Metals Ltd v COT 1938 AD 282, 9 SATC 363.
64 [1914] AC at 1010.
65 (1904) 41 Sc LR 691.
 Trading or Carrying on Business and Schemes of Profit-Making 243

The proceeds derived from the realisation of a capital asset by a realisation company are capital, not
income where such realisation is not part of a trade or business.

[150]
Realisation Company v COT
1951 (1) SA 177 (SR), 17 SATC 139
Beadle J: In the authorities there are constant references to ‘realization companies’ and there is
an underlying assumption that profits made by such companies in the ordinary course of their
operations are not taxable. The term ‘realization company’ has nowhere been defined but it is
apparent that what is envisaged is a company the main object of which is the recovery of capital,
not the making of profits. It is of course obvious that the mere description of a company as a
‘realization company’ cannot be of decisive or even of cardinal importance in the decision of the
question as to whether any particular accrual to the company is capital or income. This must be
determined on the particular circumstances of the accrual. But what is important is the recogni-
tion of the possibility of the existence of a company having as its sole or main object the
recoupment of capital, for this is contrary to the main argument advanced by Mr Yates. As I
understood it, he contends that if a company is formed with the object of acquiring certain assets
and realizing them as best it can, if possible at a profit, then, when a profit is realized it is
taxable. The suggestion is that the realization of the assets at a profit must be regarded as part
of the company’s business and it is inferred that, because it is part of the business, it attracts
tax. The fallacy underlying this argument is the assumption that, because certain operations
are contemplated by a company in its inception, they must be regarded as part of its ‘business’
and that ‘business’ implies a scheme of profit-making. This begs the whole issue in the case by
using the term ‘business’ in a special sense and then assuming that a company must have
such a business. There is no valid reason why a company should not be formed without the
object of carrying on a business in this sense at all. In deciding whether accruals produced by
the operations of a company are capital or income, the nature of these operations must be
judged on the same principles as those applied to the operations of an individual and this is
true whether these operations were envisaged by the company at the outset or subsequently
undertaken. In considering this issue undue attention must not be attached to secondary
motives. In the vast majority of cases in which a company, and for that matter an individual,
makes a genuine investment the possibility is contemplated that such investment may be realized
and the hope is entertained that such realization may be at an enhanced value. But this does not
alter the essential fact that it is an investment. In considering whether a project is a scheme
of profit-making it is important not to over-emphasize hopes or expectations which are purely
incidental to the main purpose. The matter must be decided on a broader basis and, if it is clear
that the real object is the recovery of capital, the essential nature of the undertaking cannot be
altered by considerations which are entirely subordinate to such main purpose. . . .
[I]t is apparent that a company can be formed to realize certain assets and to realize them with-
out being liable to tax on any profit resulting from realization, provided always that the company
does nothing more than realize and does not trade, or as Rowlatt J put it in the Alabama Coal
case (supra) as long as there is no trade embedded in the realization.
As I have said, it is obvious that the mere description attached to a company by its promoters is
relatively unimportant and each case must be decided on its merits in accordance with the first
principles expressed by Lord Justice-Clerk in the Californian Copper Syndicate case66 but an exami-
nation of these ‘realization company’ cases does seem to show that where a company is formed
for a legitimate purpose unrelated to tax avoidance with the express object of realizing assets
acquired at its formation from its promoter – assets which its promoter himself could have real-
ized in similar circumstances without attracting tax, and that company does nothing more than
realize those assets, then any gains made on a simple realization of those assets would be regard-
ed as accruals of a capital nature. In other words, if the promoter himself could have realized his
assets without being liable to tax on any resultant profit, the mere fact that he floated a company
to realize the assets for him would not necessarily make those gains taxable in the hands of the
company.
________________________

66 (1904) 5 TC 159.
244 Income Tax in South Africa: Cases and Materials

Notes
The Act makes no reference to ‘realisation companies’ but decisions such as this one and
[151] Berea West, below, have established that a realisation company or trust that does
no more than realise the property in question does not incur liability to income tax on
the proceeds of the sale. (But the decision in Founders Hill has made clear that this prop-
osition holds true only in circumstances where the property in question was capital in the
hands of the realisation company at the time of acquisition.) The concept of a realisation
company, as envisaged in Berea West. is an exception to the usual rule that, if a taxpayer
acquires property with the intention of selling it, the proceeds of the sale will be of a
revenue nature and hence included in ‘gross income’. The exception relating to realisa-
tion companies and trusts can be explained only on the basis that the court is, in effect,
‘lifting the veil of incorporation’, ignoring the company’s separate legal persona, and
treating the sale as though it had been effected by the members of the company or the
beneficiaries of the trust.67 Thus for instance, Rowlatt J in Rand v Alberni Land Co Ltd 68
(quoted with approval in Berea West) said: ‘I think that in this case the company has done
no more than provide the machinery by which the private land-owners were enabled . . .
to properly realise the capital of the property which they held in the lands in question . . .’
As to the characteristics of a ‘realisation company’, see [151] Berea West, below.

[151]
Berea West Estates (Pty) Ltd v SIR
1976 (2) SA 614 (A)
In terms of an inter vivos trust deed, K donated an undivided half share of a certain
property (a farm near Durban) in trust for his 13 children. On K’s death, his will be-
queathed the remaining half share in the property to the same 13 children. The admin-
istration of K’s estate and of the trust was difficult and protracted. At a meeting of heirs
and beneficiaries it was agreed that a company be formed to acquire the assets of the
estate and the trust, the shares in the company to be allotted in a manner which would
give each of the heirs and beneficiaries an interest in proportion to his or her entitle-
ment. The land in question was transferred to the company. The company did not at any
stage purchase any additional land. Prior to the company’s acquisition of the land, the K
estate had received approval for the establishment of various townships on the land, but
the townships were proclaimed after the company acquired the land. The township
conditions provided that the owner was responsible for road making, water supply etc
and these conditions had to be complied with before lots in the township could be
marketed. Between 1950 and 1970 the company spent R95 496 in development costs on
roads, water supply and surveys. The company disposed of land by first developing and
selling one area and then using the funds so raised to acquired to develop and sells lots
in another area.
Holmes JA: The issue in this appeal relates to the difficult question whether profits on the sales
of some of the appellant’s land represented (a) income or (b) capital appreciation . . .
The ratio of the Special Court
The court a quo held that this was not a case of realising a capital asset to the best advantage and
that on the contrary the appellant was carrying on business as a trading company for the purpose
of making profits. The Court’s essential ratio is expressed in the following passage of its judg-
ment –

________________________

67 See Broomberg, Tax Strategy, 2 ed p 10.

68 (1920) 7 TC 629 (KB).
 Trading or Carrying on Business and Schemes of Profit-Making 245

‘While we find that the original purpose in forming the appellant company was, no doubt, to facilitate the
administration and ultimate realisation of the estate and the trust, we find that the appellant’s subsequent
action over a long period of years indicate clearly that it deviated from this original intention. The conclusion
is arrived at after taking account of the objects in the memorandum and after a careful study of its method
of operation in disposing of the immovable property . . . When one adds to this the fact that the company
considered its tax position and accepted that it would be liable for tax on the profits made on the sale of
its land it is difficult to escape the conclusion that the appellant company was an ordinary trading compa-
ny carrying on business as such . . .’
On analysis, the Special Court’s finding of a changed intention was based on –
(1) the objects in the appellant’s memorandum;
(2) the similarity of the directors’ approach to that of a trading company;
(3) the method of operation in the disposing of the property;
(4) the long period of years involved;
(5) the appellant’s decision against block realisation of its land;
(6) the expenditure of a considerable sum of money in developing the property over a period
of 20 years;
(7) the acceptance of the appellant of its liability to pay tax on profits of the sale of land;
(8) the fact that the heirs and beneficiaries realised their interests in the estate and the trust
when shares and debentures were issued to them;
(9) the separate identity of the appellant company, which was free to form its own intention
and was not the alter ego of the beneficiaries; and the view that the events leading up to the
formation of the appellant were of but remote relevance.
The Special Court did not fix a time or stage at which the appellant deviated from the original
intention: it drew an inference of changed intention from ‘the appellant’s subsequent actions
over a long period of years’.
It will be seen from all of the foregoing that the basis of the finding, that the appellant became
an ordinary company trading for profit, was that it subsequently deviated from the original
intention . . .
The appeal in this Court
The corner-stone of the argument on behalf of the respondent was that, basically, if a company
buys land with the object of selling it, and does so at a profit, the latter is regarded as income.
Counsel for the appellant did not collide with this proposition: he sought to turn its flank by
contending that it did not apply because the appellant acted merely as a realis-ation company
and therefore any profit was of a capital nature. It is accordingly necessary to refer to the con-
cept of a realisation company in relation to income tax. As will appear later, in general the
authorities sanction a proposition which may be illustrated along the following lines:
‘Suppose, for example, A and B and C own a tract of land, not having acquired it with a view to sale, and they
wish to realise this capital asset: and they promote a company and become the exclusive shareholders; and
they transfer the land to the company for the purpose of realising the asset; and, when it has been sold,
the company is to be wound up and its assets distributed among the shareholders. The company would be
regarded as a realisation company, and not a company trading for profits, and the surplus would be re-
garded as a capital receipt; unless, of course, the company conducted itself as a business trading for prof-
its, using the land as its stock-in-trade.’
69
The position is well put in Simon, Taxes:
‘If a company is formed for the purpose of facilitating the realisation of property and the company does
no more than act as the means whereby the interests of its shareholders may be properly realised in the
property, surpluses made from sales of the property are not taxable as trading profits since such surpluses
are capital receipts.’
70
On the following page the learned editors cite the case of Rand v Alberni Land Co Ltd. It bears
examination because it has some similarities to the instant case . . .

________________________

69 3rd ed B1.214.
70 (1920) 7 TC 629 (KB).
246 Income Tax in South Africa: Cases and Materials

The following are some extracts from the judgment of Rowlatt J:

‘Now the question is whether this company has really only realised some property held as capital by those
who became its shareholders, namely, the people entitled under the trust . . . or whether it had got to the
point of embarking in a trade or business of which these receipts are the resulting profits.
If a land-owner, finding his property appreciating in value, sells part of it, and uses part of his money still
further to develop the remaining parts and so on, he is not carrying on a trade or business; he is only
property developing and realising his land. If that is to make him liable to income tax . . . I am afraid . . .
nobody would do it.
I do not believe a land-owner would be liable for a moment, and I do not think that the company is liable
. . . I do not think they did more . . . than act as the machinery by which the development and progressive
sale could be carried out, and by which alone, practically speaking, it could be carried out, when the lands
were subject to trust of this kind.
I think that in this case the company has done no more than provide the machinery by which the private
land-owners were enabled, under the peculiar circumstances of their divided title, to properly realise the
capital of the property which they held in the lands in question, and that it is not income or the proceeds
of trade . . .
(My italics)
Rand v Alberni Land Co Ltd, supra, was applied by the Court of Appeal in Taylor v Good (Inspector of
71
Taxes) where Russell LJ said of it:
It was a case in which lands were owned in the ordinary sense (that is to say, not acquired with a view of sale)
by a number of people who set up a company purely as machinery to realise their interests in the land – to
turn land into money. The company expended money in clearing the land and forming roads and even in
procuring a railway company to bring a line to open up the area. This was only a course, it was said, of en-
hancing the value of the land and not of trading.
Continuing with the concept of a realisation company in relation to income tax, one finds the
Privy Council using the expression in 1914 thus –
The argument for the respondents (ie the company assessed to income tax on certain profits) can be stat-
ed in a single sentence. They say they were not a trading company but a realisation company; that the
realisation was truly for the benefit of the original creditors of the three banks; that all the shareholders in
the company are either such original creditors or assignees of such original creditors. If that is the true
view of the situation their Lordships do no doubt that the argument must prevail.
(My italics) . . .
72
A Rhodesian case which merits attention is Realisation Company v COT. In a considered judg-
73
ment Beadle J (Tredgold CJ concurring) accepts the concept of a realisation company, and
74
concludes:
‘It is apparent that a company can be formed to realise certain assets and to realise them without being
liable to tax on any profit resulting from realisation, provided always that the company does nothing more
75
than realise and does not trade, or, as Rowlatt J put it in the Alabama Coal case, as long as there is no
trade embedded in the realisation.’
76
In the South African case of ITC 758 the Special Court was called upon to decide whether the
appellant company was (a) a realisation company and only the machinery by which the mining
company carried out a scheme of liquidation of its assets, or was (b) itself carrying on a profit-
77
making scheme to produce income. Price J expressed himself thus:
‘The appellant is not merely the alter ego of the mining company. In law it is a totally new persona, with its
own administration, its own business and its own separate intentions which cannot be assimilated to the
intention of the mining company, nor altogether to the intention of its promoters. Such antecedent inten-
tions are not immediate – they are remote. They merely provide the ground or motive for the formation of
the appellant company and do not necessarily contain exhaustively the intention of the new company
which are to found mainly in the memorandum. The motive for the formation of the appellant company

________________________

71 [1974] 1 All ER 1137 1143.

72 17 SATC 139.
73 156-160.
74 1951 (1) SA 177 (SR), 17 SATC 159-160.
75 11 TC 232 252.
76 (1952) 19 SATC 94.
77 97.
 Trading or Carrying on Business and Schemes of Profit-Making 247

is not the same thing as the intentions of the appellant company itself. The motive for the formation
of the appellant company was doubtless to realise the assets of the mining company, but the intention
of the appellant company was to acquire those assets for the agreed sum and to sell them for as much as
possible.’
In the instant case Shearer J relied strongly on the foregoing passage. In my view the passage
does not sufficiently recognise the legal position of a realisation company in relation to income
tax, as discussed above. Furthermore, a Court, in deciding whether a company was merely acting
as a realisation company or was carrying on the business of trading for profit, is entitled to look
at the facts leading up to its incorporation, and to its memorandum and articles, and to its subse-
78
quent conduct; see the judgment of Beadle J in Realisation Company v COT, supra. The contrary
view would be simplistic and blinkered. In practice, courts do look at all the circumstances. See
79
Rand v Alberni Land Co Ltd, supra; and cf Natal Estates Ltd v SIR where the history and activities
of the company were considered by this court in deciding whether it had changed its original in-
tention and had gone over to trading and selling land for profit in respect of part of its property . . .
I turn now to the question whether the appellant was indeed a realisation company. In my view
this must be answered affirmatively, for the following reasons in their cumulative effect:
In the preamble to the agreement it is stated that the object is that the company may complete
the realisation of the property; . . .
Clause 2(a) of the agreement states the principal objects of the company. One was to realise the
Konigkramer property to the best advantage . . .
Clause 9 of the agreement provides that when the whole of the Koningkramer property shall
have been realised, the company shall be wound up and the remaining available funds distribut-
ed among the shareholders; . . .
The first object in the company’s memorandum was to adopt and carry into effect the agree-
ment, . . . The company duly adopted the agreement . . .
The company allotted an aggregate of 720 vendor shares to the beneficiaries, according to the
proportionate interest of each in the estate and the trust. There were no other shareholders.
Finally, the Special Court in effect found that, at its inception, the appellant was a realisation
company, but that subsequently the appellant’s actions over a long period of years indicate that
it deviated from this original intention; . . .
In the result, the remaining issue in this appeal is whether, on all the evidence, this latter view
(ie, that the appellant deviated from its original intention and went over to trading for profit)
could reasonably have been reached . . .
I proceed therefore to examine the accepted tests for deciding whether a change of intention
has taken place.
It is, of course, clear that if a realisation company, or any company, so conducts its affairs that it
can be said to be carrying on the trade or business of making profits from the sale of land, using
the latter as its stock-in-trade, the profits will be ‘revenue derived from capital productively em-
80 81
ployed’, and taxable; see Overseas Trust Corporation Ltd v CIR and Natal Estates Ltd v SIR As was
82
said by this court in CIR v Stott:
‘There is no definite test which can always be applied in order to determine whether a gain or profit is in-
come or capital, but in order to convert what is on the face of it an ordinary investment of surplus funds
into a profit-making business there must be proof of some special acts which in the ordinary experience of
men shows that the taxpayer has conceived some scheme for profit-making and has made it his business to
carry it out.’
83
This was amplified by this Court in Natal Estates Ltd v SIR, supra:
‘In deciding whether a case is one of realising a capital asset or of carrying on a business or embarking up-
on a scheme of selling land for profit, one must think one’s way through all of the particular facts of each

________________________

78 150 to 153 in fin.

79 1975 (4) SA 177 (A).
80 1926 AD 444 453.
81 1975 (4) SA 177 (A) 198D-199A.
82 1928 AD 252 264 in fin.
83 202G-203A.
248 Income Tax in South Africa: Cases and Materials

case. Important considerations include, inter alia, the intention of the owner, both at the time of buying
the land and when selling it (for his intention may have changed in the interim); the objects of the owner,
if a company, the activities of the owner in relation to his land up to the time of deciding to sell it in whole
or in part, the light which such activities throw on the owner’s ipse dixit as to intention; where the owner
subdivides the land, the planning, extent, duration, nature, degree, organisation and marketing opera-
tions of the enterprise, and the relationship of all this to the ordinary commercial concept of carrying on a
business or embarking on a scheme for profit. Those considerations are not individually decisive and the
list is not exhaustive. From the totality of the facts one enquires whether it can be said that the owner had
crossed the Rubicon and gone over to the business, or embarked upon a scheme of selling such land for
profit, using the land as his stock-in-trade.’
In the light of the foregoing principles, one is now in a position to discuss the reasons of the
Special Court . . .
It has long been recognised that an owner who subdivides his land in order to sell it is not neces-
84
sarily carrying on the business of trading for profit; see CIR v Stott. Whether he reaches the
stage of embedding the process of realisation into a trading for profit is often difficult to decide,
and it depends on the cumulative effect of a variety of factors; see Natal Estates Ltd v SIR, supra. In
the present case the modus operandi, in essence, was to sell some lots and then use the proceeds
to build roads and thereby open up another area for the sale of lots. This needs the hand of
time. The executors had not got very far after 22 years; and it is not suggested that that made
them traders for profit. As to the question of selling blocks of land the minutes of the appellant’s
annual general meeting in 1955 record that the chairman explained that –
‘the directors had considered the possibility of selling land in blocks rather than in building sites, but that
it was evident that the only way in which the company would ever be able to repay its share and debenture
holders in full would be by selling building sites in an established township. This was not to say, however,
that, if suitable opportunity occurred, the directors would not consider the sale of land in larger areas.’
That seems to me appropriate reasoning, in the sense that one has to tailor the selling to the
exigencies of the market at any particular time. Later, when the opportunity opened up, the
appellant did sell some land in bulk; . . . I am unable to agree with the Special Court’s view that
the earlier decision against selling in bulk
‘suggests that the appellant company was not really concerned with as expeditious a realisation as possible
but approached the question of making a profit in the same way as any trading company would.’
Nor do I agree with the next sentence, namely –
‘Indeed, an examination of all the minutes suggests that throughout this was the approach.’
(My italics)
This does not fully tally with the Court’s finding that originally the intention was to realise the
land . . .
As to (6), supra, namely –
‘an expenditure of a considerable sum of money (R95 000) in developing the property over a period of 20
years. Undoubtedly this is a factor to be taken into account, but it must not be considered in isolation.
One has to look at the picture as a whole. If you have to realise 620 acres of undeveloped land and can on-
ly do it by subdivision coupled with the building of roads, this does involve spending a lot of money. But
this does not of itself mean that you are trading for profits: it depends on all of the circumstances, as was
85
stressed in the Natal Estates Ltd, case, supra. In COT v British Australian Wool Realisation Association Ltd, the
86
Privy Council quoted with approval an apt description by Rowlatt J in another case:
“Merely realising is not trading. It is no good saying it is a trade of realising. But I think what they mean
is: they have taken a process of realising and embedded it in a trade, so that in the course of carrying on
a trade they have in fact done some realising.” ’
On a fair conspectus of all of the facts in the present case I do not consider that it can be said that,
in relation to the project as a whole, the necessary expenditure of money over the years had the
effect of embedding the realisation in a trade for profit.
As to (7), supra, namely –
‘the acceptance by the appellant of its liability to pay tax on profits from the sale of land. This might be
cogent if it could be said to give rise to the inference that the appellant had thereby accepted as a fact that

________________________

84 1928 AD 252.
85 1931 AC 224.
86 252.
 Trading or Carrying on Business and Schemes of Profit-Making 249

it was carrying on the business of trading in land for profit. In my view the evidence does not give rise to
this inference. The matter is not ventilated in the stated case . . .’
To sum up:
The cumulative effect, of what I have just said under (1) to (9), leads me to the conclusion that
the Special Court erred in finding that the appellant subsequently deviated from its intention of
being a realisation company; and indeed, I consider that, on all the evidence, the decision is not
one which could, reasonably be reached. I therefore hold that the profits from the sale of land
for the year ended 30 June 1967 were capital profits and not income.
I would add that, on the facts as a whole, the present case is not comparable with that of Natal
Estates Ltd v SIR, supra. In the latter case the Special Court found that, on the totality of the facts,
the appellant had changed its original intention and had gone over to the business of develop-
87
ing and selling land at La Lucia and Umhlanga Rocks for profit. On appeal, this Court held
that, on all the facts, the Special Court was entitled to find that, to a degree not paralleled in any
reported case, the appellant in that case, with its elaborate and sustained scheme and expertise,
was doing much more than merely realising a capital asset to the best advantage in a businesslike
manner, and that by any canons of commerce it had gone beyond the field: it had crossed the
Rubicon and committed itself on a grand scale to the course and business of selling land for
profit, using the land as its stock-in-trade. That is not the position in the present case, on the
facts as a whole in the stated case before us.
In the result:
1. The appeal is allowed . . .

Notes
As to the theoretical basis of a ‘realisation company’, see the notes following [150]
Realisation Company, above. The decision in Berea West affirms the principle that a
realisation company which does no more than realise the assets in question is not taxable
on the proceeds of the sale; but that if it goes beyond mere realisation and embarks on a
trade or scheme of profit-making, it will be taxable on the proceeds.
The 1976 decision of the Appellate Division in Berea West must be seen as a counter-
balance to its 1975 decision in Natal Estates. Despite the extensive sub-division and devel-
opment of the property in Berea West, the taxpayer was held not to have crossed the
Rubicon; in other words, the taxpayer’s activities constituted the mere realisation of a
capital asset to best advantage and not the commencement of trade or scheme of profit-
making. There is no suggestion in Berea West that greater latitude in this regard is allowed
to a realisation company or trust.

The proceeds of the realisation of an asset by a ‘realisation company’ will be capital only if the asset
in question was a capital asset in the hands of the company at the time of its acquisition.

[152]
CSARS v Founders Hill (Pty) Ltd
[2011] ZASCA 66
Founders Hill (Pty) Ltd was a subsidiary of AECI Ltd. The latter company was formed in
1924 and acquired vast tracts of land in the Johannesburg area. An explosives factory was
thereafter built on the land, but much of the land remained vacant. By the 1980s AECI
no longer required such an extensive area of land, and the company took a strategic
decision to sell or develop the excess land. One of the first steps in the process of doing
so was the formation of Founders Hill (Pty) Ltd, whose main business was stated as being
________________________

87 204E-G.
250 Income Tax in South Africa: Cases and Materials

to acquire certain property from AECI which was held by the latter company as a capital
asset ‘for the sole purpose of realising same to best advantage’, after which Founders Hill
was to be wound up.
Founders Hill had no employees. All its shares were held by AECI and its directors
were those of AECI.
In June 1994 AECI Ltd sold certain erven to Founders Hill for some R14 million, and
transfer was passed two years later. Some erven were subdivided and developed by AECI
before they were sold to Founders Hill. In 1996, Founders Hill sub-divided and sold two
of the erven to third parties, and further sub-division and sales followed. Founders Hill
engaged professionals to develop certain of the erven it had acquired from AECI and
incurred expenditure to ensure that the sub-divided stands could be sold with services
such as the provision of water, electricity and sewage, and Founders Hill incurred ex-
penditure of some R11 million in developing and marketing the properties. A wholly-
owned subsidiary of AECI, Heartland Properties (Pty) Ltd was formed to promote the
sale of certain of the properties.
Issue: Were the proceeds of the sales of land in issue by Founders Hill (Pty) Ltd capital
or revenue?
Held: the proceeds of the sales were revenue; from the outset, Founders Hill (Pty) Ltd
had acquired the land in question, not as a capital asset, but with the intention of devel-
oping and then selling it in the course of a business, and the land was therefore held and
sold as stock-in-trade.
Lewis JA (HARMS DP, NUGENT AND MALAN JJA AND PLASKET AJA CONCURRING)
[2] In Natal Estates Ltd v SIR88 this court decided (in simplified terms – I shall return to the deci-
sion later) that where a landowner which89 had held land for some time as a capital asset, but
then embarked on a project of selling off the land on a large scale, it had ‘crossed the Rubicon’
and had not merely sold an investment, the profit in respect of which would be regarded as capi-
tal: it had become a trader in land such that any profits it made amounted to taxable income.
[3] The respondent, Founders Hill (Pty) Ltd (Founders Hill), is described as a ‘realization
company’ since it was formed for the avowed purpose of realising land formerly owned as a capi-
tal asset by its holding company, AECI Ltd (AECI). A realisation company, in the present con-
text, is one formed for the purpose of facilitating the realisation of property and the company
does no more than act as the means by which the interests of its shareholders in the property
may be properly realised. Surpluses made from sales of the property are supposedly not taxable
as trading profits since such surpluses are capital receipts. But it is accepted that such a compa-
ny, too, might cross the Rubicon and the appellant, the Commissioner for the South African
Revenue Service, contended that Founders Hill had indeed crossed the Rubicon when it sold
erven on which it realised profits. (I shall refer to the erven as such, or to property or land inter-
changeably.) Founders Hill maintained that it had done no more than realise a capital asset
advantageously. The parties (and the tax court) thus both approached the matter on the suppo-
sition that the property was a capital asset in the hands of Founders Hill upon its acquisition, and
that the question for determination was whether Founders Hill subsequently ‘crossed the Rubi-
con’ by starting to trade in the property.
[4] But approaching the matter in that way begs the question whether the property was a capital
asset in the hands of Founders Hill in the first place. As will be seen, Founders Hill purchased
the property from AECI for the very purpose of developing and reselling it. And so the initial
question, in my view, is whether the property was acquired by it as stock-in-trade, or whether it
was acquired as a capital asset. It is only if the property was acquired at the outset as a capital

________________________

88 Natal Estates Ltd v SIR 1975 (4) SA 177 (A).

89 Commissioner of Taxes v Booysens Estates Ltd 1918 AD 576 at 580. See also Overseas Trust Corporation Ltd v CIR
1926 AD 444 at 452-3, and CIR v Pick ‘n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A) at 46A-52B,
where there is a comprehensive analysis of the cases dealing with the distinction.
 Trading or Carrying on Business and Schemes of Profit-Making 251

asset that a second question arises – the question that was considered by the court below – which
is whether it thereafter ‘crossed the Rubicon’ by commencing to engage in the business90 of trad-
ing in the property. The distinction between realising an investment on the one hand, and carry-
ing on the business of trading, on the other, is one long recognised. In Commissioner of Taxes v
Booysens Estates Ltd91 Innes CJ, referring to and quoting from Californian Copper Syndicate v Internal
Revenue,92 said that it was well established that where an investment was realised as a profit, the
enhanced value was not taxable, but that ‘where what is done is not merely a realisation or
change of investment, but an act done in what is truly the carrying on or carrying out of a busi-
ness’, the profit made is regarded as taxable income.
[6] Founders Hill objected to the assessment on the ground that the proceeds of the sales were
capital in nature. The objection was disallowed on the basis that Founders Hill was a trader in
land. It appealed against the Commissioner’s ruling. The Johannesburg Tax Court (Joffe J and
two assessors) upheld the appeal. Starting from the supposition that Founders Hill had acquired
the land as a capital asset, it held that the property had remained a capital asset at the time it was
sold, with the result that the profit was a capital gain and not taxable income. It referred the
matter back to the Commissioner to revise the relevant assessments on the basis that no tax was
payable on the transactions in issue. It granted leave to appeal to this court. The total amount in
issue is some R1 303 588, including the interest.

The history of the property

The formation of Founders Hill
[11] One of the first steps was the formation of Founders Hill – a wholly owned subsidiary of
AECI. It was incorporated at the beginning of 1993 and its main business was:
‘To acquire from AECI Limited certain properties situated at Modderfontein, Johannesburg which are
held by AECI Limited as a capital asset and which have become surplus to its needs, for the sole purpose of
realising same to best advantage and within a period of one year of completion of such realisation to be vol-
untarily wound up’ (my emphasis).
The main object of the company was in identical terms.

Were the profits made on the sale of Founders Hill’s property capital or income?
[18] As I have said, the Commissioner impliedly accepted that Founders Hill acquired the
properties as capital assets, but contended that having regard to the extent of its activities, it had
crossed the Rubicon because it had started to trade in the land that it acquired from AECI, and
that its profits were accordingly income, and taxable as such. He argued that Founders Hill’s
intention was that of AECI since the latter was the controlling mind of Founders Hill. Although
its initial intention may have been different, it changed, he argued, as was manifest from the
activities of Founders Hill over the years when the erven were sold. The sales during the years of
assessment in question could not be viewed in isolation from those preceding and following that
time. The realisation programme of AECI was vast, and Founders Hill was but one of six compa-
nies formed by AECI to sell its surplus land throughout South Africa.
[19] Founders Hill argued, on the other hand, that its intention at all times was to realise the
land held as a capital asset. That was the purpose of the company from inception. That is evi-
dent, it contended, from the memorandum of association, set out earlier. A taxpayer is entitled
to realise an asset to best advantage, a principle recognised for nearly a century in South African
law. Founders Hill cited in support of this proposition the cases of Commissioner of Taxes v
Booysens Estates Ltd93 and Commissioner for Inland Revenue v Stott94 where Sir John Wessels JA said:

________________________

90 Californian Copper Syndicate v Internal Revenue (1904) Sc (Court of Session) LR 691 at 694.
91 Commissioner of Taxes v Booysens Estates Ltd 1918 AD 576 at 580. See also Overseas Trust Corporation Ltd v CIR
Revenue 1926 AD 444 at 452-3, and CIR v Pick ‘n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A) at 46A-
52B, where there is a comprehensive analysis of the cases dealing with the distinction.
92 Californian Copper Syndicate v Internal Revenue (1904) Sc (Court of Session) LR 691 at 694.
93 Commissioner of Taxes v Booysens Estates Ltd 1918 AD 576 at 595.
94 CIR v Stott 1928 AD 252 at 263. See also CIR v Malcomess Properties (Isando) Pty Ltd [1990] ZASCA 163; 1991
(2) SA 27 (A) at 34H-I.
252 Income Tax in South Africa: Cases and Materials

‘Every person who invests his surplus funds in land . . . is entitled to realize such asset to the best advantage
and to accommodate the asset to the exigencies of the market in which he is selling. The fact that he does
so cannot alter what is an investment of capital into a trade or business for earning profits.’
[20] And similarly in John Bell and Co (Pty) Ltd v SIR,95 PJ Wessels JA, after referring to the pas-
sage in Stott cited said:
‘The mere fact, therefore, that a person deliberately delays the disposal of a capital asset because, upon his
“reading” of the property market, “the hand of time” is needed in order to realise the asset to best ad-
vantage cannot, in my opinion, result in a change in the character of the asset so as to alter it from a capi-
tal asset, held for the purpose of advantageous disposal, to stock-in-trade, held for the purpose of earning
income in the course “of an operation of business in carrying out a scheme for profit-making” [Natal Es-
tates at 199A–B].’
[21] This court invoked in support of the proposition that a taxpayer is entitled to realise prop-
erty ‘to best advantage’ the decision in Californian Copper Syndicate v Internal Revenue96 where
Clerk LJ said that it was a settled principle that if the owner of an investment chooses to realise
it, and makes a profit, the profit is not taxable as income. But he also said:
‘But it is equally well established that enhanced values obtained from realisation or conversion of securi-
ties may be so assessable where what is done is not merely a realisation or a change in investment, but an
act done in what is truly the carrying on, or carrying out of a business.’
As I have said, on the parties’ formulation of the issue in this case, the question was whether
Founders Hill realised the erven to best advantage or whether it embarked upon the business of
selling land.
[22] The Commissioner relied extensively on Natal Estates Ltd v SIR97 to which I now turn. In
Natal Estates the taxpayer owned vast tracts of land (initially some 21 000 acres, some of which
was expropriated from time to time, but to which it also added from time to time) along the
coast north of Durban. For decades it had cultivated sugar cane on the land. In the late 1950s
the board of directors had contemplated developing townships in the areas of La Lucia and
Umhlanga Rocks. By 1963 the company that originally owned the land was taken over by Natal
Estates, which established the townships of La Lucia and Umhlanga Rocks. Tracts of land were
sold to various developers for township development. Between 1965 and 1970 Natal Estates sold
nearly 5 000 acres. The Secretary for Inland Revenue issued an assessment in 1972 for the years
from 1965 to 1972 on the basis that the profits realised were taxable as income.
[23] The Special Income Tax Court, to which Natal Estates appealed, found that it had traded
in land and dismissed the appeal against the assessment. Holmes JA, on appeal to this court,
after stating that it was clear that a taxpayer may realise an asset once owned as capital to best
advantage, held that in this matter there had been a change in the intention of the taxpayer: it
had become a dealer in land and was taxable on the income that it made from trading. The
court rejected the contention that its business operations in regard to the sales of land in Um-
hlanga Rocks and La Lucia amounted only to the realisation of a capital asset to best advantage
and that it was not using its land as stock-in-trade in a profit-making business. Holmes JA said:98
‘In deciding whether a case is one of realising a capital asset or of carrying on a business or embarking up-
on a scheme of selling land for profit, one must think one’s way through all of the particular facts of each
case. Important considerations include, inter alia, the intention of owner, both at the time of buying the
land and when selling it (for his intention may have changed in the interim); the objects of the owner, if a
company; the activities of the owner in relation to his land up to the time of deciding to sell it in whole or
in part; the light which such activities throw on the owner’s ipse dixit as to intention; where the owner sub-
divides the land, the planning, extent, duration, nature, degree, organisation and marketing operations of
the enterprise; and the relationship of all this to the ordinary commercial concept of carrying on a busi-
ness or embarking on a scheme for profit. Those considerations are not individually decisive and the list is
not exhaustive. From the totality of the facts one enquires whether it can be said that the owner had
crossed the Rubicon and gone over to the business, or embarked upon a scheme, of selling such land for
profit, using the land as his stock-in-trade.’

________________________

95 John Bell and Co (Pty) Ltd v SIR 1976 (4) SA 415 (A) at 428E-F.
96 Californian Copper Syndicate v Internal Revenue (1904) Sc (Court of Session) LR 691 at 694.
97 Natal Estates Ltd v SIR 1975 (4) SA 177 (A).
98 At 202G-203B.
 Trading or Carrying on Business and Schemes of Profit-Making 253

[24] But even looking at the totality of facts, and the taxpayer’s intention, discerning where the
Rubicon lies gives rise to difficulty. As EB Broomberg said of Natal Estates:99
‘The uncertainty created by the judgment is manifest in the use of the picturesque “crossing the Rubicon”,
which has become the trade-mark, so to speak, of this judgment. But to what “Rubicon” are we directed? Is
it the objective conduct of the taxpayer which converts what was a mere realization into an observable
trade? Or is it a purely mental turning point relating to the attitude of the taxpayer to his asset?’
[25] Assuming that a taxpayer acquires an asset with the intention to hold it as capital, a change
in that intention (if such be proved) on the part of the owner who realises it, should not be the
only determinant of the nature of the profits made. Were it to be otherwise a number of difficul-
ties arise. Whose intention is relevant? And at what stage? If the taxpayer is a realisation company
wholly owned by the original owner of the asset in question, is it the intention of the subsidiary
or its controlling mind that counts? In my view, although this need not be decided at this point,
the question should be whether the taxpayer is actually trading, or carrying on a business, at the
time of assessment, and not merely whether or not it has changed its mind. Of course the inten-
tion of all concerned must be considered, but intention cannot be conclusive in the enquiry. As
Schreiner JA said in CIR v Richmond Estates (Pty) Ltd:100
‘The decisions of this Court have recognised the importance of the intention with which property was ac-
quired and have taken account of the possibility that a change of intention or policy may also affect the
result. But they have not laid down that a possibility that a change of policy or intention by itself effects a
change in the character of the assets.’
[26] The difficulties attendant on invoking the intention of a taxpayer as the litmus test which
determines whether the proceeds of an asset sold are of a capital or income nature are made
101
plain too in Malan v KBI where E M Grosskopf J said that intentions by their nature are
changeable and often not fully formulated; and evidence after the event, however honest, is not
always reliable, sometimes being reconstructed.102 And of course in Natal Estates, in the passage
cited, Holmes JA said clearly that one must ‘think one’s way through all the facts’103 and thus not
rely only upon what the taxpayer claimed had been its original and continuing intention.
[27] Naturally the Commissioner in this matter contended that Founders Hill had crossed the
Rubicon. And Founders Hill maintained that it was still in Gaul, having realised capital assets it
held for that sole purpose. Joffe J in the tax court, starting on the supposition that the land had
been acquired by Founders Hill as a capital asset, found that the Rubicon had indeed not been
crossed. But he did not explain why. Founders Hill, on appeal, relied chiefly on the fact that its
sole purpose was to sell off the land which AECI had held for decades: its intention, it said, was
to realise capital assets to best advantage. That, as I have said, begs the question whether it ac-
quired capital assets or stock-in-trade in the first place. The tax court apparently concluded (and
before us Founders Hill contended) that because AECI had transferred surplus land in Modder-
fontein to a subsidiary company, Founders Hill, in order for the latter to realise the land, there
was an intention to realise what was a capital asset to best advantage. Founders Hill bought no
additional land, and it did not become a trader in property. The interposition of the realisation
company was thus of great significance. I shall deal with realisation entities and their purpose in
due course. But I shall deal first with the question of intention.

The intention of Founders Hill

[28] Founders Hill was formed as a ‘realization company’ on legal advice. Its witnesses were very
conscious of two principles: that it was entitled to ‘realize the property to best advantage’; and
that in so doing it should not ‘cross the Rubicon’. The problem lies in the fact that they had
failed to appreciate that the realization of property to best advantage applies to the realization of
a capital asset only and the fact that a taxpayer refers to an asset as a capital asset does not make
it one. It had acquired the erven with the express intention of selling them – carrying on the
________________________

99 1975 Annual Survey of South African Law p 517.

100 CIR v Richmond Estates (Pty) Ltd 1956 (1) SA 602 (A) at 610C-D.
101 Malan v KBI 1981 (2) SA 91 (C) at 96E-G.
102 See also ITC 1185 35 SATC 122 at 123-4, where Miller J said much the same: his dicta were relied on by
Grosskopf J in Malan.
103 For criticism of reliance on intention alone see Gavin Urquhart ‘Capital v Revenue: Some Light in the
Darkness?’ 1979 Acta Juridica p 299.
254 Income Tax in South Africa: Cases and Materials

business of selling land. The view taken that the interposition of a realisation company would in
some way enhance the intention to realise capital assets, rather than to trade, requires greater
scrutiny.

Realisation entities
[29] The principal progenitor of cases in South Africa dealing with realisation companies104 is
105
Berea West Estates (Pty) Ltd v SIR, also a judgment of Holmes JA in this court, where the profit on
the sale of land by a company formed for the purpose of realising land held for many years by
different family members, was found to be capital in nature. . . .
[38] The court concluded that Berea West had not traded in land and was not taxable on the
profits that it made on its sales over time. Holmes JA held that the beneficiaries had set up the
company ‘for the purpose of facilitating the realisation of the land, and that the company, in
which they became the shareholders, was merely the machinery for realising their interest in the
land’.106 On the special court’s reasoning, he said, all realisation companies would be taxable on
their profits.
[39] What, then, is the difference between Natal Estates, on the one hand, and Berea West on the
other? Some writers have assumed that the mere interposition of a realisation company makes
the difference. Silke on South African Income Tax 22 states:
‘An important exception to the general rule that if a company acquires an asset with the express object of
reselling it the proceeds are income is to be found in the concept of realization company, which is applied
when the transaction is not undertaken as a scheme of profit-making.’
[40] Similarly, RC Williams Income Tax in South Africa: Law and Practice107 states that ‘it is well
established that . . . realisation to best advantage may be effected by means of a company or trust
(a so-called “realisation company” or “realisation trust”)’. Both Silke and Williams cite Berea West
as authority for the proposition. It is possible that counsel who advised AECI took the same view,
hence the transfer of the erven in question to Founders Hill. Yet Holmes JA in Berea West108 made
it quite clear that if a realisation company ‘so conducts its affairs that it can be said to be carrying
on the trade or business of making profits from the sale of land, using the latter as its stock-in-
trade, the profits will be “revenue derived from capital productively employed”.109’
[41] Founders Hill relied also on ITC 1481110 where a company had been formed for the sole
purpose of acquiring land, subdividing and selling it. The court found that the company had not
embarked on the business of township development and selling land for profit. The court held
that Natal Estates was distinguishable because of the extent of the development, the marketing,
and construction of houses. In my view, the test whether the taxpayer is engaged in the business
of selling, and therefore taxable on profits, cannot depend only on the degree of its activities.
The case is not in line with the cases on realisation entities discussed in Berea West and below,
and was based on the supposition that the land was capital in the hands of the realisation com-
pany. It is thus of no assistance in determining the matter before us.

Where the interposition of realisation entities does not change the capital nature of the property
sold
[42] Calling an entity a ‘realization company’ (and limiting its objects and restricting its selling
activities in respect of the assets transferred to it), is not itself a magical act that inevitably makes
the profits derived from the sale of the assets of a capital nature. Silke recognises this when it
states that it is conceivable that a realisation company can change its intention and start trading
in the assets. But this assumption begs the question whether, in circumstances where the original
holder of the assets could, without the interposition of a subsidiary company (the sole purpose
________________________

104 There are earlier decisions in the Southern Africa tax courts, most notably Realisation Company v Commis-
sioner of Taxes 1951 (1) SA 177 (SR), referred to by this court in Berea West Estates (Pty) Ltd v SIR below.
105 Berea West Estates (Pty) Ltd v SIR 1976 (2) SA 614 (A).
106 At 634F.
107 P 176.
108 At 631E-G.
109 A quotation from Overseas Trust Corporation Ltd v Commissioner for Inland Revenue 1926 AD 444 at 453.
110 ITC 1481 52 SATC 285 (Eastern Cape Special Court).
 Trading or Carrying on Business and Schemes of Profit-Making 255

of which is to realise what was in the former owner’s hands a capital asset), realise the assets it-
self, there could ever be an intention on the part of the interposed entity to realise the property it
has acquired as a capital asset. If the sole purpose of the transfer to the realisation company is so
that it can realise the property, on what basis can it be said that it ever held it as capital?
[43] Referring to companies formed for the purpose of realising property Clerk LJ stated the
general rule in Californian Copper Syndicate:111 in such cases ‘it is not doubtful that where they
make a gain by a realisation, the gain they make is liable to be assessed for income tax’.112 The
import of this statement is that when an entity is formed for the sole purpose of realising proper-
ty, profits achieved amount to income made from trading.
[44] In my view an interposed realisation company (or other entity) will stand in the shoes of
the entity that has transferred assets to it, and hold them in turn as capital assets, only in special
circumstances, exemplified in Holmes JA’s judgment in Berea West (where A, B and C hold shares
in property and require a vehicle to sell them as advantageously as possible, as was the case in
Berea West), or where there is a need to protect the assets from the original holder. Malone Trust v
SIR113 is an illustration of the latter situation.

Did Founders Hill acquire capital assets or stock-in-trade?

[53] Founders Hill was not merely AECI’s alter ego. It was formed solely for the purpose of
acquiring the property and then developing and selling it at a profit and I see no reason then
why the property was not stock-in-trade. This is apparent from the terms of the memorandum of
association and was confirmed by the minutes of the board of directors and the witnesses as well
as the manner in which it dealt with the properties. As I have said, the mere fact that Founders
Hill said that it acquired the properties as capital assets did not make them such. [The business
of Founders Hill was] to develop the erven and sell them. Its intention in acquiring was differ-
ent from that which AECI had had, at least originally, to hold its surplus land as a capital invest-
ment. Founders Hill’s profits were gains ‘made by an operation of business in carrying out a
scheme for profit-making’ and therefore revenue derived from capital productively employed
and must be taxable income. Counsel for Founders Hill could not explain why it was formed,
and AECI assets sold to it, other than on the basis that AECI had taken legal advice to this end.
That is not an explanation. And the case does not fall within the exception recognised on the
special facts of Berea West where the realisation of the property was not the main purpose of the
interposition of the trust but a subsidiary one, or where, in the example of Holmes JA, three
parties form a company to enable them to realise their properties to their best advantage. Spe-
cial cases do not create general rules.
[54] I therefore consider that Founders Hill acquired the property as stock-in-trade and then
conducted business in trading in the property and that the profits made were taxable as income.
The Commissioner’s assessments in the tax years 2000 and 2001 were thus correct.

Notes
In [151] Berea West Estates (Pty) Ltd v SIR the Appellate Division held that the taxpayer
company in that case was a ‘realisation company’ – a concept explained in the judgment
– and that when it sold land that it had acquired for the purposes of mere realisation, as
distinct from trading in land, the proceeds of the sale were capital.
The decision in Founders Hill does not hold that the decision in Berea West was wrong.
To that extent, the decision in Founders Hill does not, in principle, annihilate the concept
of a realisation company.
However, the decision in Founders Hill holds that the proceeds of the sale of property
by a so-called realisation company (a label that, as the court points out, has no magical
quality) will be capital only where the property was acquired and held by the realisation
________________________

111 Above at 694.

112 See the analysis of the passage by Nicholas AJA in CIR v Pick ‘n Pay Employee Share Purchase Trust [1992]
ZASCA 84; 1992 (4) SA 39 (A) at 49E-I.
113 Malone Trust v SIR 1977 (2) SA 819 (A).
256 Income Tax in South Africa: Cases and Materials

company as a capital asset. In Founders Hill, the Supreme Court of Appeal held that, at
the time of acquisition, the company intended to sell the land at a profit – and that it did
so in the course of a trade – thus, from the time of acquisition, the property was never a
capital asset in its hands.
In Founders Hill the Supreme Court of Appeal held (at para [44]) that it is only in spe-
cial circumstances that the proceeds of property acquired and disposed of by a so-called
realisation company will be capital and not revenue. Such circumstances, says the judg-
ment (at para [53]) will be where (as in Berea West) ‘the realization of the property was
not the main purpose of the interposition of the trust but a subsidiary one’ or (see the
judgment at [44]) where (as in Berea West) ‘A, B and C hold shares in property and
require a vehicle to sell them as advantageously as possible’ or where (as in Malone Trust)
‘there is a need to protect the assets from the original holder’.

A taxpayer who realises a capital asset is entitled to do so in the most advantageous way; the pro-
ceeds of the realisation will be of a capital nature, unless he goes beyond mere realisation and em-
barks on a trade or scheme of profit-making.

[153]
Elandsheuwel Farming (Edms) Bpk v SBI
1978 (1) SA 101 (A), 39 SATC 163
For the facts of this case, see extract [182].
Corbett JA: (dissenting) [W]here a taxpayer wishes to realize a capital asset he may do so to best
advantage and the fact that he does just this cannot of itself convert what is a capital realization
114 115
into a business or a profit-making scheme (see Natal Estates case; John Bell case ). There are,
however, limits to what a taxpayer may do in order to realize to best advantage. The manner of
realization may be such that it can be said that the taxpayer has in reality gone over to the run-
ning of a business or embarked upon a profit-making scheme. The test is one of degree. (Natal
Estates case (supra))116 . . .

The mere fact that the taxpayer has converted a building, hitherto held as a capital asset, to sectional
title before selling the individual units does not necessarily constitute the ‘something more’ that
makes the sale a scheme of profit-making as opposed to the mere realisation, to best advantage, of a
capital asset.

[154]
Berea Park Avenue Properties (Pty) Ltd v CIR
1995 (2) SA 411 (A), 57 SATC 167
The taxpayer was a private company, incorporated in 1974, whose main object was to
acquire and develop property situated in Pretoria. The property in question, a certain
vacant consolidated erf, was acquired soon after the company’s incorporation. In 1975,
two individuals, Ellinas and Pashiou, purchased the shares and loan accounts and were
appointed directors of the company. These two individuals also carried on business in
Pretoria as building contractors through a company called Pace Construction (Pty) Ltd
(‘Pace’) which had been incorporated in 1973. They each owned half the shares of the
latter company and were the directors.

________________________

114 At 199, 201-202.

115 At 428-429.
116 At 199.
 Trading or Carrying on Business and Schemes of Profit-Making 257

In 1975, the taxpayer company, now under the control of Ellinas and Pashiou, decided
to develop the appellant’s vacant erf. An eight-storey block of 45 flats known as ‘Vasella’
was erected. The construction work was done by Pace. The building was completed in
August 1976. The flats were then let and rental income was earned. In October 1979 the
taxpayer company resolved to convert the property to sectional title, and this was duly
done.
Some five months later, in August 1980, the taxpayer company sold all the units for
the sum of R1.3m. The taxpayer contended that liquidity problems affecting Pace neces-
sitated the sale of the block of flats in question. The financial well-being of Pace was all-
important to E and P as it was ‘the goose that laid the golden egg’ and their main source
of income. The sale of the property restored Pace to financial stability.
The Commissioner assessed the taxpayer company to tax on the basis that the sale was
in pursuance of a profit-making scheme. The Tax Court upheld the assessment, taking
the view that, with the opening of the sectional title register, the taxpayer company had a
change of intention vis-à-vis the property, and had an overriding motive to sell when it
became profitable to do so; alternatively that the taxpayer company had a dual intention,
either to rent out the property or to sell it at a profit.
Issue: was the sale of the property a mere realisation of a capital asset, or the culmina-
tion of a scheme of profit-making?
Held: the sale was a realisation of capital, and the proceeds were capital.
On appeal, the court held that the block of flats, Vasella, was initially a capital asset,
held to produce rental income. The court held that, in many cases, a sale by sectional
title will indicate that a trade has been embarked upon but this was not necessarily so. In
the present case, the opening of a sectional title register in respect of the property in
question did not point to a profit-making scheme. A taxpayer who is a land-jobber (a
dealer in land) may hold other property as an investment and not part of his trading
stock. It therefore did not follow that all the business affairs of the taxpayer’s share-
holders were ‘interrelated and interdependent’. It was held that the taxpayer company
had succeeded in establishing that no change of intention of the kind that converts a
capital asset into stock-in-trade had occurred. The proceeds of the sale of the property
were therefore of a capital nature.
Nestadt JA: Two factors are of decisive importance in deciding the type of problem with which
we are faced. They are (i) the intention with which the taxpayer acquired the property and (ii)
the circumstances in which the property was sold (Malan v KBI).117 I commence with a considera-
tion of the former. The appellant’s intention is to be determined by examining the state of mind
of Ellinas and Pashiou when they acquired the shares in the appellant and when, shortly after-
wards, Vasella was erected. At the time of the hearing before the Special Court Pashiou’s health
was such that he was unable to testify. However, Ellinas gave evidence on behalf of the appellant.
He stated that the project was an investment ‘for ourselves and our children’; the intention was
‘to keep the building for rental’ . . . And, as the Special Court pointed out, not only was the
evidence in question not seriously disputed, but in argument its veracity was accepted by the
Commissioner’s representative . . .
One proceeds then on the basis that, initially at least, Vasella was a capital asset. But this is not
conclusive in favour of the appellant. As has been indicated, the circumstances in which the
property was sold must be looked to. In a given case they may reveal that there was a change of
intention in the sense, not merely of a decision to realise the asset (to best advantage), but by
the adoption of a new policy which has the effect of converting the character of the asset to trad-
ing stock in a profit-making scheme or business (Elandsheuwel Farming (Edms) Bpk v SBI).118

________________________

117 1983 (3) SA 1 (A) at 10B.

118 1978 (1) SA 101 (A) at 118F-119 in fin.
258 Income Tax in South Africa: Cases and Materials

This, so it was contended on behalf of [SARS] is what happened in the case of the appellant. On
grounds to which I shall in due course refer, it was argued that the intention to hold the proper-
ty as a long-term investment changed in 1979 and the appellant thereafter crossed the Rubicon
and used the property in a profit-making scheme. The appellant disputed this. And most of the
evidence adduced by it to the Special Court was aimed at discharging the onus which it bore of
negativing the alleged change of intention . . .
Often the reason why a taxpayer sells an asset will be irrelevant. A capital investment may be
disposed of for whatever motive. But . . . the reason for disposal might provide a good indication
that there had been a change of intention and that a profit-making scheme was afoot. It is there-
fore not surprising that in its evidence the appellant sought in some detail to explain why, con-
trary to its declared intention to retain Vasella, the property was sold. The reason advanced
hinged around Pace and was to the following effect. The financial well-being of this company
was all important to Ellinas and Pashiou. According to their auditor, Pace was ‘the goose that
laid the golden egg’; it was their main source of income . . . But by 1978 liquidity problems had
developed. The company was short of working capital. Its overdraft facilities were inadequate.
. . . And over the next two years its financial position worsened. The company was ‘in a very pre-
carious state’. Efforts were accordingly made to borrow money which could be injected into
Pace. They were unsuccessful . . . As Ellinas said, there was no option but to sell; he did not want
to sell Vasella; he had to sell it to save Pace; had he not done so Pace could have been liquidated.
Save that Pashiou was even more reluctant to dispose of the property, this reflected his state of
mind as well. Thus it was that the units comprising Vasella were sold. With the proceeds of the
sale the appellant repaid the sum of R160 520 owing to Pace for the construction of Vasella and
in addition lent Pace R638 958. Pace accordingly received from the appellant just under R800
000. In the result, so it would seem, Pace was restored to financial stability; at least its liquidity
crisis was overcome.
On this evidence, it is clear, I think, that Vasella remained a capital asset; that there was no
change of intention as alleged by the respondent . . .
In considering the correctness of both courts’ judgments, and in particular their finding that
there was a change of intention, it will be apparent that there are, broadly speaking, three fac-
tors that require analysis. They are (1) Pace’s illiquidity; (2) the conversion of Vasella to a sec-
tional title scheme; and (3) the land-jobbing activities of Ellinas and Pashiou. Obviously they are
interdependent and must be cumulatively weighed. It will be convenient, however, to deal with
them separately. I proceed to do so.
[In regard to Pace’s illiquidity, the court considered the evidence and proceeded:] It is, of
course, true that the object of paying the proceeds of the sale of Vasella to Pace was to enable
Pace to continue with its profit-making activities (and probably to enhance them) . . . [The rea-
soning of the court a quo] was that Ellinas and Pashiou must have realised that the appellant
would have to sell at least part of its interest in Vasella. But this is not borne out by the evidence
of Ellinas. He said that in 1976 when Vasella was erected he did not contemplate that Pace would
have any difficulty in carrying the loan owed by the appellant; it was not foreseen that repayment
would be required by Pace, at least not until the appellant’s bond had been paid; and thereafter
the appellant would be able to pay Pace from its rental income.
. . . I do not think that the opening of a sectional title register in respect of Vasella pointed to a
profit-making scheme.
. . . Ellinas and Pashiou were minority shareholders in five other property-owning companies
whose shares or properties (blocks of flats) were (for the most part during 1979 and 1980) sold
at a profit . . . There was, as the court a quo observed, credible evidence that Ellinas and Pashiou
were at pains to keep the speculative ventures apart from what they considered to be invest-
ments; ‘a clear divide’, as it was referred to. This may, of course, be done. A taxpayer who is a
land-jobber may have other property as an investment and which is therefore not part of his
trading stock (cf Cohen v CIR).119 So it does not follow that all the business affairs of Ellinas and
Pashiou were (in the words of the Full Court) ‘interrelated and interdependent’. If they contin-
ued to regard Vasella as an investment, the building did not become part of the stock-in-trade of
their business of dealing in land.
________________________

119 1962 (2) SA 367 (A) at 376C-F.

 Trading or Carrying on Business and Schemes of Profit-Making 259

The test whether a taxpayer has embarked on a profit-making scheme is one of degree. Often,
therefore, a decision whether this has occurred is a finely-balanced one. The present matter
exemplifies this. I have, nevertheless, come to the firm conclusion that the appellant succeeded
in establishing that no change (of the kind that converts a capital asset into stock-in-trade)
occurred in its intention to hold Vasella as a long-term investment. The property was kept for
five years. The appellant’s reluctance to sell . . . is not easily reconcilable with the voluntary un-
dertaking of a profit-making scheme. The proceeds were not (as one would have expected, had
the sale of Vasella been part of Ellinas and Pashiou’s land-jobbing,) used to deal in other fixed
property. Nor . . . can an inference of such dealing be drawn from the opening of a sectional title
register. As I have said, this was done on legal advice and as a precautionary measure. It was a pru-
dent step. In any event, the appellant was entitled to adapt its asset to the exigencies of the market
and dispose of it to best advantage . . . I therefore cannot agree with the respondent’s argument
(based on the language of Wessels JA in John Bell & Co (Pty) Ltd v SIR 120 that the appellant’s conver-
sion of Vasella to a sectional title scheme was the ‘something more’ which metamorphosed its
character. More especially is this so seeing . . . that Ellinas’ and Pashiou’s land-jobbing opera-
tions were of a restricted nature. In my view Vasella never became part of such operations. The
appellant never went over to the business of trading in fixed property. There was a mere change
of intention without the intervention of any new or additional factor. The profit on the sale of
Vasella was of a capital nature. It was, therefore, incorrectly included in its taxable income.
The appeal succeeds . . . The matter is referred back to the Commissioner for Inland Revenue
for assessment on the basis that the profit . . .on the sale of Vasella should not have been includ-
ed in the appellant’s taxable income.’
JOUBERT JA, VAN HEERDEN JA, KUMLEBEN JA and NICHOLAS AJA concurred.

Notes
In every case in which the taxpayer sells an asset that was previously of a capital nature in
his hands, and SARS contends that the proceeds of the sale are taxable as income, the
issue will arise as to whether the taxpayer had undergone a ‘change of intention’ and
had ‘crossed the Rubicon’. The decisions in Natal Estates121 and Berea West 122 are land-
marks in this regard. The Rubicon is the dividing line between merely realising a capital
asset to best advantage, and embarking on a trade or scheme of profit-making, using the
property as stock-in-trade.
In Berea West the fact that the taxpayer had subdivided the property before sale did
not, of itself, mean that the Rubicon had been crossed. In the present case, it was held
that the mere fact that the taxpayer had converted a property to sectional title prior to
sale did not, of itself, mean that the Rubicon had been crossed.
In this regard, it is fundamental that a ‘change of intention’ vis-à-vis a capital asset does
not simply mean deciding to sell it. As was held in John Bell and has been affirmed many
times by the courts, ‘something more’ is required, in the form of an outward manifesta-
tion of the subjective decision to embark on a trade or scheme of profit-making using the
property as stock-in-trade. In Natal Estates, the ‘something more’ was the elaborate and
large-scale activities involved in township development.
In the present case, the court held that the activities undertaken by the taxpayer com-
pany in order to maximise the profit of resale – the conversion of the property to sec-
tional title so that the units could be sold off individually – was not sufficient to constitute
the ‘something more’ required by the principle laid down in John Bell.123 Hence, the
character of the asset – its capital nature – had not changed when the properties were
sold, and the proceeds of the sale were thus of a capital nature.
________________________

120 1976 (4) SA 415 (A) at 429C-D.

121 Natal Estates Ltd v SIR 1975 (4) SA 177 (A), 37 SATC 193.
122 Berea West Estates (Pty) Ltd v SIR 1976 (2) SA 614 (A).
123 John Bell & Co (Pty) Ltd v SIR 1976 (4) SA 415 (A), 38 SATC 87,
260 Income Tax in South Africa: Cases and Materials

The court also affirmed that, just because the taxpayer is a trader in a particular kind
of property, does not mean that all property of that kind held by him is necessarily stock-
in-trade. Thus, the fact that E and P were land-jobbers – dealers or speculators in land –
did not necessarily mean that the ‘Vasella’ block of flats was necessarily stock-in-trade
as well. They had, said the court, been at pains to keep their speculative ventures
distinct from their investments. The court did not lay emphasis – as it perhaps
should have done – on the fact that the land-jobbing activities were conducted by com-
panies in which E and P were share-holders and directors, and (it seems) were not en-
gaged in by E and P as individuals. The obvious way in which a person may keep his
trading activities separate from his investment activities is by housing the activities in
different companies.
The same principle was recognised in Trust Bank 124 where a bank which was admittedly
a dealer in shares, was held to hold particular shares as capital assets, with the result that
the proceeds of the sale of those particular shares was of a capital nature.

Where the taxpayer trades in a particular commodity, he may hold items of that same commodity as
capital assets.

[155]
CIR v Volkswagen of SA (Pty) Ltd
(2000) 63 SATC 109 (SCA)
The taxpayer company manufactured motor vehicles. Most were manufactured for sale
to the public. The taxpayer also manufactured motor vehicles for its own use, which it
used for a period of time, and then sold. These were vehicles in the lease scheme, out-
lined below, and promotional vehicles.
To provide a benefit to its employees and to attract suitable persons into its employ,
the company operated a vehicle leasing scheme in which certain employees were allowed
to lease a company car at an extremely favourable rental, which the company then main-
tained and serviced at its expense. The employees had to return the vehicle after a
stipulated mileage or time period, and was then given the option of buying the vehicle.
Only about 20% of the employees availed themselves of this opportunity. Those not
purchased by employees were then sold to franchised dealers.
The company also used some of the vehicles that it manufactured as promotional
vehicles to enhance the public image of the company and its vehicles. Vehicles in this
category included press vehicles, vehicles used for motor sport, vehicles provided to
schools for driver education, and vehicles used in special market demonstrations. The
company had rules as to when these vehicles were to be sold, and they were passed on to
the used vehicle department for sale.
Issue: were the proceeds from the sale of the taxpayer’s lease vehicles and promotional
vehicles income or capital?
Held: the purpose of the vehicle lease scheme was not to derive a profit to benefit the
taxpayer’s employees. Hence, the proceeds of the sale of these vehicles were capital
receipts. The proceeds from the disposal of promotional vehicles were also capital.
Hefer ADCJ: [T] he concept of capital receipts and accruals has never been defined in the legis-
lation or in the judgments of the courts. All that we have is a number of judicial guidelines for
the determination of the nature of a particular receipt or accrual on the facts of each case. In
performing this exercise we must bear in mind what Innes CJ said in Overseas Trust Corporation
Ltd v CIR 125 viz that –
________________________

124 SIR v Trust Bank of Africa Ltd 1975 (3) SA 652 (A), 37 SATC 87.
125 1926 AD 444 at 453.
 Trading or Carrying on Business and Schemes of Profit-Making 261

‘[w]here an asset is realised at a profit as a mere change of investment there is no difference in character
between the amount of enhancement and the balance of the proceeds. But where the profit is, in the
126
words of an eminent Scotch Judge see Californian Copper Syndicate v Inland Revenue a gain made by an op-
eration of business in carrying out a scheme for profit making, then it is revenue derived from capital
productively employed, and must be income.’
A full discussion of the guidelines that have emerged from the cases will not serve any useful
purpose. We are concerned in the present case with what is alleged by the taxpayer to be the sale
of capital assets and it is sufficient to refer to the following exposition in Corbett JA’s judgment
127
in Elandsheuwel Farming (Edms) Bpk v SBI
‘Where a taxpayer sells property, the question as to whether the profits derived from the sale are taxable in
his hands by reason of the proceeds constituting gross income or are not subject to tax because the pro-
ceeds constitute receipts or accruals of a capital nature, turns on the further enquiry as to whether the sale
amounted to the realisation of a capital asset or whether it was the sale of an asset in the course of carrying
on a business or in pursuance of a profit-making scheme . . . In the determination of the question into
which of these two classes a particular transaction falls, the intention of the taxpayer, both at the time of
acquiring the asset and at the time of its sale, is of great, and sometimes decisive, importance. Other signi-
ficant factors include, inter alia, the actual activities of the taxpayer in relation to the asset in question, the
manner of its realisation, the taxpayers other business operations (if any) . . .’
The vehicles in question fall broadly into four categories: lease vehicles, test vehicles, promotion
vehicles and transport vehicles. Since the Commissioner has conceded the correctness of the
Special Court’s findings in respect of the test and transport vehicles [namely that the proceeds
of sale were capital] the enquiry will be confined to the remaining two categories . . .
It is necessary to deal at the outset with an argument on behalf of the Commissioner to the effect
that the lease and promotional schemes should not be treated as separate enterprises but as part
of the respondents entire business operation. The schemes, it is submitted, are designed to ren-
der the entire operation more profitable by attracting a better calibre of employee and advertis-
ing the company’s products; and it matters not whether either scheme, viewed independently, is
or is not profit orientated.
The submission must be rejected. We are dealing with the disposal of specific assets and the
income generated in that way. The income is taxable or non-taxable depending on the nature of
the receipts and we must determine whether their disposal constituted transactions in the course
of a profit-making scheme or whether it amounted to the realisation of capital assets. The object
of the acquisition and disposal of the assets is plainly relevant both in regard to the respondent’s
entire business and in regard to the schemes in terms of which it occurred. Indeed, bearing in
mind that profit-making is obviously the ultimate aim of any business venture, it would be impos-
sible to separate capital assets from trading stock if only the overall purpose of the entire enter-
prise were to count.
It is beyond dispute that the purpose of the lease scheme is not to derive a profit. The undisput-
ed evidence is that it is intended entirely as a benefit to the respondent’s employees, which in
effect forms part of the latter’s remuneration packages. The Commissioner’s counsel frankly
conceded as much. He conceded moreover that the lease scheme as such does not and cannot
yield a profit from the way in which it operates. The President of the Special Court said in this
regard:
‘It is obvious from this that the leasing scheme was never regarded by the [company] as a profit-making
operation planned along sound commercial lines . . . The [company] therefore persisted with the scheme
only as an exercise in labour relations.’
The way in which the respondent deals with the lease vehicles points the same way . . .The fol-
lowing emerges from the evidence:
‘The company does not concern itself with the condition in which hired vehicles are kept and when it
comes to selling returned ones it takes no real interest to ensure that the best prices are realised. The pro-
cess is described as follows in the Special Court’s judgment:
‘. . . The list of cars available for sale and the fixed prices thereof are simply made available to the
[company’s] franchised dealers without any bargaining as to price. . . . [T]he [company’s] attitude in
disposing of these vehicles at the end of the lease is to involve itself in the least time, effort and cost.’
________________________

126 41 Sc R 694.
127 1978 (1) SA 101 (A) at 118A-E.
262 Income Tax in South Africa: Cases and Materials

Counsel for the Commissioner relies heavily on the fact that the use of the vehicles for relatively
short periods lacks an element of permanency. As authority he cites Rabie JA’s observation in
SBI v Aveling128 to the effect that there is an element of permanency in fixed capital. But the re-
mark must be understood in the context in which it was made. It refers to the distinction be-
tween fixed and floating capital drawn in CIR v George Forest Timber Co Ltd,129 where it was said that
‘. . . floating capital is consumed or disappears in the very process of production, while fixed capital does
not’.
But, as Innes CJ proceeded to say,
‘[t]he distinction is relative, for even fixed capital, such as machinery, gradually wears away and needs to
be renewed’.
. . . business. In both cases the equipment used for the production of income This is true of the
vehicles with which we are concerned too. Admittedly they are sold, not because they have
reached a state of disrepair where their replacement has become imperative, but (apart from the
agreement with the trade unions) because it is considered in economic terms that the time for
replacement has arrived. But this holds good for any piece of equipment used for the produc-
tion of income: no factory owner will use his machinery until it becomes worthless; he will re-
place it when it is most economical to do so.
I do not share the Commissioner’s view that the position changes where the equipment is the
very commodity in which the taxpayer trades. Like the manufacturer of computers who needs
computers to conduct his business so the manufacturer of motor vehicles needs motor vehicles
to conduct his has to be replaced from time to time. In the absence of a change of intention a
computer in the first case and a motor vehicle in the second cannot be converted from capital
assets into trading stock whenever it has to be replaced and is sold.
Counsel for the Commissioner also relies on the regularity and extent of the sales. That the sale
of returned vehicles takes place on a regular basis cannot be gainsaid but, for the reasons listed
in the previous paragraphs, it is an entirely neutral factor. And so is the extent of the sales. The
evidence is in any event clear and uncontradicted that, compared with the respondent’s total
turnover, the sale of used vehicles is insignificant.
For these reasons I agree with the finding of the two lower Courts that the income from the sale
of lease vehicles constituted capital receipts or accruals . . .
Counsel for the Commissioner elected not to address us on the correctness of the finding relat-
ing to the promotional vehicles. It was a wise decision, for one needs but a glance at the descrip-
tion of the use of these vehicles, above, to realise that the income derived from their disposal
also constituted capital receipts or accruals.
The appeal is dismissed with costs.
NIENABER JA, SCOTT JA, MELUNSKY AJA and MPATI AJA concurred.

§5 Isolated and recurrent transactions

Continuity or recurrence is not essential; an isolated transaction can constitute a trade.

[156]
CIR v Strathmore Exploration Ltd
1956 (1) SA 591 (A), 22 SATC 213
For the facts of this case, see extract [183].
Centlivres CJ: [C]ontinuity, although a necessary element in certain circumstances in the case of
130
an individual, is not a necessary element in the case of a company. In CIR v Stott Wessels JA
said:
________________________

128 1978 (1) SA 862 (A) at 880E-F.

129 1924 AD 516 at 524.
130 1928 AD 251 at 262.
 Trading or Carrying on Business and Schemes of Profit-Making 263

‘If you are dealing with a company one of whose objects is to buy and sell land, then the company might
well be considered to be doing the business of selling and buying land even though it carries out only a
single transaction.’
Stratford JA in CIR v Leydenburg Platinum Ltd 131 quoted the above passage from the judgment of
Wessels, JA and added:
‘So that ‘continuity’ (as it has been called) is a necessary element in the carrying on of a business in the
case of an individual but not of a company . . .’

[157]
Stephan v CIR
1919 WLD 1, 32 SATC 54
The taxpayer, a general merchant, maintained a number of small steam and sailing
ships, principally for the purpose of conveying goods between coastal branches of the
business, but also to carry goods and passengers. All these vessels except one steamer and
on schooner were disposed of before June 1916. The taxpayer had undertaken salvage
work under charter in respect of ships wrecked near Cape Town. One such salvage
operation was mounted in each of the years 1910, 1913, 1916 and 1917. The last of these
related to the ship Ping Suey which struck Dassen Island in June 1916. The taxpayer
tendered for the salvage of the ship, and was awarded the contract. He immediately
began work by hiring equipment and completed the work in July. The services of his
business staff and his schooner were used in this enterprise. The salvage operation re-
sulted in a profit to him of £41 736. The Commissioner included this amount in the
taxpayer’s gross income for the year ended June 1917.
Issue: were the profits derived by the taxpayer from the salvage operations ‘income’?
Held: in the affirmative. They were revenue derived from capital productively em-
ployed. Even if isolated, the transactions were business transactions.
Mason J: The first point to determine is whether the profits out of the Ping Suey salvage opera-
tions are income within the language of the statute. Section 6 of Act 41 of 1917, defines gross
income as the total amount received by or accrued to, or in favour of, any person other than
receipts or accruals of a capital nature in any period of assessment from any source within the
Union . . . The appellant’s counsel . . . contended that according to the decisions in the COT v
Booysens Estates and the South Deeps Ltd case132 it was only the profits and gains from the carrying
on of a trade or business and not those from an isolated venture which fell within the purview of
the Act . . . Now it was not, and, as far as one could judge, it could not be successfully contended
that the expenditure or receipts in this case were of the nature of fixed capital, the sense in
which the word capital is used in the definition of income. The profits are therefore prima facie
liable to income tax. The argument that they are not profits and gains within the meaning of the
Income Tax Act of 1914, as interpreted in the Booysens case, and within the meaning of the Eng-
lish statutes and decisions seems to me unsound. These profits are ‘revenue derived from capital
productively employed’, a definition of income given by Wessels J approved by the Chief Justice.
They are not ‘accruals which are really capital’. They have resulted from the productive use of
capital employed to earn them, and not ‘from the realization of capital at an enhanced value’.
There is nothing in the Income Tax Act of 1914, nor in the judgments in the Booysens case
which, so far as I can see, directly exempts isolated transactions resulting in profit not of a capital
nature from the payment of taxation . . .
On the other hand the wide language used in the definition of income in our Act of 1917 may
lead to some unexpected results. Take for instance the case of a man winning money at cards or
at racing, who does not make his living in that manner but bets incidentally as a method of di-
version. The amounts he receives are certainly not of a capital nature . . . But whatever may be
the position with reference to transactions undertaken primarily not for purposes of gain, but
________________________

131 1929 AD 137 at 145-146.

132 1918 AD 605.
264 Income Tax in South Africa: Cases and Materials

for the sake of amusement or distraction, these salvage operations which were managed by the
staff of the appellant’s business, and which necessitated so many ordinary business acts such as
engaging the services of men, hiring apparatus, purchasing equipment, the transport of cargo to
Cape Town, and the like, stand on an entirely different footing. The whole thing was an adven-
ture or concern of the nature of a business or trade; the profits arising therefrom come within
the very words of the definition of income, and arise from the productive use of capital em-
ployed to earn them. They are therefore, in my opinion, liable to the normal tax and super tax
under Act 41 of 1917.
The second question is whether they are liable to the excess profits duty. This depends, in terms of
s 51, on whether they are derived from any trade or business, whether continuously carried on or
not. The word trade is defined generally in s 22, but only for the purposes of Chapter II, in which it
appears. The appellant contended that no isolated transaction such as these salvage operations
constituted any trade or business; these words, it was maintained, were only applicable to a series of
transactions bound together by the intention of making them an occupation or means of liveli-
hood . . .
The word ‘business’ which probably also includes any trade has a very wide meaning, varying often
with the context in which it appears. A general definition of it was given by Jessel MR in Smith v
Anderson133 viz ‘anything which occupies the time and attention of a man for the purpose of profit’,
and though his decision was reversed on appeal, the definition was not queried. It may be some-
what wide, but it supplies the criterion, namely, whether the transaction was undertaken with the
direct and primary object of making a profit and not with a mere hope of making an ultimate prof-
it incidentally in carrying out another purpose . . . This salvage venture seems to me, therefore, a
business transaction; the profits arise from the business done. There is no doubt, however, that the
phrase ‘carrying on business’ does imply a series of transactions . . . But the natural meaning seems
to me that ‘trade’ or ‘business’ includes any ordinary business transactions apart from the question
whether there is such a series of them as to constitute the continuity of carrying on business. There
seems, however, no equitable reason for excluding isolated speculations resulting in great profits
and of the nature of ordinary business transactions from the operation of excess profits duty and
the long list of exemptions in s 51 seems to imply that all other business transactions liable to the
normal duty would also come within the provisions of Chapter IV. But even if the words trade or
business do necessarily require more than an isolated transaction for the interpre-
tation, that requirement seems to me to be fulfilled in the present instance. This salvage venture
does not resemble a simple act such as the purchase of a horse, or of shares as a speculation; it
demanded numerous acts of business and the employment of a large capital, and the work might
have extended over a very long period. If a company had been formed to carry out the operation
can it be doubted that it would have been carrying on business? I have come, therefore, to the
conclusion that even if this venture had been undertaken by a person not in business, it would have
come within the provisions of Chapter IV. But the circumstances of the appellant are very different.
The work was done entirely by his business staff, so far as can be judged by the evidence, and not by
him at all; the contract itself was signed by his business manager, who apparently supervised all the
operations. The whole thing was dealt with as a special enterprise of the business. We have also the
fact that three similar ventures were undertaken by the business during the preceding six years, all
of them resulting in profit and one of them in a substantial profit . . .

In an inquiry as to the existence of a trade, the number of similar transactions by the taxpayer is
relevant, as is the scale of his activities.

[158]
Natal Estates Ltd v SIR
1975 (4) SA 177 (A), 37 SATC 193
For the facts of this case, see extract [174].
Issue: were the proceeds of the sale of the properties by the taxpayer income or capital?
________________________

133 (15 Ch D 258).

 Trading or Carrying on Business and Schemes of Profit-Making 265

Held: the proceeds were income. Although the property had originally been acquired
by the taxpayer as a capital asset, to be used for farming and milling sugar cane, a change
of intention following the take-over of the company by Huletts, followed by the extensive
development of the township, changed the character of the property from capital to
stock-in-trade. In embarking on the extensive development and sale of the township, the
taxpayer had crossed the Rubicon and embarked on a trade or scheme of profit-making
using the land as stock-in-trade.
Holmes JA: I have already indicated that it was common cause that the Special Court, by the
clearest implication, held that the appellant had changed its intention to hold its land as a capi-
tal investment and had decided to sell some of it. The judgment of Miller J proceeds to make the
following findings. For convenience I have paragraphed and lettered the passages:
(a) It is very clear that the appellant’s operations were on a vast scale. Preparatory to selling, intensive
planning and organization took place . . . It appears to me that it must have been very obvious to any
objective observer at that time that the appellant had entered the field of township development and
the marketing of township land on a grand scale. The appellant had, to put it plainly, gone into busi-
ness. I do not know of any more appropriate words to describe what it was doing . . .
These factual findings . . . are unequivocal. They are unappealable unless vitiated by misdirec-
tion, irregularity or the absence of any evidence reasonably warranting them . . .
To sum up with regard to the profits from sales of land at Umhlanga Rocks and La Lucia . . . on all
the facts the Special Court was entitled to find that the appellant, with its elaborate and sustained
scheme and expertise, was doing much more than merely realizing a capital asset to the best ad-
vantage in a businesslike manner; and that by any canons of commerce it had gone beyond that
field: it had crossed the Rubicon and committed itself on a grand scale to the course and business
of selling land for profit, using the land as its stock-in-trade. On those factual findings the Special
Court’s conclusion, that the profits were receipts or accruals of income and taxable, is correct in
law.

Notes
This has become the leading authority, in the context of the sale of fixed property, on
the circumstances in which land, which was acquired as a capital asset, can become stock-
in-trade through a change of intention, with the result that the proceeds of the sale are
included in the taxpayer’s gross income.
The taxpayer had owned the land in question for over 40 years. Its original intention
was to use the land as a capital asset, and indeed it was used as such for farming and
milling sugar cane for those 40 years. If the taxpayer had sold the land, as it stood and
without sub-division, the sale would have been the mere realisation of a capital asset.
Indeed, if the taxpayer had done no more than sub-divide the land prior to sale, it would
probably still have been regarded as a mere realisation to best advantage – compare
[179] Stott and [151] Berea West.134
However, the extensive and elaborate activities of the taxpayer in developing a town-
ship on the property and the selling of the land following Hulett’s take over of the com-
pany led the court to conclude that it had ‘crossed the Rubicon’ and embarked on trade
or scheme of profit-making using the land as its stock-in-trade.

________________________

134 However, if the sale of the land (even in an undivided state) had occurred after the take-over by Hulett’s,
it is arguable – on the basis of the majority judgements in [164] Elandsheuwel – that the proceeds of the
sale would be taxable. But the majority judgements in Elandsheuwel have been severely criticised and the
concept, propounded in the judgement of Wessels JA, of a scheme of profit-making between a company
and its own shareholders has not been adopted in any subsequent reported decision.
266 Income Tax in South Africa: Cases and Materials

[159]
Oryx Mining and Exploration (Pty) Ltd v Secretary for Finance
(1991) 53 SATC 359 (NS)
Mahomed AJA: A profit made in consequence of the sale of an asset might be taxable, notwith-
standing the fact that the taxpayer is not ordinarily engaged in the business of selling that kind
of asset. The relevant test is not whether the transaction yielding the profit was an isolated trans-
action. The relevant test is to determine the intention or motive behind the transaction. If the
intention involved a ‘scheme of profit-making’ the resultant profit would attract tax even if there
were no previous or subsequent similar transactions. (ITC 382.)135

§6 A hobby contrasted with a trade or scheme of profit-making

[160]
ITC 1510
(1992) 54 SATC 30
The taxpayer, a game warden, was assessed to income tax on the amount of $14 000
which he had derived from the sale of certain game trophies, namely elephant tusks and
skins. He objected to the assessment on the ground that this amount had been derived
from a hobby or pastime.
Issue: on the facts, was the amount in question derived from a hobby or was it derived
from a trade or scheme of profit-making?
Held: the taxpayer had discharged the onus of proving that the amount in question was
of a capital nature, having been derived from a hobby which had not developed into a
scheme of profit-making. The ventures giving rise to the amount were not motivated by
considerations of profit-making.
Smith J: The question of whether any particular income is of a capital nature is one of law which
must be decided on the facts of each particular case. The court must have regard to the totality
of all the relevant facts (Natal Estates Ltd v SIR)136 and to all the circumstances of the case (African
Life Investment Corporation (Pty) Ltd v Secretary for Inland Revenue 137).
138
In SIR v Trust Bank of Africa Ltd Botha JA quoting from the judgment of the President of the
Special Court said –
‘The question whether the profits realized on the sale of [an asset] constituted a revenue or capital accrual
depended . . . “upon whether the purchase, holding and sale of [the asset] were steps in a scheme of prof-
it-making, ie to make a profit by the resale of [the asset] at an enhanced price; or whether the sale consti-
tuted the realisation of a capital asset acquired and held for purposes other than such a profit-making
scheme. This is fundamentally a question of intention.” . . .’
In determining whether the proceeds arising from the disposal of an asset are in the nature of
income or capital, the intention of the taxpayer must be ascertained. With what intention did he
acquire and hold the asset? . . .
Accordingly the intention of the appellant in this case must be investigated not only at the time
he acquired the tusks and skins but during the whole period over which he held them. It has
even been suggested that his intention at the time he disposed of them is an important consid-
eration – see SIR v Rile Investments (Pty) Ltd.139

________________________

135 (1937) 9 SATC 439.

136 37 SATC 193 at 220.
137 31 SATC 163 at 176.
138 37 SATC 87 at 101-102.
139 40 SATC 135 at 141.
 Trading or Carrying on Business and Schemes of Profit-Making 267

It is not an essential requirement that the intention of the appellant was antecedent to or pre-
sent at the time he acquired the tusks or skins. Likewise it is not essential that the intention of
the appellant when he went on the hunting trips was solely to acquire trophies which he could
sell. He might well have had mixed motives for undertaking the hunting trips. The onus lies on
him to satisfy this court that that was not his dominant motive.
There is also the possibility that the appellant might have changed his intention. An original
intention to keep the tusks as trophies or to make a table for his own use might have changed to
one to use it in the carrying out of a scheme of profit-making. Such a change of intention, how-
ever, implies more than the mere decision to dispose of the assets in question. [The judge here
quoted from John Bell & Co (Pty) Ltd v SIR.140 to the effect that a mere change of intention is not
sufficient to metamorphose the character of an asset, and that something more is required. The
judge then considered the evidence and continued:]
I agree that the appellant must have taken great pains and incurred a lot of expense in organizing
his hunting trips. It is to be expected that in such circumstances he would take measures to ensure
that, if he were successful in shooting an elephant, he would be able to recover the tusks and the
skins. However I do not consider that is sufficient to indicate that the appellant had embarked
upon a scheme to make money. The appellant has, in my opinion, shown that these two hunting
trips were embarked upon as a hobby or form of recreation. They involved substantial expenditure
without any certainty that income would be produced. They were two separate trips which in
my view could not be regarded as incidents in a trade or scheme to make profit carried on by the
appellant. . . .
In my view the hunting activities of the appellant had not developed into and become a scheme
of profit-making. The circumstances show, to my mind, that the three hunting trips under
consideration were all separate ventures motivated by considerations other than profit-making.
Whilst in the case of the two hunting trips in Kariba the appellant might well have had a desire
to obtain trophies which he could sell in order to cover the expenses of the trips, I do not think
that his was the predominant motive or, indeed, even a major consideration.
The appeals are accordingly allowed . . .

§7 Schemes of profit-making
§7.1 General principles
In CIR v George Forest Timber Co Ltd 141 de Villiers JA said that, ‘The fact to remember . . . is
that whatever a person receives in the way of his trade, business or profession is income
. . . That simple principle, which held sway in our law for many years, can no longer be
regarded as correct in this unqualified form since the decision in [165] CIR v Pick ’n Pay
Employee Share Purchase Trust.142 In the latter case, the majority judgment held that
(italics added) ‘a distinction is drawn between the carrying on of a business and the
pursuance of a profit-making scheme. The basis for such distinction is that it is more
appropriate to refer to a profit-making scheme where a single transaction is involved. I
accept that a series of transactions is characteristic of the carrying on of a business. But
irrespective of the number of transactions, whether the receipts that flow from the carrying on of a
business are revenue still depends on whether the business was conducted with a profit-making
purpose, ie as part of a profit-making venture or scheme.’
In other words, it is no longer true to say that the proceeds of any business are income;
it is only if the business constituted a ‘scheme of profit-making’ that the proceeds thereof
will be income.
A gain made by an operation of business in carrying out a scheme for profit-making is income.

________________________

140 38 SATC 87 at 103.

141 1924 AD 516, 1 SATC 20.
142 1992 (4) SA 39 (A).
268 Income Tax in South Africa: Cases and Materials

[161]
Overseas Trust Corporation Ltd v CIR
1926 AD 444, 2 SATC 71
L formed the taxpayer company and held 97% of its shares. He registered it in South
Africa and Windhoek as a financial and investment company, so that it could take over
certain of his business interests in the South-West Africa Protectorate. These interests
consisted mainly of shares and debentures in mining companies in the Protectorate, but
included small shareholdings in South African companies. At the time the taxpayer
purchased L’s shares, the mining companies in question had already gone into liquida-
tion and the share capital had been repaid. But there were further undistributed divi-
dends due to the shareholders which were in the hands of the Custodian of Enemy
Property. At the time the taxpayer company was formed, each share in the companies in
liquidation entitled the holder to an ascertainable sum in the hands of the Custodian.
The taxpayer took over L’s interests at less than half their market value. The taxpayer
received from the shares of the companies in liquidation £32 628 more than it had paid
for the shares. The taxpayer made a further profit of £4 354 from the sale of shares
effected in Germany.
Issue: did the profits of £32 628 and £4 354 form part of the taxpayer’s gross income,
or were they of a capital nature?
Held: the profits were not capital, but income.
Innes CJ: The point we have to consider is that an investment company whose business it was to
buy and sell shares acquired shares on terms which entitled it to receive a definite sum of money
over and above the purchase price without going through any process of realisation. The ques-
tion is whether the money so received is of the nature of capital. It was pointed out in COT v
Booysens Estates143 that the profit resulting from the sale of an asset might be either capital or in-
come, according to circumstances. If the transaction were a mere realisation of capital at an
enhanced value, the entire proceeds would remain capital; but if it were an act done in the
ordinary course of the vendor’s business, then the resulting gain would be income. The
reason for the distinction is clear. Where an asset is realised at a profit as a mere change
of investment there is no difference in character between the amount of enhancement and
the balance of the proceeds. But where the profit is, in the words of an eminent Scotch Judge,
see Californian Copper Syndicate v Inland Revenue,144 ‘a gain made by an operation of business
in carrying out a scheme for profit making’, then it is revenue derived from capital productively
employed, and must be income. Here there has been no sale of an asset by the appellant;
the profit resulted from the acquisition of an asset at a price less than the benefits which
automatically flowed from it. There is no difference between the realisation of an asset and
the fructification of an asset if the benefits received amount to a gain made by an operation
of business in carrying out a scheme of profit-making. And this transaction comes within that
description. The acquisition of the shares in question was part of the business which the
company was formed to undertake; they were acquired on terms which inevitably secured to
the company a profit not only large but definite in amount. This was no fortuitous and
unforeseen enhancement. It followed from facts which were within the knowledge of the
contracting parties and the resulting benefits must have been within their contemplation and
intention. The profits of such a transaction are not of the nature of capital. They are plainly
income.

In its normal and most straightforward form, a scheme of profit-making involves the acquisition of
property for the purpose of selling it at a profit.

________________________

143 1918 AD 576 at 675.

144 41 Sc LR 694.
 Trading or Carrying on Business and Schemes of Profit-Making 269

[162]
Elandsheuwel Farming (Edms) Bpk v SBI
1978 (1) SA 101 (A), 39 SATC 163
For the facts of this case, see extract [182].
Corbett JA: (dissenting) Where a taxpayer sells property, the question as to whether the profits
derived from the sale are taxable in his hands by reason of the proceeds constituting gross in-
come or are not subject to tax because the proceeds constitute receipts or accruals of a capital
nature, turns on the further enquiry as to whether the sale amounted to the realization of a capi-
tal asset or whether it was the sale of an asset in the course of carrying on a business or in pursu-
ance of a profit-making scheme. Where a single transaction is involved it is usually more
appropriate to limit the enquiry to the simple alternatives of a capital realization or a profit-
making scheme. In its normal and most straightforward form, the latter connotes the acquisition
of an asset for the purpose of reselling it at a profit.

Notes
Like the dissenting judgment of Schreiner JA in [180] Richmond Estates, the dissenting
judgment of Corbett JA in Elandsheuwel has been more influential than the majority
judgments. His is one of the few judicial attempts to explain what is meant by ‘an operation
of business in carrying out a scheme of profit-making’ – an English concept which was
first accepted into our law by Innes CJ in [161] Overseas Trust. The majority judgment in
[165] CIR v Pick ’n Pay Employee Share Purchase Trust 145 has now elevated the concept
of a ‘scheme of profit-making’ to pre-eminence in any inquiry as to whether the proceeds
of the realisation of an asset are income or capital. The import of the majority judgment
in the latter case is that it is only where a business carried on by a taxpayer constituted a
‘scheme of profit-making’ that the proceeds of the business will be income.

The most important element in a scheme of profit-making is the taxpayer’s intention at the time of
acquisition of the property in question.

[163]
ITC 1379
45 SATC 236
Vivier J: From time to time between about 1968 until the beginning of 1980 the appellant in this
matter purchased a total of 65 Kruger rands. He sold all these on 8 February 1980 at a total prof-
it of R30 420 . . . [T]he Commissioner for Inland Revenue . . . included the aforesaid amount of
R30 420 in the appellant’s gross income . . . Appellant’s objection was disallowed and he now
appeals to this court against the Commissioner’s decision.
In Elandsheuwel Farming (Edms) Bpk v SBI 146 Corbett JA pointed out 147 that where a taxpayer sells
property, the question as to whether the profits derived from the sale constitute gross income or
whether it amounts to receipts or accruals of a capital nature, turns on the further enquiry as to
whether the sale amounted to the realization of a capital asset or whether it was the sale of an asset
in the course of carrying on a business or in pursuance of a profit-making scheme. With regard
to an asset of the latter nature, the learned Judge of Appeal went on to say the following:148
‘In its normal and most straightforward form, the latter connotes the acquisition of an asset for the pur-
pose of reselling it at a profit. This profit is then the result of the productive turnover of the capital repre-
sented by the asset and consequently falls into the category of income. The asset constitutes in effect the
taxpayer’s stock-in-trade or floating capital.’
________________________

145 1992 (4) SA 39 (A).

146 1978 (1) SA 101 (A), 39 SATC 163.
147 At 118A-B.
148 At 118C.
270 Income Tax in South Africa: Cases and Materials

Corbett JA went on to contrast an asset constituting the taxpayer’s stock-in-trade with a capital
asset which he described as follows:149
‘[A]n asset acquired with a view to holding it, either in a non-productive state or in order to derive income
from the productive use thereof . . .’
In deciding whether the true nature of a transaction is one of the realization of a capital asset or
whether it is the sale of an asset used as part of a profit-making scheme, the totality of all the
relevant factors which may legitimately be taken into account should be considered. In the
150
Elandsheuwel case (supra) Corbett JA mentioned the following factors:
‘In the determination of the question into which of these two classes a particular transaction falls, the
intention of the taxpayer, both at the time of acquiring the asset and at the time of its sale, is of great and
sometimes decisive importance. Other significant factors include inter alia, the actual activities of the tax-
payer in relation to the asset in question, the manner of its realisation, the taxpayer’s other business opera-
tions (if any) and, in the case of a company, its objects as laid down in its memorandum of association.
...
A taxpayer is entitled to realize or change his investment to the best advantage and the mere fact
that he does so cannot of itself convert what is capital investment into a business or profit-
making scheme . . .
The onus is on the appellant to prove that the disposal was merely the realization of a capital
asset and therefore excluded from gross income . . .
Turning now to the facts of the present case, the appellant’s evidence, on oath, was that his in-
tention in acquiring the Kruger rands was to hold the coins as a capital asset, it being a relatively
stable asset and easily transportable. He had been taught the need for this by his parents who
were forced to leave Eastern Europe before the Second World War when they had to abandon
all their assets. His father had impressed on him the necessity to make provision for political
uncertainty by holding assets which would retain their value and which would be easily trans-
portable. The appellant said that he started buying Kruger rands during about 1967 to 1968 and
he continued buying until just before he sold all his Kruger rands on 8 February 1980. He paid
between R27 and R400 each for his coins. All purchases were made from his bank and out of his
savings. He said that his name was on a list kept by his bank and he took up all the coins allocat-
ed to him from time to time.
In determining what the true intention of the appellant was when he acquired the Kruger rands,
regard must be had not only to his ipse dixit but also to all the relevant circumstances and facts.
The weight to be attached to a taxpayer’s ipse dixit regarding his intention was expressed thus by
Miller J in ITC 1185:151 [The learned judge here quoted from the decision in ITC 1185.] . . .
When weighed against the probabilities and inferences to be drawn from the established facts,
we are satisfied that the ipse dixit of the appellant that he acquired the Kruger rands with the
intention to hold them as a capital asset should be accepted. His family history and his parents’
loss of their possessions support the appellant’s ipse dixit regarding his intention. The appel-
lant’s activities in relation to the Kruger rands also indicate, in our view, that the Kruger rands
were acquired as a capital investment. While his purchases took place gradually over a lengthy
period, he not once before 8 February 1980 sold any of these coins. With regard to the reason
for the eventual sale, it is quite clear, in our view, from the newspaper reports at the time, that
the sale took place in response to urgent and repeated warnings by experts that the gold price
was too high and would fall substantially. Under these circumstances it cannot be said that the
selling of the Kruger rands took place in pursuance of some scheme for making profit. We are
accordingly of the view that the appellant has discharged the onus of proving that the proceeds
of the sale of the Kruger rands constitute receipts or accruals of a capital nature, and that these
should therefore have been excluded from his gross income.

Notionally, it is possible to conceive of a scheme of profit-making in which shares are selected for
purchase on a purely random basis. A feature which distinguishes such an activity from irrational
betting on horse-races is that the taxpayer acquires a tangible and valuable asset which he hopes to
sell at a profit.
________________________

149 At 118C.
150 At 118D-E.
151 (1972) 35 SATC 122.
 Trading or Carrying on Business and Schemes of Profit-Making 271

[164]
ITC 1222
(1974) 37 SATC 17
The taxpayer, an attorney, had inherited shares from his father. At the end of February
1968, the taxpayer had an investment of R500 in shares. By the end of February 1969
he had invested a further R6 000 in shares, and his purchases and sales of shares
had given him a profit of some R3 000. He did not claim that, up to this period, he
was a dealer in shares. In the tax year ending in February 1970, he became more heavily
involved in the share market, purchasing inter alia shares in de Beers and in Glen Anil,
and went into a joint venture with two friends with the object of dealing in shares. In
May 1970, the taxpayer sold the de Beers and Glen Anil shares for R37 395 less than
he had paid for them. He claimed this loss as a deduction in the tax year ending in
February 1971 on the basis that it was a loss incurred in the course of a profit-making
scheme.
Issue: whether the taxpayer, on the facts, was to be assessed to tax on the basis that he
was a dealer in shares.
Held: in the affirmative. His conduct in relation to the acquisition of shares could not
be equated with the irrationality of a gambler but bore the hallmarks of a trade and a
scheme of profit-making.
Van Winsen J: Appellant stated in evidence that from about May 1969 at about the time he
entered into the joint venture and when he bought the Glen Anil shares he started dealing in
shares with the object of systematically buying and selling shares in order to make a profit. He
did so on his own account and through the medium of the joint venture. He said that at that
time (May 1969) the market was buoyant and that it offered good speculative opportunities. He
states that he was influenced to buy the Glen Anil shares since this was a property-dealing com-
pany and he, by reason of his being a conveyancer, had a certain knowledge of and interest in
property. He was not interested in dividends but only in profits to be made on resale . . .
It was conceded on behalf of the Secretary that, at any rate as from 1969 (thus during the year of
assessment ending 28 February 1970), appellant acquired shares for the purpose of resale at a
profit, and I think it can be accepted by the court that appellant has discharged the onus of prov-
ing that in 1969 he embarked upon a profit-making scheme in the buying and selling of shares.
Mr Swemmer contended, however, that appellant was nevertheless not entitled to enjoy the bene-
fit of the deduction since appellant’s actions in the buying and selling of shares was entirely lack-
ing in expertise and was conducted in a spirit of feverish speculation and could therefore not be
dignified by the appellation of a ‘trade’ as defined, but was equivalent to the activity of betting
on horse-races. Accordingly, so the argument ran, appellant’s gains and losses are purely fortui-
tous and irrationally acquired and they neither attract tax nor, in the case of loss, does the loss
qualify as a deduction.
From observation and experience it must be conceded that the two activities in question not
infrequently exhibit characteristics that have much in common with each other. Notionally it is
not impossible to conceive of a situation in which a ‘scheme’ of profit-making on the stock mar-
ket is conducted in such a mindless fashion, eg with the aid of a pin, that it could be equated to
the method by which some punters, but by no means all, execute bets on horse-races.
But we are not here concerned with a notional but with an actual position . . .
In the present instance I do not consider that appellant’s conduct in relation to his purchase of
the shares, more particularly the Glen Anil shares, could be said to have been undertaken irration-
ally. His evidence is that before buying the shares he sought advice of his broker, of the then
chairman of a trust company with which he personally and his firm of attorneys retained close
contact – as well as the advice of his accountant. The two former persons advised favourably and,
and while the latter saw no purpose in appellant’s burdening his own property with a bond in
order to buy a property company’s shares, he did not counsel against it. He also, as a conveyanc-
er, had some knowledge of and interest in property, the field in which the Glen Anil company
272 Income Tax in South Africa: Cases and Materials

operated. True, as he admitted under cross-examination, he did not study the balance-sheets
and profit and loss accounts of Glen Anil. His failure to do this cannot render his action in buy-
ing the shares that of a gambler, more especially when it is borne in mind that while a company’s
balance-sheet and profit and loss account may be enlightening as to the past profit history of the
company concerned it often casts but a faint light upon its future prospects. It is furthermore a
well-acknowledged circumstances that the past history of a company is only one of the factors
which influence the price paid for a share on the stock market . . .
One other feature which further distinguishes appellant’s actions from one who bets irrationally
on the results of horse-races is that he acquired a tangible and valuable asset (the shares) as a
result of his purchases. Price J in ITC 765152 remarks as follows as to the evidential value of this
distinction between a purchaser of shares on the stock market and the irrational place of bets:
‘An examination of the various cases and legal authorities on the point suggests that the reason why it has
been held in many cases that gains made by a punter as a result of successful bets on races are not subject
to taxation is because such gains are not the result of a rational occupation which can in any way be assimi-
lated to or compared with the normal conception of a business, vocation, trade or occupation. It is con-
ceded, of course, that there is a very great difference between gains made by speculating in shares and
gains make from betting on horse-races. In a share transaction the speculator acquire property or the right
to property which he hopes to sell at a profit, and if this is his occupation or one of his occupations it can-
not be described as irrational in the sense in which betting on horse-races is irrational.’
I conclude, therefore, that appellant in his purchase and sale of shares was conducting a trade
within the meaning of the Income Tax Act, and that it was undertaken with the intention of
carrying out a profit-making scheme, and that he is accordingly entitled to deduct losses from
income liable to tax. The following question is: how is calculation of the amount claimable as a
tax deduction to be made. This turns upon the interpretation of s 22 of the Income Tax Act . . .
It was argued on behalf of the Secretary that if it were to be found that appellant is a dealer in
shares the profits and losses, as the case may be, would have to be determined with reference to
the provisions of s 22 quoted above. With this contention I am in agreement.
Applying this section to the present case it will be necessary, in order to calculate any deduction
to which appellant is entitled, to make provision in appellant’s accounts for the year in which he
started to trade as a share dealer (ie the tax year ending 28 February 1970) for an entry ‘trading
stock’. Appellant held at the end of the previous tax year a considerable number of shares. He
was, however, not in that year a dealer in shares and therefore there could in his case be no
question of such shares constituting trading stock. When, in the following year he became a
dealer, those shares, in addition to any shares which he bought during that year (ie the tax year
ending 28 February 1970) became part of his stock. It would thus become incumbent upon him
to bring these shares into his accounts as an opening entry at some value. What this value should
be is in issue between the appellant and the Secretary . . .
The matter is accordingly referred back to the Secretary to determine, on the basis that appel-
lant was a sharedealer during the year ending 28 February 1970, and the year of assessment, the
amount of the deduction to which appellant is entitled by reason of his losses as a sharedealer
both in his personal capacity and in his capacity as a partner in the joint venture.

The proceeds of the realisation of property are income only if the realisation occurred in the course of
carrying out ‘a scheme for profit-making’; this criterion applies to both isolated and recurrent trans-
actions.

[165]
CIR v Pick ’n Pay Employee Share Purchase Trust
1992 (4) SA 39 (A)
The Pick ’n Pay Employee Share Purchase Trust was formed by the Pick ’n Pay group of
companies in terms of s 38(2)(b) of the Companies Act to administer a share purchase
scheme for the benefit of its employees.
________________________

152 19 SATC 198 at 203.

 Trading or Carrying on Business and Schemes of Profit-Making 273

The purpose of the scheme was to give employees the opportunity of acquiring shares
in the company, to incentivise them, and encourage them to see their interests as being
identical with those of the company.
Shares were initially allotted to the Trust, which then sold them to employees of the
Pick ’n Pay group. When shares were sold to an employee, the Trust held them in trust
for at least five years, unless the employee left the employ of the group before the five
years had elapsed. If an employee left his employment before the five years had elapsed
or if he was dismissed for dishonest conduct, he forfeited his shares, in which event the
Trust had to repurchase them for the amount owing on the shares.
Ordinarily, employees had to pay for shares not later than ten years after they were
purchased. After the initial allotment, the trust acquired scheme shares in one of three
ways: (1) from employees who had paid for their shares and wished to realise their
holdings; (2) as a result of their forfeiture by employees; and (3) by purchase on the
open market.
The trust made a profit when an employee forfeited shares. In respect of the 1982-
1984 tax years, SARS included in the Trust’s gross income, the profit made by the Trust
from the sale of shares in those years. The Trust objected to the assessment on the basis
that the profits were of a capital nature.
The trust acted primarily as a conduit for acquisition of shares by employees entitled
to them in terms of scheme’s rules. It did not operate along ordinary business lines, in
that the trust only bought shares when it was required to do so in terms of its rules, and
sold when it was required to do so by its rules.
The trust contended that it did not acquire shares with the intention of selling them at
a profit. It purchased shares in order to make them available to employees who were
entitled to them in terms of its rules and, in terms of its constitution, it was obliged to
repurchase them from employees who forfeited their shares. Accordingly, so it was
argued, the profits on resale were fortuitous and of a capital nature.
It was held, by a majority, that the proceeds of the sale of shares by the Trust were not
income and thus not taxable, as they were not sold in the course of a scheme of profit-
making. Those profits were not intended or worked for, but were purely fortuitous in the
sense of being an incidental by-product. The accruals were therefore non-revenue, and
thus of a capital nature.
Smalberger JA: The Trust can escape liability for normal tax on the profits made in the tax years
1982, 1983 and 1984 provided it establishes that such profits are non-revenue . . .
There are a variety of tests for determining whether or not a particular receipt is one of a reve-
nue or capital nature . . . The appropriate test in a matter such as the present is a well-
established one. The receipts accruing to the Trust will be revenue if they constitute ‘a gain
made by an operation of business in carrying out a scheme for profit-making’, in the words of the
eminent Scottish Judge in the Californian Copper Syndicate case quoted with approval in the passage
from Overseas Trust Corporation Ltd v CIR 153 . . . The corollary is that they will be non-revenue if they
do not derive from ‘an operation of business in carrying out a scheme for profit-making’.
The phrase from the Californian Copper Syndicate case has undergone some measure of refine-
ment in the cases of Natal Estates Ltd v SIR 154 and Elandsheuwel Farming (Edms) Bpk v SBI 155 to the
extent that a distinction is drawn between the carrying on of a business and the pursuance of a
profit-making scheme. The basis for such distinction is that it is more appropriate to refer to a
profit-making scheme where a single transaction is involved. I accept that a series of transactions
is characteristic of the carrying on of a business.
________________________

153 1926 AD 444 at 452-453.

154 1975 (4) SA 177 (A) at 198E-G.
155 1978 (1) SA 101 (A) at 118A-B.
274 Income Tax in South Africa: Cases and Materials

But irrespective of the number of transactions, whether the receipts that flow from the carrying
on of a business are revenue still depends on whether the business was conducted with a profit-
making purpose, ie as part of a profit-making venture or scheme. To hold otherwise would
amount to a departure from the earlier authorities – something clearly never intended in either
the Natal Estates or Elandsheuwel Farming cases. In this respect I agree with what is said in
Meyerowitz and Spiro on Income Tax that –
‘[t]he rather clumsy phrase “operation of business in carrying out a scheme of profit-making” in
plain language really means that receipts or accruals bear the imprint of revenue if they are not
fortuitous, but designedly sought for and worked for’.
The application of this test involves a consideration of the objectives of the taxpayer (the Trust)
and what its purpose, or if there was more than one, what its dominant purpose was (compare
COT v Levy156). Transactions involving shares do not differ from transactions in respect of any
other property and the capital or revenue nature of a receipt is determined in the same way
whether one is dealing with land or shares . . .
I am unable to agree with Nicholas AJA [who gave the dissenting minority judgment in this case]
that the Trust was carrying on a business by trading in shares. Whether or not it was doing so
must be determined applying ordinary common sense and business standards (compare
Rhodesia Railways v COT 157). There was no intention on the part of the Trust to conduct a business
in shares. The Trust was to operate primarily as a conduit for the acquisition of shares by em-
ployees entitled to them in terms of the scheme’s rules. The Trust did not operate along accepted
business lines. The normal way in which a trader in shares operates is to buy shares and resell
them at a profit (De Beers Holdings (Pty) Ltd v CIR 158). The Trust had no such intention. While a
profit motive is not essential for the carrying on of a business, its presence or absence is an impor-
tant factor in determining whether a business is being conducted. A dealer doing business in
shares can be expected to engage freely in the market; to buy and sell at the most advantageous
times and prices according to the dictates of the market. This is not what the Trust did. It bought
when it was obliged to and sold when it was required to. The constraints placed upon the
trustees in dealing with the shares are altogether foreign to trading or business in the accepted
commercial sense. On a common-sense approach the Trust was not carrying on a business by
trading in shares.
But even if the Trust could be said in a broad sense to have been conducting a business, it was
not a business carried on as part of a scheme of profit-making. Receipts of a revenue nature (in
the form of profits) accrue to a trader who acquires and disposes of shares as part of a scheme of
profit-making (compare De Beers Holdings (Pty) Ltd v CIR 159). Nicholas AJA accepts, in my view
correctly, that the purpose of the scheme was not one of profit-making. If that is so, it seems
impossible to conclude, as a matter of logic, that any business conducted in pursuance of the
scheme, and according to the strict letter thereof (which is essentially the case here), could be
part of a scheme of profit-making . . . While they might have contemplated the possibility of
profits, it was not the purpose of either the Company (Stores) in founding the Trust, or the trus-
tees in conducting the affairs of the Trust, to carry on a profit-making scheme. The sole purpose
of acquiring, holding and selling the shares was to place them in the hands of eligible employ-
ees. The forfeiture provision was not intended to yield a profit. Its purpose was to deter unwant-
ed resignations.
A different conclusion might have been justified if the making of profits was inevitable. But this
was not the case. The prospects of profits were highly problematical. They depended upon the
degree of success achieved by the scheme. If it had operated to its full potential, and there had
been no forfeitures, there would probably have been no profits. But even accepting that forfei-
tures were inevitable, whether they resulted in profits being made depended on when they oc-
curred in relation to the date of acquisition of the shares and the state of the market at the time
of forfeiture. And the overall profits would depend further on whether other purchases and sales
________________________

156 1952 (2) SA 413 (A).

157 1925 AD 438 at 462.
158 1986 (1) SA 8 (A) at 30E.
159 Supra at 30G.
 Trading or Carrying on Business and Schemes of Profit-Making 275

resulted in profits or losses. There were thus a number of variables which could influence the
profit factor. That profits were not inevitable is proved by the fact that in the 1985 year of assess-
ment the operation of the scheme showed a loss of R70 619.
In my view, therefore, any receipts accruing to the Trust were not intended or worked for, but
purely fortuitous in the sense of being an incidental by-product. They were therefore non-
revenue. That makes then accruals of a capital nature falling outside the definition of ‘gross
income’ in the Income Tax Act, and therefore not subject to tax. This probably renders it un-
necessary to consider Nicholas AJA’s first conclusion, viz that the shares bought and sold by the
Trust amounted to floating capital . . . It is correctly accepted by Nicholas AJA, as I have said,
that the purpose of the scheme was not one of profit-making . . .
That notwithstanding, Nicholas AJA holds that the shares acquired by the Trust constituted float-
ing capital. In my opinion, an analysis of the manner in which the Trust held and dealt with the
shares makes that conclusion untenable . . .
GOLDSTONE JA and HOWIE AJA concurred in the judgment of SMALBERGER JA.

Notes
In this seminal decision, the Appellate Division was split 3:2 on a fundamental issue
regarding the criterion which determines the taxability or otherwise of the proceeds of a
sale of shares, and by extension, any other form of property. This issue concerns the
inter-relationship between two concepts – ‘carrying on business’ and carrying out ‘a
scheme of profit-making’.
This is now the leading case on the criteria which determine whether the proceeds of
the realisation of property are income or capital. The nub of the majority judgment is
that, where the taxpayer realises property, the proceeds will be taxable only where the
realisation occurred in the course of ‘a scheme of profit-making’, and that this is the
determinative criterion irrespective of whether the realisation was an isolated transaction
or one in a series of recurrent transactions. If the realisation took place in the course of
carrying on a business, the proceeds will be income only if the business itself constituted
a scheme of profit-making.
The minority (dissenting) judgment
The minority (dissenting) judgment (per Nicholas AJA with whom Hoexter JA
concurred) takes as its starting point the premise that there is a distinction between
merely realising an asset, in which the proceeds of capital, and selling an asset in
the course of a business or scheme of profit-making, in which event the proceeds of sale
are of a revenue nature, and thus taxable. (This principle was laid down in 1904
in Californian Copper Syndicate v Inland Revenue.160 It was affirmed in South Africa in 1918
in COT v Booysens Estates Ltd,161 in Overseas Trust Corporation Ltd v CIR 162 in 1926 and in
many subsequent Appellate Division decisions. The minority judgment went on to affirm
the long-established distinction between fixed and floating (also called ‘circulating’)
capital.
These aspects of the minority judgment are not at odds with the majority judgment.
The minority judgment went on to quote from Corbett JA’s judgment in Elandsheuwel
Farming (Edms) Bpk v SBI 163 where he said that the proceeds of the realisation of an asset
are taxable if the sale occurred in the course of carrying on a business or a profit-making
scheme. He said further that, ‘where a single transaction is involved it is usually more
________________________

160 41 Sc LR 691.
161 1918 AD 576.
162 1926 AD 444 at 452-453.
163 1978 (1) SA 101 (A).
276 Income Tax in South Africa: Cases and Materials

appropriate to limit the enquiry to the simple alternatives of a capital realisation or a

profit-making scheme’
The minority judgment says that the corollary of this dictum is that, ‘where a series of
transactions is involved, the appropriate enquiry is usually whether or not the receipts
flow from the carrying on of a business.’ In other words, the concept of a ‘scheme of
profit-making’ is applicable only to an isolated transaction which, because it lacks repeti-
tion of continuity, might not constitute ‘carrying on business’.
Applying these principles to the facts, the minority judgment concluded that the Trust
did not possess an income-earning structure (in that it had no premises or staff or
equipment of its own). Moreover, none of the shares acquired by the Trust were ‘fixed
capital’. If they were capital at all, they were floating capital and the proceeds on sale
could not be receipts of a capital nature.
The minority judgment went on to say that the Trust did not have the purpose of mak-
ing a profit, but that –
‘the Special Court erred in going on to draw the conclusion that because the Trust had showed that its acquis-
ition and resale of the shares was not in pursuance of a scheme of profit-making, the proceeds were not
income and were accordingly of a capital nature’.
The present case, said the minority judgment, did not involve a single or an isolated
transaction, but one involving a series of transactions. Therefore the appropriate test to
apply was not whether the Trust was engaged in a ‘scheme of profit-making’ (the test
appropriate to single or isolated transactions) but whether the activities of the Trust in
relation to the shares amounted to ‘the carrying on of a trade or business’ (the appropri-
ate test for multiple or continuous transactions).
The minority judgment held that, ‘The real question to be decided is whether the
profits resulting from the sale by the Trust of Pick ’n Pay shares were capital or income,
and that depends upon whether the transactions were mere realisations of capital at an
enhanced value or were acts done in the ordinary course of the Trust’s business’.
The minority judgment went on to hold that, in the tax years in issue, ‘the Trust en-
gaged in share-dealing activities which were characteristic of a business. They were part
of a series and they were continuous. In regard to the profit element, it was inherent in
all the activities, which were conducted in a fluctuating market, that in the ordinary
course they would result in profits/losses’.
In short, the trustees were, in relation to the shares in question, ‘carrying on a busi-
ness’ even though their purpose may not have been profit-making.
The minority judgment concluded that,
‘It is true that in performing those transactions the Trust did not carry on a business as the word is ordi-
narily understood. A profit motive was not the driving force behind its activities. They were subject to con-
straints not usual in the ordinary share-dealing business: the Trust’s buying and selling of shares was not
determined with reference to market conditions and it was not entirely within its control: by and large it
bought only shares which were forfeited or shares which were offered to it by participants who had paid
for them, and it sold shares only to persons entitled to obtain them under the terms of the Trust. But it is
irrelevant to the real question for decision that the share-dealing activities carried on by the Trust differed
from those of the ordinary share-dealing business. The fact is that the Trust was engaged in trading in
shares and not in realising investments’.
From this it followed that the proceeds of the sale of the shares were income, on which
the Trust was taxable.
This, then, was the reasoning of the minority (dissenting) judgment of Nicholas AJA,
with whom Hoexter JA concurred.

The majority judgment (per Smalberger JA with whom Goldstone JA and Howie AJA concurred).
Smalberger JA said that, on the basis of such judgments as Elandsheuwel,
‘a distinction is drawn between the carrying on of a business and the pursuance of a profit-making scheme.
The basis for such distinction is that it is more appropriate to refer to a profit-making scheme where a
 Trading or Carrying on Business and Schemes of Profit-Making 277

single transaction is involved. I accept that a series of transactions is characteristic of the carrying on of a
business. But irrespective of the number of transactions, whether the receipts that flow from the carrying on of a business
are revenue still depends on whether the business was conducted with a profit-making purpose, ie as part of a profit-
making venture or scheme.’
(Italics added.)
In essence, the majority judgment holds that just because a taxpayer sells an asset in
the course of ‘carrying on a business’ does not make the proceeds income, and thus
subject to tax. The question whether the receipts that flow from the carrying on of a
business are revenue ‘still depends on whether the business was conducted with a profit-
making purpose, ie as part of a profit-making venture or scheme.’
In other words, according to the majority judgment, the proceeds of carrying on a
business are income only if the business constituted a ‘scheme of profit-making’.
The cardinal difference between the minority judgment and the majority judgment is
that the minority judgment regards the primary question to be whether the taxpayer was
‘carrying on a business’, and holds that an affirmative answer to this question means that
the proceeds of the sales in the course of that business are taxable as income. The ques-
tion whether the taxpayer was engaged in a ‘scheme of profit-making’ only needs to be
asked if a single or isolated transaction is in issue.
By contrast, the majority judgment holds that just because the taxpayer was carrying
on a business does not mean that the proceeds of realisations in the course of that busi-
ness are taxable; it is only if the business involved a ‘scheme of profit-making’ that the
proceeds will be taxable. It is implicit in the majority judgment that not every business is
a ‘scheme of profit-making’, and for those that are not, the proceeds of sales are not
taxable as income.

§7.2 The intention of a company

Where the taxpayer is a company, it can form an intention without passing a formal resolution.

[166]
CIR v Richmond Estates (Pty) Ltd
1956 (1) SA 602 (A), 20 SATC 355
For the facts of this case, see extract [180].
Centlivres CJ: A company is an artificial person with no body to kick and no soul to damn, and
the only way of ascertaining its intention is to find out what its directors acting as such intended.
Their formal acts in the form of resolutions constitute evidence as to the intentions of the com-
pany of which they are directors but where a company has only one director, who is also the
managing director and the sole beneficial owner of all its shares. I can see no reason in principle
why it should be incompetent for him to give evidence as to what was the intention of the com-
pany at any given time. In such a case it is, perhaps, not going too far to say that his mind is also
the mind of the company.

[167]
SIR v Trust Bank of Africa Ltd
1975 (3) SA 652 (A), 37 SATC 87
For the facts of this case, see extract [187].
Botha JA: Counsel for the appellant, in challenging the manner in which the Special Court
sought to ascertain the respondent’s intention, submitted that, with certain immaterial excep-
tions not relevant in this case,
‘the only way of ascertaining its (a company’s) intention is to find out what its directors acting as such in-
tended.’
278 Income Tax in South Africa: Cases and Materials
164
(CIR v Richmond Estates (Pty) Ltd) and that (again with immaterial exceptions not relevant in
this case) the only way to find out what a company’s directors acting as such intended is from
their formal acts. For this proposition counsel relied on the following statement of Benjamin J in
Wilson v CIR:165
‘The company being an artificial entity, its intentions must be determined from its formal acts. There was
nothing in the resolutions of the company to indicate an intention to capitalise the £25 000 requisite for
the payment of the dividend.’
I do not think that Benjamin J intended to lay down a general rule that a company’s intention or
purpose in regard to any particular transaction cannot be ascertained in any other way than by
its formal acts. I certainly would not be able to subscribe to such a proposition, for it is clear that
it could lead to injustice and grave difficulties if the Special Court were, in an enquiry as to the
company’s intention, to be bound by the formal acts, in the form of resolutions, of that compa-
ny, particularly where such resolutions may be incorrectly recorded, either deliberately or mis-
takenly, or where such resolutions are inconsistent with each other or with other relevant facts.
Just as there cannot in the case of a one-man company be any reason in principle why it should
be incompetent for him to give evidence as to what the intention of his company at any given
time was, CIR v Richmond Estates (Pty) Ltd 166 so I can see no reason in principle why the persons
who are in effective control of a company cannot give evidence as to what was the intention or
purpose of the company in relation to any matter at any given time. That the management
committee was for practical purposes in effective control of the affairs of the respondent bank is
clear from the evidence. It was under its leadership that the respondent’s business activities had
been diversified to such an extent that, in addition to ordinary commercial banking, it had be-
come engaged in a number of other incidental business activities as indicated above. I cannot
find any reason in principle why the intention of the members of the management committee in
regard to any matter in which it was concerned on behalf of the respondent cannot be taken to
indicate the intention of the respondent. Confirmation for this principle is to be found in
the passage in Gower, Modern Company Law 167 cited by the learned president of the Special Court,
and I cannot find anything in the judgment of the House of Lords in Tesco Supermarkets Ltd
v Nattrass,168 to which we have been referred by counsel for the appellant, which in this regard
is in conflict with that passage. In an enquiry as to the intention with which a transaction was
entered into for the purpose of the law relating to income tax, a court of law is not concerned
with that kind of subjective state of mind required for the purposes of the criminal law,
but rather with the purpose for which the transaction was entered into. (CIR v Paul).169 Why that
purpose cannot, in the case of a company, be proved, inter alia, by evidence as to the state of mind or
intention of the persons in effective control of the affairs of the company is not clear, and the exclu-
sion of such evidence would in my view be insupportable in law. While such evidence will, there-
fore, always be admissible, the weight thereof must necessarily depend upon the circumstances.

§7.3 Dominant intention, dual intention, and alternative intentions

‘Intention’ in this context means the taxpayer’s dominant intention at the time of acquisition of the
property in question.

[168]
COT Southern Rhodesia v Levy
1952 (2) SA 413 (A), 18 SATC 127
In October 1945 the taxpayer, for a consideration of £2 750, acquired 2 500 shares in a
company which had been formed in July 1945 to acquire three stands in a part of Bulawayo
________________________

164 1956 (1) SA 602 (A) at 606.

165 1926 CPD 63 at 70.
166 At 606.
167 3 ed 148-149.
168 [1971] 2 All ER 127.
169 1956 (3) SA 335 (A) at 340-341.
 Trading or Carrying on Business and Schemes of Profit-Making 279

which was thought likely to develop. On the stands were buildings which, though dilapi-
dated, were rent-producing. The company had purchased the stands for £10 000. The
taxpayer’s shares represented one-fourth of the issued capital of the company, and the
taxpayer became a director. In June 1947 one Crombie purchased all the shares in the
company for £22 141, of which the taxpayer received £5 531. The Commissioner includ-
ed in the taxpayer’s income the sum of £2 781, being the difference between what he
paid for the shares and what he sold them for. The taxpayer objected on the grounds
that these moneys were of a capital nature.
In the court a quo, the judge accepted that the taxpayer’s dominant purpose was to
acquire the shares as an income-earning investment. It was common cause that the
taxpayer did not carry on the business of dealing in land or shares.
Issue: were the proceeds of the sale of the taxpayer’s shares were ‘income’ in his
hands?
Held: in the negative. The issue turned on the taxpayer’s dominant intention vis-à-vis
the shares at the time he acquired them, and the taxpayer was not required to complete-
ly exclude the slightest contemplation of profitable resale.
Schreiner JA: I return now to the contention advanced on behalf of the Commissioner that in a
case like the present, where admittedly Levy did not, when he bought the shares, have a definite
fixed intention to hold them exclusively for dividends, but contemplated also as a possibility
their resale, the fact that within two years he did sell them concludes the case against him. For
this proposition counsel relied mainly on the cases of CIR v Leydenburg Platinum Ltd 170 and Lace
Proprietary Mines Ltd v CIR.171
[The judge discussed and quoted from these two cases and continued:] In terms, these state-
ments only relate to companies and this is the more significant in that, as I have indicated,
Stratford JA had in the Lydenburg Platinum case172 pointed out that
‘The test to be applied in the case of an individual is not quite the same as the test in the case of a trading
company.’
It seems to me, for these reasons, that the present argument for the Commissioner cannot be
sustained . . . [I]t seems to me that where the purposes of an individual taxpayer are mixed the
only course, on principle as well as for practical reasons, is to seek and give effect to the domi-
nant factor operating to induce him to effect the purchase. The point is hardly covered by au-
thority. The cases in this Court cited on behalf of Levy in support of this view (De Villiers v CIR 173
and CIR v King 174), do not deal with the question of mixed motives for the purchase of property
where the problem of capital or income is involved. In Sephton v CIR 175 Mason J used the expres-
sion ‘the direct and primary object’ in describing the criterion for deciding whether a transaction
was a business transaction or not. But unless one were to hold, what the Legislature could not have
intended, that the taxpayer must exclude the slightest contemplation of a profitable resale of the
property, it seems to me that the only test to apply is that of the main or dominant purpose. If
therefore the question to be decided was the purpose or intention of Levy when he acquired the
shares, Beadle J was right in asking himself what was Levy’s main or dominant intention.
The finding that that purpose was ‘to acquire the shares as an income-bearing investment’
was a finding of fact which could only be challenged in this Court by showing that it was a
finding at which no reasonable person could arrive. [The court found that the finding of
the court a quo was one which could reasonably be arrived at and hence could not be reversed
on appeal.]
________________________

170 1929 AD 137.

171 1938 AD 267.
172 At 145.
173 1929 AD 227.
174 1947 (2) SA 196 (A).
175 1919 WLD 1.
280 Income Tax in South Africa: Cases and Materials

Notes
This was the first Appellate Division decision to lay down the principle – which still holds
true – that where the question whether a particular amount is income or capital turns on
the taxpayer’s intention at the time of acquisition of the property in issue, what must be
determined is the main or dominant purpose with which the asset was acquired. The
court was however careful to limit this principle to individual taxpayers; different consid-
erations, it said, might apply to a company.
The court therefore considered but distinguished its earlier decision in [169] Leyden-
burg Platinum (which was decided on the basis of a dual intention at the time of acquisi-
tion) on the grounds that the criterion for taxability in the case of a trading company,
was not the same as for an individual, such as the taxpayer in Levy. The court held that,
where the purposes of an individual taxpayer are mixed, effect must be given to his
dominant purpose.
For an illustration of the principle that a taxpayer – even a company – need not ex-
clude all contemplation of a profitable resale, see [167] Trust Bank, where the taxpayer
purchased certain shares, contemplating a profitable re-sale, but with the dominant
intention of securing certain collateral benefits of a capital nature from holding the
property. It was held that the taxpayer’s profit on resale of the shares was of a capital
nature.

If a corporate taxpayer acquires property with the dual intention of holding it as a capital asset and
using it to produce income, or alternatively, selling it at a profit, then if it elects to do the latter, the
proceeds of the sale are taxable as income.

[169]
CIR v Leydenberg Platinum Ltd
1929 AD 137, 4 SATC 8
The taxpayer company was incorporated in 1924. The objects in its memorandum of
association were to acquire land and mining claims, to acquire prospecting rights and to
prospect and search for minerals, to carry on the business of mining, and to sell land,
rights and any other property of the company.
The taxpayer purchased certain properties. It then carried out prospecting and min-
ing activities. In doing so, the company’s technical adviser discovered a rich deposit of
platinum and platinum-bearing reefs and informed the directors. The company immedi-
ately ceased its mining activities and utilised its financial resources in buying up the
surrounding land expeditiously and clandestinely.
The board of directors at this time intended that the company would make its profits
either by mining the land or by a sale. The platinum which had been discovered was in
enormous quantity but of low grade and required a large amount of capital in order to
be profitably exploited.
The finances of the company had been depleted by its extensive purchases of land.
The company therefore sent a representative overseas to negotiate for the formation of a
powerful consortium with the necessary financial backing to exploit the platinum ore.
The consortium formed a new company which took over all the assets of the taxpayer. In
return, the taxpayer received £160 000 sterling in cash, 480 000 fully paid shares in the
new company, and the right to take up a further 80 000 shares at par.
 Trading or Carrying on Business and Schemes of Profit-Making 281

Issue: were the profits made by the taxpayer in selling its properties (those originally
acquired by it and the subsequently-acquired properties) to the new company assessable
to income tax, or were they of a capital nature?
Held: the profits made by the taxpayer were obtained through a scheme of profit-
making and were therefore assessable to income tax. At the time of purchase the taxpay-
er was aware that there were two methods of turning its new acquisitions to profitable
account, both of which were authorised by the taxpayer’s memorandum. The first was to
derive income from mining the properties; the second was to re-sell them at a profit. In
deciding on the latter course of action, the taxpayer was not merely making a change of
investment.
Stratford JA: Two questions . . . arise . . . the first is whether the profits realised by the respond-
ent company by the sale of its properties to the new company are profits taxable as income un-
der the Income Tax Act or are accruals of a capital nature and therefore not taxable? And the
second is whether the profits so made should be taken to be £160 000 cash and 480 000 shares in
the new company or £80 000 cash and 600 000 shares in that company?
The principles to be applied in a case like the present, in order to answer the first question, are
176
now well settled. In Overseas Trust Corporation Ltd v CIR Innes CJ said: ‘When an asset is realised
as a mere change of investment there is no difference in character between the amount of
enhancement and the balance of the proceeds. But where the profit is, in the words of an
177
eminent Scotch judge (see Californian Copper Syndicate v Inland Revenue) ‘a gain made by an
operation of business in carrying out a scheme for profit making’ then it is revenue derived from
capital productively employed, and must be income.’
Applying this test to the present case the question is whether the profits made by the respondent
in the above transaction were made in the course of its business in carrying out a scheme for
profit making or whether the whole transaction was a mere change of investment? The test to be
applied in the case of an individual is not quite the same as the test in the case of a trading com-
pany as explained in Smith v Anderson,178 and in CIR v Stott 179 Wessels JA said: ‘As a general rule
one or two isolated transactions cannot be described as the carrying on of a business’, there the
learned Judge is clearly dealing with the case of an individual for he says later on: ‘If you are
dealing with a company, one of whose objects is to buy and sell land, then the company might
well be considered to be doing the business of selling and buying land even though it carries out
only a single transaction.’ So that ‘continuity’ (as it has been called) is a necessary element in the
carrying on of a business in the case of an individual but not of a company . . . In the case of a
company we have primarily to look at its objects laid down in its constitution and next at its actu-
al operations . . . However, holding the view I do in regard to the later activities of the respond-
ent company it is not necessary definitely to decide what was its first object . . . But whatever the
respondent’s primary business may have been I am satisfied, for reasons presently to be stated,
that the profits in question resulting from the sale to the new company were obtained in an op-
eration of business in a scheme for profit making. When the respondent ceased its mining work
and devoted its remaining cash resources to the acquisition of the properties enumerated in the
Schedule (r to aa) it did so because of the information, by that time obtained, of the value of
those properties. The technical adviser of the company had found that the platinum-bearing
reef existed on them, and, particularly, advised the purchase of Dwarsrivier where platinum had
also been discovered . . . In any event the policy decided upon of stopping mining work and
devoting the remaining cash resources to the acquisition of more mineral bearing properties,
was unquestionably dictated by the hope and expectation of making substantial gains by buying
cheaply, ‘expeditiously and secretly’, properties which, from their own private information, the
Board had reason to believe were very valuable. Whether, at the date of purchase, the Board had
definitely formed the intention to secure those profits by resale or by mining is not necessary to
say, for the facts of the case convince me that a profitable resale or resales were certainly in their
________________________

176 1926 AD 444.

177 41 Sc LR 694.
178 15 Ch D 247.
179 1928 AD at 262.
282 Income Tax in South Africa: Cases and Materials

contemplation. There were these two methods of turning the valuable acquisitions to profitable
account; both were business methods of making gains authorised by the company’s memoran-
dum. Securing profits by mining must have been a deferred method since fresh capital was re-
quired, whereas the other method offered immediate results and required no further capital.
When, therefore, shortly afterwards the Board decided to sell, their choice was definitely in fa-
vour of this method of doing business in preference to the other. The profits were, therefore, in
my judgment, made in the carrying on of a business in a scheme for profit making. Or, to use
another phrase to be found in the cases, those profits ere ‘income derived from capital produc-
tively employed’ and the whole operation was not merely a change of investment.
There remains to be considered whether that portion of the profits derived from the resale of
properties originally acquired by respondent company (enumerated a to g in the Schedule) are
to be classed in the same way . . . For even though it be assumed that these properties were orig-
inally acquired for the purpose of carrying on the business of mining, the subsequent events to
which I have referred point to a clear change of policy in regard to the use to which they were
put. If, indeed, the above conclusion is correct that the business of buying and selling was em-
barked upon in respect of the properties (r) and (aa) it is hardly open to doubt that the earlier
acquired properties were deliberately included in this business and that all the profits were made
out of the same business operation. In Stott’s case (supra) Wessels J 180 dealing with the intention
of the original purchase said: ‘It is sufficient to say that the intention is an important factor and
unless some other factor intervenes to show that when the article was sold it was sold in pursu-
ance of a scheme of profit making, it is conclusive in determining whether it is capital or gross
income.’ In the present case, a new factor did intervene of a decisive character, namely the
deliberate adoption of the policy of selling the company’s properties to make profits.
...
The result is that the appeal succeeds . . .
DE VILLIERS ACJ and CURLEWIS JA concurred.

Notes
The judgment in this case is explicitly directed to companies, and Stratford JA observed
that, ‘The test to be applied in the case of an individual is not quite the same as the test
in the case of a trading company’. Thus, for example, in [168] Levy, the court had regard
only to the individual taxpayer’s dominant intention. In Leydenburg Platinum the court
said that, ‘In the case of a company we have to look primarily at its objects laid down
in its constitution and next at its actual operations. In the case of most companies they are
empowered in their memorandum of association to carry on more businesses than one.’
The court held that, at the date the taxpayer purchased the new properties, a profita-
ble re-sale was ‘certainly in their contemplation’;181 in effect, therefore, the properties
were acquired with a dual intention or alternative intentions. Another example of a dual
or alternative intention is found in [170] Ropty.
More recent cases have said that a scheme of profit-making requires an ‘intention’ ra-
ther than mere ‘contemplation’. In CIR v Pick ’n Pay Employee Share Purchase Trust 182 the
court warned that ‘intention’ is not to be confused with ‘contemplation’. Moreover, a
taxpayer who seeks to rebut the existence of a scheme of profit-making need not show
that he excluded from his mind the slightest contemplation of a profitable resale of the
property; see [168] COT Southern Rhodesia v Levy and [187] Trust Bank.
The decision in Leydenburg Platinum is also significant for the finding that the proper-
ties which the taxpayer originally acquired as capital assets to be used in a mining ven-
ture were ‘deliberately included’ in the later scheme of profit-making, and the proceeds
of their resale, as well as the sale of the subsequently acquired properties, were subject to
tax.
________________________

180 At 264.
181 At SATC 147.
182 1992 (4) SA 39 (A), 54 SATC 271.
 Trading or Carrying on Business and Schemes of Profit-Making 283

A person may envisage making a profit in two alternative ways without either being a dominant
intention. In this situation, there is a single scheme of profit-making that can be brought to fulfil-
ment in alternative ways.

[170]
Ropty (Edms) Bpk v SIR
(1984) 43 SATC 141 (Appellate Division)
For the facts of this case, see extract [171].
Muller JA: [translated] Counsel for the appellant said that, if a person can speak at all of a dual
intention or subordinate intention, then one needs to ask what the dominant intention was. See
COT v Levy183 and CIR v Paul.184 And in this regard counsel’s submission was that the intention to
develop the property was apparently the dominant intention. I have a problem with this proposi-
tion, because in the present case there were apparently alternative intentions to develop the
property or to sell it if there were problems with the development.
In Malan v KBI 185 Grosskopf J said the following in this regard:
‘A person who contemplates making a profit in one of two ways does, however, not necessarily have a
‘dominant intention’ simply because he chooses one of these methods over the other. In such a case, the
court may find that both methods form part of a single scheme of profit-making that can be carried out in
alternative ways.’
When these factors are taken into consideration they throw a different light on the features on
which the appellant relies so heavily – namely the serious attempts which were undoubtedly
made to develop the property and the refusal of Mr Malan to sell his shares . . . The events which
ostensibly gave rise to the decision to sell the property were all events which could and should
have been foreseen when it was decided to embark on the scheme of development . . . It is diffi-
cult to accept that such problems were not foreseen and, if they were to be foreseen, it is not
possible to avoid the inference that the appellant also contemplated a sale of the property if the
development scheme were to fail . . .’ ...
In my view, the Special Court did not err in drawing the inferences that it did – that is to say, it
cannot be said that there was no evidence, including inferences, to support it or that the court
came to a decision that was not reasonable. If one gives consideration to all the facts, there was
in all likelihood a double intention or a concurrent intention of the kind outlined above.
Counsel for appellant submitted that, if one can speak at all of a double intention or a concur-
rent intention, then one needs to ask what the dominant intention was. See COT v Levy186 and in
this regard, counsel’s contention was that the intention to develop the property was apparently
the dominant intention. I have a problem with this proposition, because in the case at hand
there were apparently alternative intentions to develop the properties or to sell them if there
should be problems with the development.
In Malan v KBI187 Grosskopf J said the following in this regard–
‘A person who envisages making a profit in one of two ways does not necessarily have a “domi-
nant intention” purely because he chooses one of these ways above the other. In such a case, the
court may find that both ways formed part of a single scheme of profit-making, which could be
executed in alternative ways.
. . . Then, after Grosskopf J referred to a passage in a judgement of Miller J in ITC 1185,188 he
says–
‘. . . Even if one accepts the complete honesty of these witnesses, one cannot in my view accord decisive
importance to their testimony as to their intention, as appears from the above dicta of Miller J, with which

________________________

183 1952 (2) SA 413 (A) at 420-421.

184 1956 (3) SA 335 (A) at 341F.
185 1981 (2) SA 91 (K) at 94E. The decision was overturned on appeal – see Malan v KBI (1983) (3) SA 1 (A),
45 SATC 59 – but no criticism was made of this statement of principle.
186 1952 (2) SA 413 (A); CIR v Paul 1956 (3) SA 335 (A) at 341F.
187 1981 (2) SA 91 (C) at 94E.
188 35 SATC 122.
284 Income Tax in South Africa: Cases and Materials

I respectfully agree. The reason why a taxpayer’s ipse dixit is not necessarily accepted, need not mean that
his honesty is doubted. A person’s intentions are often changeable, unformed and unformulated, and
their ex post facto testimony in this regard, however, honest, is often unreliable or consists of pure recon-
struction’.
I believe that the learned judge’s view is correct.
In the present case, I am of the view that, if all the relevant facts are looked at, it must be clear
the shareholders and directors of the appellant entered into the transaction with the intention
to make money out of it, either by developing the property or by selling it, and that one cannot
speak of a dominant intention.
The profit that was made is thus taxable and the appeal cannot succeed.
KOTZE JA, JOUBERT JA, TRENGOVE JA and HOLMES AJA concurred.

In order to establish a dominant intention of investment, the taxpayer must satisfy the tribunal as a
matter of probability that he had reasonable grounds for believing he could achieve that purpose.

[171]
Ropty (Edms) Bpk v SIR
(1984) 43 SATC 141 (Appellate Division)
The taxpayer company was registered in April 1969. At all times four persons were the
shareholders, and two of them plus an outside party were directors. In 1968 and 1969 the
company purchased four erven in Newton Park for R110 000 which it sold in January
1971 for R310 000, making a profit of R158 407,95.
The two main erven, numbers 1919 and 1920 were purchased with funds borrowed
against the suretyship of the shareholders. The purchase of the other two was financed
partly on credit. The taxpayer’s intention was to develop the erven by erecting a business
complex which would yield a steady income from rental. The taxpayer made strenuous
and energetic attempts to develop the property as planned. The success of the project
depended chiefly on arranging finance and acquiring a key tenant. Messrs Travenna
were negotiated with as the likely key tenant, but by August 1970 these negotiations fell
through and there was no other likely key tenant.
In September 1970 an offer was received for the shares of the appellant, but one
shareholder was not prepared to sell. The question of selling the property was then
raised. In January 1971 an offer of R310 000 for the property was received from Volkskas,
and this was duly accepted. It was also decided that once this transaction had been con-
cluded, the company should go into voluntary liquidation.
The Commissioner included the profit of R158 407,95 in the taxpayer company’s in-
come.
Issue: was the profit derived by the taxpayer from the sale of the property income or
capital?
Held: the profit was not of a capital nature. The taxpayer had failed to discharge the
onus of proving on a balance of probability that it had reasonable grounds for believing
that it could achieve the stated purpose of developing the property as a capital asset.
When the taxpayer company acquired the property it realised and intended that if it was
not able to find the necessary finance it would sell the property, if possible at a profit;
this was a co-existent and equally predominant intention. The shareholders and directors
of the taxpayer entered into the transaction to make money out of it, either by develop-
ing it or by selling it, neither of which was a dominant intention.
Muller AR: [translated] After Addleson J, the president of the Special Court, dealt with the issue
of the onus of proof . . . the learned judge said the following:
‘Assuming that it is established in the present case that, when the appellant exercised its options to pur-
chase erven 1919 and 1920, it then intended to retain and develop them as an investment, the question
 Trading or Carrying on Business and Schemes of Profit-Making 285

remains whether that was its only or predominant intention or whether the facts give rise to an inference
of a co-existing or subsequent intention to sell at a profit if circumstances so required . . . The following
factors . . . must also be taken into account:
(a) When the erven were purchased the appellant had no funds in hand either to pay for them or for
their development and had not at that stage even obtained any assurance that funds for their develop-
ment would be available.
(b) By the same token, there had not been any reliable estimate or ‘breakdown’ of the cost of develop-
ment so as to ensure that the investment would be a viable one.
(c) . . .
(d) No preliminary negotiations for tenants – especially for a key tenant – were undertaken before the
land was purchased.
(e) . . .
(f) . . .
(g) The appellant apparently possessed insufficient funds to enable it to bear the increased property tax-
es or to enable it to continue to explore the possibilities of investment, beyond the short period of
approximately eight months from January to August 1970 when negotiations with Travenna col-
lapsed.
(h) Immediately such negotiations fell through, a decision was made to sell either the property or the
shares.
(i) When the sale was concluded, there was no consideration of reinvesting the proceeds . . . Indeed the
initial decision was to liquidate the appellant, despite the acquisition of a large amount of capital with
which it could have pursued its authorised object of purchasing properties for development.
(j) . . .
(k) No attempt was made to adapt the proposed premises so that they could be let in another form, after
Trevenna withdrew from the picture.
When these factors are taken into consideration they throw a different light on the features on
which the appellant relies so heavily – namely the serious attempts which were undoubtedly
made to develop the property and the refusal of Mr Malan to sell his shares . . . The events which
ostensibly gave rise to the decision to sell the property were all events which could and should
have been foreseen when it was decided to embark on the scheme of development . . . It is diffi-
cult to accept that such problems were not foreseen and, if they were to be foreseen, it is not
possible to avoid the inference that the appellant also contemplated a sale of the property if the
development scheme were to fail . . .’
Thereafter the judge refers to the fact that the principles in the present case (but not the facts)
coincide with the principles in ITC 1162189 and the following passage from Galgut J’s judgment
in the said case is quoted:
‘If the promoter does not succeed in getting his scheme off the ground, either because the land did not
acquire the expected additional rights, or because events indicated that the area did not prove suitable, or
because partners or associates are not to be found, or because the necessary finances cannot be arranged,
the promoter usually has to dispose of the land. It is natural that he does not expect to incur a loss in so
doing. If in so doing he makes a profit and is taxed thereon, he, because of his ambition, takes up the atti-
tude, which may be bona fide when he testifies, that he or the company which he formed did not acquire
the property with the intention of selling it for profit but as an investment. This may or may not be the
true position. The promoter when giving evidence before the appeal tribunal may well believe this to be
the case. That is not the test. He must satisfy the tribunal on a balance of probabilities that at the relevant
time this was his dominant or main purpose and in order to do that it seems to me that he will have to sat-
isfy the tribunal as a matter of probability that he had reasonable grounds for believing he could achieve
that purpose. It seems further that when a person of the group described above acquires the property he
realizes and must be taken to intend that if he is not able to find the necessary finance he will sell the
property and hope to make a profit.’
There follows the decision of the Special Court as follows:
‘On the facts before this Court we can clearly find that when the appellant purchased the erven in ques-
tion it planned and expected to develop the property as an income-producing investment and that it made
serious and determined efforts to achieve that purpose. We cannot however, on all the facts, find that it
has been shown that the Secretary was wrong in holding that there was also an intention to sell the proper-
ty, if the development scheme could not be achieved. Having obtained the rezoning of the land, the
appellant could fairly hope to be able to find the necessary tenants and finance and overcome the other
________________________

189 (1970) 33 SATC 201.

286 Income Tax in South Africa: Cases and Materials

problems in the way of developing the property as an income-producing investment; but in the light of the
existing circumstances, the subsequent events, its own conduct and the absence of evidence from its active
directors, we cannot hold that, in the event of the failure of the scheme, a sale of the property at a profit
was not equally or predominantly its intention.’
With that decision the East Cape Division agreed. This appears clearly from the following pas-
sages in Smalberger J’s judgment:
‘That the appellant intended to develop the property, as established from the evidence, the minutes and
the correspondence, is not disputed. Much was done by the appellant in the furtherance of this intention.
But such intention does not necessarily exclude the existence of a co-existing and equally predominant
intention to sell the property at a profit in the event of the plans for development falling through’ . . .
In the present case, in my view, if all the relevant facts are looked at, it must be clear that the
shareholders and directors of the appellant entered into the transaction with the intention to
make money out of it, either by developing the property or by selling it, and that there can be no
talk of a dominant intention.
The profit that was made is thus taxable and the appeal cannot succeed.

Notes
This Appellate Division decision establishes an important rider to the principle that the
subjective intention of the taxpayer at the time of acquisition of property is the most
important factor in determining whether the proceeds of the sale of that property are
income or capital.
In terms of the principle laid down in Ropty, a taxpayer who asserts that he purchased
property for the purpose of holding it as a capital asset will not discharge the onus of
proof which rests upon him unless he can prove that, objectively, he had reasonable
grounds for believing that he could achieve his purpose. Thus, for example, he will have
to prove that he reasonably believed that the necessary finance was or would become
available to bring his purpose to fruition. If he cannot prove this, the court will infer that,
at the time of acquisition of the property, he intended to sell if finance proved to be
unobtainable. On this issue, see also [178] Greenband Properties.

§7.4 Changes of intention

The taxpayer’s intention at the time of acquisition is not necessarily conclusive; property acquired for
resale at a profit can, through a change of intention, become a capital asset. Per Schreiner JA: a mere
subjective change of mind by the taxpayer does not suffice to change the character of assets from stock-
in-trade to capital.

[172]
CIR v Richmond Estates (Pty) Ltd
1956 (1) SA 602 (A), 20 SATC 355
For the facts of this case, see extract [180].
Centlivres CJ: This case must therefore be decided on the footing that although the fifteen
properties in question were originally bought for re-sale at a profit, they were afterwards held as
an investment. That the character of assets held by a company can be altered by a change of
190
intention in regard to those assets is clear from the case of CIR v Lydenberg Estates Ltd where the
191
court decided that there was a change of policy by the company concerned which resulted in
capital assets becoming the stock-in-trade of the company. See too New Mines Limited v CIR.192 . . .
Counsel for the Commissioner contended that, in deciding the question in issue, one must look
at the purpose the respondent had when it originally acquired the fifteen properties. Here the
original purpose was to re-sell at a profit and the respondent achieved that purpose when it
________________________

190 1929 AD 137 at 144.

191 At 147.
192 1938 AD 455 at 460-461.
 Trading or Carrying on Business and Schemes of Profit-Making 287

re-sold at a profit in 1951. For this contention counsel relied on CIR v George Forest Timber Compa-
ny Ltd 193 and Lace Proprietary Mines Limited v CIR.194 But in neither of those cases had there been
the factor which exists in the present case, viz a decision by the company to hold assets which it
previously held as stock-in-trade, as capital.
Schreiner JA: (dissenting) One must not lose sight of the true nature of the inquiry in cases of
this kind. There is no legislative provision that makes the intention of the taxpayer decisive of
whether the receipt or accrual was of a capital nature or not. The decisions of this Court have
recognised the importance of the intention with which property was acquired and have taken
account of the possibility that a change of intention or policy may also affect the result. But they
have not laid down that a change of policy or intention by itself effects a change in the character
of the assets. The test has been variously expressed but it is enough to say that the profits of a
company business activities are generally speaking part of its income. Where, as here, a company
is formed to carry on land-jobbing and land-letting, these are simply alternative methods of us-
ing the company’s money to make a business profit, each method having advantages over the
other according to circumstances . . .
But the exceptional cases, assuming them to exist, are not brought into existence simply by an
intention to hold the asset indefinitely or for a long time; they would be cases where property
has been made part of the permanent structure of the company, on which its business rests; such
property would in effect be taken out of the field of the company’s business where decisions are
made from time to time on how best to make a profit. In contrast with such properties, which
might be said to be truly fixed capital, is property which the company would use in its business
operations, which it would deal with or hold as the prospects of profitable user dictated that
would be its floating capital.

Notes
This is a leading authority for the proposition that a ‘change of intention’ by the taxpay-
er can change the character of an asset from stock-in-trade to capital. The majority
judgments did not however analyse what is meant by a ‘change of intention’. On this
issue, Schreiner JA’s dissenting judgment has been very influential.
Schreiner JA differed from the majority judgment in holding that a mere change of
‘policy’ or ‘intention’ (terms which he used interchangeably) is not enough to change
the character of assets from stock-in-trade to capital. In his view, such a change could be
effected only where the property was made part of the permanent structure of the com-
pany’s business. Schreiner’s approach was adopted by the Appellate Division in [173]
John Bell, which expressed the same principle in slightly different words, holding that in
addition to a subjective change of intention, there must be ‘something more’ before the
character of assets can change from capital to trading stock (and, by implication, from
trading stock to capital). The requirement of ‘something more’ than a subjective change
of intention has since been accepted and reiterated in many decisions, including [181]
Natal Estates.195
The mere subjective change of intention by the taxpayer does not change the character of an asset
from capital to stock-in-trade. Something more is required.

[173]
John Bell and Co (Pty) Ltd v SIR
1976 (4) SA 415 (A), 38 SATC 87
Wessels JA: Moreover, my understanding of the cases that deal with the matter is that the mere
change of intention to dispose of an asset hitherto held as capital does not per se subject the
________________________

193 1924 AD 516 at 523.

194 1938 AD 267 at 277.
195 And also including CIR v Malcolmess Properties (Isando) (Pty) Ltd 1991 (2) SA 27 (A), 53 SATC 153 at 162;
Elandsheuwel Farming (Edms) Bpk v SBI 1978 (1) SA 101 (A), 39 SATC 163.
288 Income Tax in South Africa: Cases and Materials

resultant profit to tax. Something more is required in order to metamorphose the character of
the asset and so render its proceeds gross income. For example, the taxpayer must already be
trading in the same or similar kinds of assets, or he then and there starts some trade or business
or embarks on some scheme for selling such assets for profit, and, in either case, the asset in
question is taken into or used as his stock-in-trade.

Notes
This decision endorsed a principle first articulated by Schreiner JA in his dissenting
judgment in [166] Richmond Estates. Many subsequent decisions, including Appellate
Division decisions, have affirmed the principle laid down in John Bell, as stated above, that
before a taxpayer can be taxable on the sale of property previously held by him as a
capital asset, ‘something more’ is required than just a subjective change of mind by the
taxpayer, or just a decision to sell the property. As was noted in [176] CIR v Modified
Investments (Pty) Ltd the nature of the ‘something more’– the additional factor – has
not been defined in subsequent cases. However, it seems that what is required is some
outward manifestation that the taxpayer has decided to embark on a trade or scheme of
profit-making using the property in question as stock-in-trade. Thus, for example, in
Natal Estates, the elaborate activities involved in developing the property for sub-division
and sale constituted the requisite ‘something more’.

A change of intention by the taxpayer, after the acquisition of property, can change the character of
that property from a capital asset to stock-in-trade or vice versa.

[174]
Natal Estates Ltd v SIR
1975 (4) SA 177 (A), 37 SATC 193
In 1921 the taxpayer company acquired, as a going concern the assets of a company
which carried on business as a grower and miller of sugar. The assets so acquired includ-
ed 21 025 acres of land which was planted with sugar cane. The cost of the land was
about R6 per acre. The company thereafter acquired additional land and carried on the
business of growing and milling sugar cane and manufacturing sugar. In 1962 the tax-
payer company was taken over by Hulett Ltd, which was itself taken over shortly thereaf-
ter. At one of the first meetings of the newly-constituted board of directors, the future
development of a township at La Lucia, on land owned by the taxpayer, was discussed
and it was resolved to instruct town-planners to prepare plans for the development of a
township. In 1963 consulting engineers and architects were appointed for the purposes
of the development.
Between 1965 and 1970 the taxpayer sold substantial areas of land at a considerable
profit. These included sales in bulk to associated companies which were to take over the
development and would resell at a profit to the public. The Commissioner included the
proceeds of the sales made by the taxpayer in the taxpayer’s gross income.
Issue: were the proceeds of the sale of the land by the taxpayer realisations of a capital
asset (and thus of a capital nature) or the proceeds of a trade or scheme of profit-making
(and thus of a revenue nature)?
Held: although the land was originally acquired by the taxpayer company as a capital as-
set, the taxpayer had undergone a change of intention in relation to such land. In em-
barking on the large-scale development and sale of the land, the taxpayer had crossed
the Rubicon and had commenced a trade or scheme of profit-making. This applied also
to the bulk sales of land to associated companies; such land was also the subject of the
taxpayer’s change of intention.
 Trading or Carrying on Business and Schemes of Profit-Making 289

Holmes JA: Cases in this court . . . recognize the relevance of a change of intention on the part
of the owner, that is to say, a change from the original intention when acquiring the asset; see
CIR v Leydenberg Platinum Limited 196 where Stratford, JA said at 148:
‘For, even though it be assumed that these properties were originally acquired for the purpose of carrying
on the business of mining, the subsequent events to which I have referred point to a clear change of policy
in regard to the use to which they were put . . . In the present case, a new factor did intervene of a decisive
character, namely the deliberate adoption of the policy of selling the company’s properties to make
profits.’
. . . However, the principle just stated was recognized by this court in CIR v Richmond Estates (Pty)
Ltd 197 in which Centlivres CJ said:
‘That the character of assets held by a company can be altered by a change of intention in regard to those
198 199
assets is clear from the case of CIR v Leydenberg Estates Ltd where the court decided that there was a
change of policy by the company concerned which resulted in capital assets becoming the stock-in-trade of
the company.’ (The citation of the respondent should be Leydenberg Platinum Ltd.)’
Schreiner JA, in his dissenting judgment, also recognized the relevance of a change of intention.
The learned judge of appeal expressed himself thus:200
‘The decisions of this court have recognized the importance of the intention with which property was ac-
quired and have taken account of the possibility that a change of intention or policy may also affect the
result. but they have not laid down that a change of policy or intention by itself effects a change in the
character of the assets.’ (My italics.)
...
It does not necessarily follow, however, that proof of land-jobbing (buying land for resale and
selling it) is the only way of establishing that a taxpayer is engaged in the business of selling land
for profit, using it as his stock-in-trade. Nor is the argument in my view well attended by logic, for
it was conceded (correctly) that the character of land can change from stock-in-trade to capital
in consequence of a changed intention to hold it as an investment. It was also conceded (cor-
rectly) that the character of land can change from that of capital to that of stock-in-trade by a
change of policy whereby the land is merged with the stock-in-trade of an existing trading con-
cern. I agree with counsel for the respondent in his submission that it is not a definitive charac-
teristic of carrying out a scheme for profit-making in land that there should be a buying-in for
the purpose of a resale at a profit; that that feature may often be present but, on the other hand,
the taxpayer may find it unnecessary to buy in for purposes of resale; that he may have at hand
such a stock-in-trade of hitherto capital assets that he does not need to buy in further stock; and
that to say that there must always be buying-in for purposes of resale at a profit is in effect to say
that capital assets immutably remain capital assets in the hands of the acquirer.

Notes
In this case the Commissioner argued that the taxpayer had initially acquired the land in
question with a dual intention. The Special Court rejected this argument, and the case
therefore turned on whether there had been a subsequent ‘change of intention’ by the
taxpayer in relation to the land. To this question, the Special Court had given an affirma-
tive answer and the Appellate Division declined to reverse that decision.
The taxpayer’s change of intention coincided with the take-over of the taxpayer com-
pany in 1962; under its new controllers, the company immediately adopted and began
implementing a new policy in regard to the land in issue. Although the taxpayer contin-
ued with its business of producing and milling sugar cane, the court found that, after the
change of intention, it had embarked on a subsidiary or secondary business of township
development and the selling of township land.

________________________

196 1929 AD 137 at 144.

197 1956 (1) SA 602 (A) at 607.
198 1929 AD 137 at 144.
199 At 147.
200 At 610D.
290 Income Tax in South Africa: Cases and Materials

The court rejected the argument that, to be a ‘land-jobber’(in other words, a trader in
land), it was necessary that the taxpayer should have bought in the land for that purpose;
instead, it was held that a change of intention could convert the character of land, al-
ready held by the taxpayer, from capital to stock-in-trade.
The court stressed (what has sometimes been overlooked in subsequent cases) that, in
order for the land to change its character in this way, the taxpayer must use the land as
stock-in-trade; in other words, the subjective change of mind must be manifested, objec-
tively, in the way in which the taxpayer deals with the land. The requirement that there
must be ‘something more’ than a mere subjective change of mind before property held
by the taxpayer will change its character from capital to stock in trade was made explicit
a year later in John Bell & Co (Pty) Ltd v SIR.201 In Natal Estates that ‘something more’ was
the sub-division, the laying down of roads, the provision of electricity, etc and all the
other elaborate activities involved in township development.

[175]
Elandsheuwel Farming (Edms) Bpk v SBI
1978 (1) SA 101 (A), 39 SATC 163

For the facts of this case, see extract [182].

Trollip JA: Of course, every decision by an owner to dispose of an asset held as a capital
asset does involve a change of intention: hitherto his intention has been to retain it as
such: now he changes that intention by deciding to dispose of it. According to the above-
mentioned dicta a mere change of intention of that kind does not per se subject any
resultant gain to tax; something more is required for that to happen. That additional
factor is usually something indicating that the disposal is in reality in pursuance of some
trade or business or scheme for making profit. The intervention of such an additional
factor may be indicated by the circumstances surrounding the change of intention or in
the way in which it was manifested or carried out.
Corbett JA: (dissenting) While the normal type of profit-making scheme, relating to the acquisi-
tion and subsequent sale of an asset, contemplates a continuing and unchanging purpose from
acquisition to sale, the courts have recognized the possibility of an intervening change of pur-
pose or intention. Thus, an asset may have been acquired with the intention of reselling it at
a profit but thereafter the owner’s intention may change and he may decide to hold it as
an income-producing capital asset or investment . . . Conversely, an asset originally acquired
to be held as an income-producing investment may by reason of a subsequent change of purpose
or intention on the part of the owner become the subject-matter of a profit-making scheme so
that the proceeds of an ultimate realization constitute gross income (see eg Natal Estates Ltd v
SIR 202) . . .
In conjunction with what has been stated in regard to change of intention, particularly the kind
of change which converts a capital asset into stock-in-trade, must be read the principle that
where a taxpayer wishes to realize a capital asset he may do so to best advantage and the fact that
he does just this cannot of itself convert what is a capital realization into a business or a profit-
203 204
making scheme (see Natal Estates case; John Bell case. There are, however, limits to what a
taxpayer may do in order to realize to best advantage. The manner of realization may be such
that it can be said that the taxpayer has in reality gone over to the running of a business or em-
barked upon a profit-making scheme. The test is one of degree. (Natal Estates case,205 . . .)
________________________

201 1976 (4) SA 415 (A), 38 SATC 87.

202 1975 (4) SA 177 (A).
203 At 199, 201-202.
204 At 428-429.
205 At 199.
 Trading or Carrying on Business and Schemes of Profit-Making 291

Notes
Both the majority and the minority judgments accepted that the land in question, when
first acquired by the taxpayer company, had been of a capital nature; it was acquired for
farming purposes and farming activities were in fact carried out on the land.
The majority judgments refused to set aside the finding of the Special Court that, after
‘the de Villiers group’ acquired all the shares in the taxpayer company, the company
underwent a change of intention which altered the land from a capital asset to stock-in-
trade with the result that when the land was sold, the proceeds formed part of the tax-
payer’s gross income.
The majority judgments have been criticised206 on the grounds that all that the compa-
ny did after the de Villiers group got control of it, was to decide to sell the land. In
particular, the company did not sub-divide or develop the land prior to sale, and this
factor immediately distinguishes the facts from those in Natal Estates. However, the
majority judgments did accept, in principle, that something more than a mere subjective
change of mind is required to change an asset from capital to stock-in-trade.
A change of intention can operate in either direction to metamorphose stock-in-trade to a capital
assets or vice-versa. The nature of the additional factor – the ‘something more’ – that is required in
addition to a subjective change of mind in order to commence or abandon a scheme of profit-making
and thereby change the nature of an asset from stock-in-trade to capital or vice versa has not been
delimited in the reported cases.

[176]
CIR v Modified Investments (Pty) Ltd
1982 (1) SA 331 (T), 43 SATC 257
MI (Pty) Ltd was formed by the late Mr B, a stockbroker, who held 99 of the 100 issued
shares. B died in December 1976. During B’s lifetime, the business of the company was
to deal in shares. After B’s death, Rush and Krawitz (the executors of his estate) were
appointed directors and made all decisions affecting the company. They decided against
liquidating the company, and determined that henceforth the company would become
an investment holding company. No formal resolution in this respect was passed. They
decided to sell the existing stock save for such shares as were suitable for holding in an
investment company; included in the latter were shares in the H company.
In accordance with this new policy, certain shares of a speculative nature were sold at a
loss in February 1977. The company recorded these transactions as a loss on revenue
account, and the Commissioner did not challenge this.
In June 1977 the company sold 3 000 shares in Hartebeesfontein Gold Mining Co Ltd
(‘Harties’). They had been bought in 1970 for R5 500 and were sold for R41 000, thus
yielding a profit of some R36 000. The Commissioner assessed the company to income
tax on this profit. The company claimed that this was a capital profit.
Issue: did the sale of the Harties’ shares yield income or capital?
Held: the proceeds of the sale were of a capital nature. Although the shares had been
acquired by the taxpayer as trading stock, there had been a subsequent change of inten-
tion which converted them to capital assets.
O’Donovan J: The second line of argument on behalf of the appellant is based on the proposi-
tion, which has been stated in a number of cases, that a mere change of intention is insufficient

________________________

206 See Wunsh, 1977 De Rebus Procuratoriis 102; Williams, (1991) 54 THRHR 826.
292 Income Tax in South Africa: Cases and Materials

to change the character of an asset, and that something more is required. This, according to
the submission of the appellant, includes as its foremost component the actual holding of
the shares as fixed capital, that is, more or less permanently and with the intention of
earning income. In other words, it is argued on behalf of the appellant that it must be shown
that the policy of investment holding as a business was actually implemented. There would
otherwise be a mere change of policy which of itself does not convert trading stock into fixed
capital.
The nature of the additional factor which is required has not been delimited in the reported
cases. In the case of SIR v Rile Investments (Pty) Ltd 207 Corbett JA, delivering the unanimous judg-
ment of the Court, assumed, without deciding, that the principles referred to in this connection
which relate to the circumstances under which an asset held as capital may as a result of the
changed intention on the part of a taxpayer become stock-in-trade, or the subject-matter of a
profit making scheme, apply equally to the converse situation, namely where the question is
whether, by reason of a changed intention, an asset formerly held as stock-in-trade or as the
subject-matter of a profit making scheme has become converted into fixed capital.
Accepting the submission for the appellant that such an additional factor must be established,
and that it must be shown that the change of intention has been implemented, so that assets
formerly held as stock are thereafter held as fixed assets, the intervention of the additional factor
may be established by the circumstances surrounding the change of intention or by the way in
which it is manifested or carried out. See in this respect the observations of Trollip JA in Eland-
sheuwel Farming (Edms) Bpk v SBI.208 In the present case it seems to me that the factors of critical
importance are the death of the original shareholder and the assumption of control of respond-
ent by trustees who were aware that they could not, with propriety, continue the respondent’s
trade in shares, or continue with its holding of speculative assets. These factors, together with the
disposal of other shares in February 1977, constitute circumstances surrounding the change of
intention which establish the intervention of an additional and decisive factor. They do not
merely provide evidence of a change of intention; they establish on a balance of probabilities
that the assets of the respondent which were not sold off by February 1977 were in fact held as a
fixed investment in pursuance of the decision of the two persons in control. The shares so held
included the Harties shares.
For this reason it seems to be the finding of the Special Court was justified. Its finding should
therefore be confirmed and the appeal dismissed.

Notes
In [181] Natal Estates the ‘something more’ was the elaborate and extensive activities
associated with sub-division and township development. In Modified Investments it was the
death of the director of the company and the assumption of control by executors who
were debarred from speculating with estate assets. In [182] Elandsheuwel the majority
judgments accepted that there had to be ‘something more’ in order to change a capital
asset into trading stock, but critics have doubted whether, on the facts, this additional
factor was present.209

The requirement that a change of intention necessitates ‘something more’ than a mere subjective
change of mind on the part of the taxpayer applies equally where the change of intention would have
the effect of converting stock-in-trade to a capital asset.

________________________

207 1978 (3) SA 732 (A) at 748D.

208 1978 (1) SA 101 (A) at 115A-B.
209 For critical comment on the decision in Elandsheuwel, see Wunsh, 1977 De Rebus Procuratoriis 102 and
Williams, (1991) 54 THRHR 826.
 Trading or Carrying on Business and Schemes of Profit-Making 293

[177]
SIR v Rile Investments (Pty) Ltd
1978 (3) SA 732 (A), 40 SATC 135
Corbett JA: I shall assume in appellant’s favour that the principles . . . in the cases cited by coun-
sel, which related to the circumstances under which an asset held as capital may as a result of a
changed intention on the part of the taxpayer become stock-in-trade or the subject-matter of a
profit-making scheme, apply equally to the converse situation, viz where the question is whether
by reason of a changed intention an asset formerly held as stock-in-trade or as the subject-matter
of a profit-making scheme has become converted into fixed capital. (Cf the minority judgment
of Schreiner JA in CIR v Richmond Estates (Pty) Ltd.)210

A ‘change of intention’ does not mean a mere hope or an idea that is not implemented and whose
feasibility was never explored.

[178]
Greenband Properties (Pty) Ltd v CIR
(1981) 43 SATC 151 (Cape Provincial Division)
The taxpayer company was registered in November 1968 by a certain Campbell for the
express purpose of speculating in fixed property. Pursuant to this purpose, it acquired
three vacant plots in Gabriel Road, Plumstead, intending to build houses on them and
sell them at a profit. This was done in relation to one of the plots. The two remaining
plots – plots number 69951 and 69952 – were separated by an intervening plot on which
stood a block of flats owned by M.
In May 1970 a partnership consisting of O, B and R purchased the intervening plot. In
the Special Court R and O testified that their intention was to derive income from the
flats. But B deposed that their intention was to erect a petrol station on the site. H, an
estate agent, advised them that the flat site was too small for a petrol station and that they
ought to acquire plots 69951 and 69952 and consolidate them with the flat site. At this
point, O withdrew from the partnership.
B and R acquired control over plots 69951 and 69952 by purchasing all the shares in
the taxpayer company. The idea of a petrol station or a shopping centre on the site was
abandoned after cursory consideration. In February 1973 all three plots were sold, the
profits on plots 69951 and 69952 being R51 475.
The taxpayer contended that when B and R acquired the shares in the company, the
intention with which plots 69951 and 69952 had previously been held – namely as stock-
in-trade – changed to one of capital investment, thereby changing the character of the
asset to capital.
Issue: whether the decision of the Special Court that the proceeds of the sale of plots
69951 and 69952 were income could reasonably have been reached on the evidence.
Held: in the affirmative. The plan of the controlling shareholders which would have
changed the property from stock-in-trade to a capital asset was never anything more than
an idea which was never implemented and whose feasibility was never explored. This was
insufficient to change the character of the asset.
Vivier J: The question for decision accordingly is whether the profit of R51 475 made by appel-
lant on the sale of the two vacant plots was a receipt or accrual of a capital nature, as contended by
appellant, or whether it should be regarded as part of appellant’s gross income, as the Commissioner

________________________

210 1956 (1) SA 602 (A) at 610C-H.

294 Income Tax in South Africa: Cases and Materials

has done. As Corbett JA pointed out in the case of Elandsheuwel Farming (Edms) Bpk v SBI,211 this
question turns on the further enquiry as to whether the sale amounted to the realization of a
capital asset or whether it was the sale of an asset in the course of carrying on a business or in
pursuance of a profit-making scheme.
It was not in issue that the two plots were originally acquired by appellant for the purpose of
building houses thereon and reselling them at a profit, and that until August 1970, when Ban-
derker and Rawoot acquired control of appellant, the plots formed part of appellant’s stock-in-
trade and would have thus been subject to tax on profitable resale. Appellant’s main contention
before the court a quo and on appeal before us, was that the intention with which the plots were
held changed to one to hold the plots as a capital asset when Banderker and Rawoot acquired
the shares in the company, with the result that the character of the asset also changed into one
of a capital investment.
In dealing with the question as to whether such a change of intention had been established, the
Special Court accepted that Banderker and Rawoot bought the shares in the hope of establish-
ing a petrol station on the site. The Special Court found, however, that this could have been
nothing more than a mere hope as there were a number of serious obstacles in the way to ful-
filling their hope. The Special Court found that, despite the ipse dixit of Banderker and Rawoot
that the building of a petrol station was their sole reason for buying the shares, this had not been
shown to be their sole, or even their dominant intention . . . It found that ‘all that happened was
that Banderker and Rawoot went through the mental process of earmarking the plots for con-
version into a petrol station if that should be possible, but when that failed they were put to the
same purpose for which they were originally acquired by the company, namely resale’ . . .
Although the cases of John Bell & Co and Elandsheuwel Farming concerned the question whether
land held as a capital asset changed its character to stock-in-trade due to an intervening change
in intention, the same principles therein stated apply to the converse situation which exists in
the present case, namely whether land held as stock-in-trade became a fixed capital asset as a
result of a change in intention. See SBI v Aveling supra 212 See also SIR v Rile Investments, supra.213
At the time when Banderker and Rawoot acquired control over the company, the petrol station
scheme was still nothing more than an idea which seems to have been suggested to them by Hel-
ler. There is nothing on record to show that anything was done thereafter to take this idea any
further. They conducted no investigations, made no enquiries, enlisted no assistance and took
no steps of any kind. They had no money, yet nothing was done to find out what the cost of the
project would be and nothing was done to raise money. There were a number of formidable
obstacles in the way to getting the scheme off the ground, about which they did nothing . . .
It is true that Banderker and Rawoot waited to hear from Heller. As has been pointed out in the
judgment of the Special Court, however, Heller’s role in the matter has remained a mystery . . .
When Heller eventually informed Banderker and Rawoot that no oil company would provide the
necessary finance, the project which, from the company’s point of view, had never progressed
beyond a mere idea, was summarily abandoned.
Having regard to the above circumstances the majority of the court – basing its findings on both
credibility and probabilities – held that appellant had not discharged the onus upon it. I am not
persuaded that this conclusion is wrong.
Mr Dison, who appeared for appellant, contended that the court a quo judged the intention of
the directors from an objective angle and not subjectively. I cannot agree. The court, in my
judgment, was clearly entitled to assess the ipse dixit of the directors in the light of general hu-
man and business probabilities, which the court in fact did.
In any event, a change in the nature of the asset could not come about unless and until the land
was held by the appellant as a more or less permanent investment. SBI v Aveling, supra.214 Having
regard to the lack of finance of appellant and its directors and to the nebulous nature and
________________________

211 1978 (1) SA 101 (A) at 118B.

212 At 879-881.
213 At 748D-H.
214 At 880A-880B.
 Trading or Carrying on Business and Schemes of Profit-Making 295

uncertainty of the petrol station project, appellant could, in my judgment, never properly be
said to be holding the land as a more or less permanent investment. If the scheme did not even-
tuate the land would have had to be sold, as in fact happened and as appellant’s directors surely
contemplated.
The court a quo accordingly correctly held that appellant had failed to discharge the onus of
proving that a change in the character of the asset from stock-in-trade to fixed capital had taken
place . . .

Notes
This decision puts into effect the principle first enunciated by Schreiner JA in his dissent-
ing judgment in [172] Richmond Estates and adopted by the Appellate Division in [173]
John Bell, that a mere subjective change of intention does not in itself convert a capital
asset to stock-in-trade or vice-versa. There must be ‘something more’. This additional
factor usually takes the form of some manifest implementation of the change of inten-
tion.

§8 Immovable property transactions

The following are extracts from leading cases as to what constitutes a ‘trade’ or ‘scheme
of profit-making’ in relation to the acquisition and sale of immovable property.

[179]
CIR v Stott
1928 AD 252, 3 SATC 253
The taxpayer was an architect and surveyor, practising in Pietermaritzburg. He had
purchased land on the Natal north coast some 30 years previously, which he let and
subsequently sold at a profit. He had bought a farm in the Vryheid district, which he had
let for five years. He had one or two town properties, which he let. (All these transactions
the court regarded as lacking information and too long ago to be relevant.) He had
bought two acres at Winkelspruit as a seaside residence, which he later sub-divided and
sold, but it was not known whether he had made a profit. In August 1920 he wanted a
seaside residence and bought 54 acres of land at Ifafa for £900, and built a cottage on it.
Later he subdivided half the block and sold the lots at a profit. In March 1921 he bought
a small fruit farm at the Bluff, on which there was a long lease. The tenant failed to pay
the rent, and the second tenant also caused trouble. The taxpayer then subdivided the
farm and sold the lots at a profit in 1923 and 1924. In 1924 he bought the farm ‘Woody
Glen’ which measured 1 800 acres, for the purpose of assisting tenants who were living
there and feared that they would be ejected. Half the farm was stony and valueless, and
part was sold to the them at a small profit. The Special Court found that this farm was
bought primarily for philanthropic motives to assist the tenants.
Issue: whether the proceeds of the sale of the taxpayer’s land on the Bluff and at Ifafa
were income or capital.
Held: the amounts were of a capital nature. There was no proof that the taxpayer had
engaged in a scheme of profit-making.
Wessels JA: Though we are concerned only with the proceeds of the respondent’s Bluff and Ifafa
properties, yet in order to determine whether these proceeds are gross income or accruals of a
capital nature, we have to consider all the land transactions of the respondent as found in the
stated case, for the solution of the question depends upon whether he was carrying on the busi-
ness of a landjobber or engaged in a scheme for profit-making in regard to these transactions . . .
[The judge here summarised the facts, and continued:]
296 Income Tax in South Africa: Cases and Materials

Upon these facts the majority of the Special Court found that as regards the farm on the Bluff
and the land at Ifafa the enhanced value at which the respondent sold the land was a profit upon
which income tax was payable. The reasons given by the Special Court for this finding are (1)
That ‘by putting his brains into it and organising a trade in the selling of the lots, he converted
his original intention in buying in such a way as to bring it within the scope of profit-earning
undertaking’. (2) By cutting up the properties into small lots and selling these at a profit, the
taxpayer was carrying on a business as part of his business as a surveyor, and therefore the profits
on these transactions cannot be regarded as being of a capital nature.
...
. . . The facts as stated are sufficiently clear to enable us to decide this appeal. The question we
have to determine is whether the facts as set out in the special case show that the proceeds of the
sale of the Ifafa and Bluff properties constitute gross income or capital. In order to arrive at this
decision it is necessary to know whether the acts of the taxpayer in buying and selling these
properties show that he was carrying on the trade or business of a land-jobber. Whether he was
or was not carrying on such a business is an inference from facts. This inference is a matter of
law. Do or do not such facts as are found lead to the conclusion that the taxpayer is carrying on a
business or trade within the meaning of the law? Whatever view other courts have expressed, it is
quite clear that this Court has regarded the inference from the acts of the taxpayer that he car-
ries on a trade or business as a question of law. The case of Platt v CIR 215 is conclusive . . . In the
Overseas Trust Corporation Ltd v CIR 216 the Chief Justice said:217 ‘Where an asset is realised at a prof-
it as a mere change of investment there is no difference in character between the amount of
enhancement and the balance of the proceeds. But where the profit is, in the words of an emi-
nent Scottish Judge, “a gain made by an operation of business in carrying out a scheme for prof-
it-making then it is revenue derived from capital productively employed and must be income”.
‘Californian Copper Syndicate v Inland Revenue.218 In order, therefore for this Court to determine
whether an asset realised at a profit is a mere change of investment or an operation of business
in carrying out a scheme for profit-making, it must have before it all the facts and circumstances
of the sale and not merely the inference of the Special Court from these facts. In law this Court
can only determine whether the proceeds of an asset sold by the taxpayer is capital or gross in-
come when it has considered under what circumstances the asset was sold. The inference drawn
by the Special Court from the facts found by it cannot bind this Court. Even, therefore, if the
majority of the Special Court had stated specifically that the taxpayer was carrying on the busi-
ness of a landjobber, this Court is entitled to enquire into the correctness of that conclusion by
considering the same facts from which the Special Court drew its inference.
I shall now proceed to enquire whether the evidence supports the contention that the taxpayer
was carrying on a scheme for profit-making by buying land, cutting it up and selling it in lots. It
is quite clear that his real business is that of a surveyor and architect. When, however, he has
funds to invest he sometimes buys land with these funds. About 30 years ago he bought land on
the north coast of Natal which he sold at a profit. We know no further details of this transaction,
and as it is so long ago it may be passed over: the same may be said with regard to the farm he
owns in the Vryheid district and his town properties. These have been let, and are clearly invest-
ments. We now come to his transactions between 1918 and 1923. During these five years he
bought and sold land on four occasions. In 1918 he sold the two acres at Winkelspruit, Natal,
which he had bought for the purpose of a seaside residence. He thought the place too crowded
and so sold the land in plots. We are not told whether he made a profit or not. There is, howev-
er, no suggestion that this land was bought otherwise than as an investment. This purchase shows
no intention on the part of the taxpayer of acting as a landjobber. If, therefore, he began to do
business as a landjobber, it must have been between 1920 and 1923. We can dispose at once of
the purchase of ‘Woody Glen’ in 1923 because the Special Court does not suggest that this land
was bought as a profit-making scheme. It is specifically found that the property was bought as an
investment in order to assist certain native tenants who were afraid they would be ejected. The
________________________

215 1922 AD 42.

216 1926 AD 441.
217 At 453.
218 41 Sc LR 691.
 Trading or Carrying on Business and Schemes of Profit-Making 297

taxpayer was the son of a missionary, and there were, therefore, sentimental reasons for the pur-
chase. We are therefore confined to purchases of land during the period August 1920 to March
1921, and the subsequent sale of this land in plots. In other words we are asked to infer that the
taxpayer was carrying on the business of a landjobber or engaged in a scheme for profit-taking
from two transactions, viz the purchase of the land at Ifafa in August 1920, and the farm at the
Bluff in March 1921.
As regards the land at Ifafa, it is true that it is difficult to assume that Mr Stott would wish to buy
54 acres for a seaside residence only. The explanation is that he had either to buy the whole
block or leave it alone. He chose to buy. There is nothing in this to suggest any intention to do
the business of a landjobber. In April 1921, he was asked to sell 30 acres out of the 54. He of-
fered to sell the whole block for £3 000 and thus realise a large profit. Nothing came of this. He
built a seaside cottage on the land, and some time afterwards divided the block into two por-
tions. He retained the cottage and about half of the property, divided the other half into lots
and sold these at a profit. The stated case does not say that Stott surveyed the lots himself, but
the judgement of Mr Mitchell, a member of the Special Court, seems to imply it. I assume that
he did the survey himself. Can the fact that he divided the property into two halves and cut up
the one half into lots convert what was prima facie an investment into a business? It is not suffi-
cient that the cutting up of the land and its sale in lots should in its result prove to be a profit-
making matter so as to stamp the proceeds as gross income. The gain must be acquired by an
operation of business in carrying out a scheme for profit-making. I should like to quote here the
words of the Lord Justice-Clerk in the Californian Copper Syndicate case referred to with approval by
the Chief Justice in the Overseas Corporation case (supra). After stating that if an owner of an ordi-
nary investment chooses to realise it and obtains a greater price this is capital and not profit, he
goes on to say: ‘But it is equally well established that enhanced values obtained from realization
or conversion of securities may be so assessable where what is done is not merely a realization or
change of investment but an act done in what is truly the carrying on or carrying out of a busi-
ness.’ The fact that an owner cuts up his land in order to get more for it than if he sells as a
whole cannot be described as the carrying on of a business. In COT v South Deeps Ltd 219 Innes CJ
says: ‘When the directors of a company genuinely floated for mining purposes are faced with the
position that their capital is inadequate and that it is not practicable to increase it; if under those
circumstances they decide to dispose of their assets and finally wind up the concern, the fact that
they do so by instalments is not in itself sufficient to prove that they are embarking in a new
business and using their capital to produce revenue.’ As a general rule one or two isolated trans-
actions cannot be described as the carrying on of a business. There are no doubt exceptions. As
single undertaking may be of such a nature that it can be correctly described as a business. Thus
in Stephan’s case220 the salvaging of a single ship’s cargo was considered a business because ‘these
salvage operations which were managed by the staff of the appellant’s business, and which neces-
sitated so many ordinary business acts such as the engaging of services of men, hiring apparatus,
purchasing equipment, the transport of the cargo to Cape Town and the like stand on an entire-
ly different footing.’221 If you are dealing with a company one of whose objects is to buy and sell
land, then the company might well be considered to be doing the business of selling and buying
land even though it carries out only a single transaction; but when an individual like a surveyor
who is not professedly carrying on the occupation of a landjobber buys and sells one or more
plots of land, he cannot be said prima facie to be doing the business of a landjobber. Before it
can be said that an individual is carrying on a business there must be some proof of continuity
. . . The mere fact that the land was cut up into lots rather than sold as a whole cannot by itself
alter the character of the proceeds derived from the land from capital to gross income. Nor can
the fact that Stott as a surveyor knew somewhat more than the ordinary public about the value of
land make any difference. Certainly the fact that Stott cut up the land himself into lots rather
than employ another surveyor cannot convert an ordinary investment of capital into a trade or
business. Every person who invests his surplus funds in land or stock or any other asset is entitled
to realize such asset to the best advantage and to accommodate the asset to the exigencies of the
market in which he is selling. The fact that he does so cannot alter what is an investment of capi-
tal into a trade or business for earning profits.
________________________

219 (1918) AD at 606.

220 1919 WLD 1.
221 Per Mason J at 7.
298 Income Tax in South Africa: Cases and Materials

. . . There was no idea of cutting up the Bluff property and selling it in lots when it was acquired,
for there was then a seven-year lease upon the property. It was only fortuitously that the lease
came to an end by non-payment of rent . . . This idea only arose in August 1922, or almost eight-
een months after the property had been bought. There is, therefore, no proof that the taxpayer
conceived a scheme of making profits by buying land for the purpose of cutting it up and selling
it in lots. The intention of the purchaser has been regarded as one of the tests whether he is
making a trade of buying and selling land at a profit . . . It is unnecessary to go so far as to say
that the intention with which an article or land is bought is conclusive as to whether the pro-
ceeds derived from a sale are taxable or not. It is sufficient to say that the intention is an im-
portant factor and unless some other factor intervenes to show that when the article was sold it
was sold in pursuance of a scheme of profit-making, it is conclusive in determining whether it is
capital or gross income. Now the evidence is clear that neither the Ifafa nor the Bluff property
was bought for that purpose. Prima facie each property was bought as an ordinary investment of
surplus funds, and there is nothing in the stated case to show that at any time thereafter there
was an idea of dealing with them as part of a business of buying and selling land. As has been
pointed out in the Booysen’s Estate case, there is no definite test which can always be applied in
order to determine whether a gain or profit is income or capital, but in order to convert what is
on the face of it an ordinary investment of surplus funds into a profit-making business there
must be proof of some special acts which in the ordinary experience of men shows that the tax-
payer has conceived some scheme for profit-making and has made it his business to carry it out.
Of this we have no proof in the case submitted to the court below, and therefore it is unneces-
sary to deal with Mr Hathorn’s argument that the onus of proof lies on the taxpayer. The facts as
found by the Special Court negative the contention that the respondent dealt with his land as a
landjobber and that therefore the enhanced value at which he sold is taxable.
The judgment of the court below is therefore upheld . . .
SOLOMON CJ, DE VILLIERS JA, CURLEWIS JA and STRATFORD JA concurred.

Notes
Of the numerous purchases and sales of land by the taxpayer, the court regarded only
those transacted between August 1920 and March 1921 as being in issue, namely those
involving property at the Bluff and at Ifafa. The other transactions the court regarded as
too long ago and too lacking in information to be relevant.
This is one of the earliest Appellate Division cases which throw light on the trouble-
some but firmly established principle that a taxpayer is entitled to realise a capital in-
vestment in the most profitable way without incurring liability to income tax, but if he
‘crosses the Rubicon’ that marks the dividing line between mere realisation and embark-
ing on a trade, he is taxable. The court in Stott held that the mere subdivision and sale of
fixed property does not constitute a trade. (Compare [174] Natal Estates where the
taxpayer’s activities included but went beyond subdivision and sale.) This principle is still
good law; in [151] Berea West the court observed that, ‘It has long been recognised that
an owner who subdivides his land in order to sell it is not necessarily carrying on the
business of trading for profit; see CIR v Stott.222 More recently, the Special Court has held
that the conversion of property to sectional title in order to maximise the profit on resale
does not necessarily constitute a scheme of profit-making.223 A second important princi-
ple laid down in Stott is that the taxpayer’s intention at the time of acquisition is decisive,
unless some other factor supervenes.

________________________

222 1928 AD 252.

223 Judgement of McEwan J in case number 7552 (Transvaal Income Tax Special Court) on 18 August 1980;
noted by Wunsh in 1981 De Rebus Procuratoriis 188.
 Trading or Carrying on Business and Schemes of Profit-Making 299

[180]
CIR v Richmond Estates (Pty) Ltd
1956 (1) SA 602 (A), 20 SATC 355
The taxpayer, a one-man company with C as the sole shareholder, was registered in 1939,
from which time it carried on business as a speculator in land as well as deriving rent
from the letting of some of its properties. The company’s objects authorised both of
these activities. Amongst its properties were plots of land in the Lady Selborne native
township near Pretoria. For the year ended 30 June 1948, the taxpayer company sold
land at a profit, which was (in terms of the income tax legislation then in force) ‘appor-
tioned’ to C who paid heavy income tax. The policy of the company changed at the end
of 1948 when C decided that the company would no longer hold the land in the Lady
Selborne township for re-sale, but that it should be built on and let. A factor leading to
the change of policy was that the Lady Selborne township became, under statute, an area
‘predominantly occupied by natives’ with the result that the taxpayer company could no
longer acquire land in it, except with ministerial permission. The company’s main source
of income had been land in that township but, after the statute came into force, it could
no longer replenish its stock-in-trade of such land. Another factor in the change of policy
was that C, who was fairly elderly, did not feel up to the strain of competitive buying and
selling land in a market with which he was not familiar.
In March 1951 the Group Areas Act came into operation, and the government an-
nounced plans to remove ‘black spots’ which involved prohibiting the sale of land in the
Lady Selborne township to natives. C believed this would cause a slump in land values,
and the company proceeded in some haste to sell its improved and unimproved land in
that township. In the year ended 30 June 1952, the company sold fifteen of its 18 proper-
ties in the township, all fifteen of which it had bought prior to its change of policy. The
net profit was £8 053 19s 11d. The Commissioner included this sum in the taxpayer
company’s income for income tax purposes.
Issue: whether the amounts derived by the taxpayer from the sale of land in the 1952
tax year were income or capital.
Held: (by a majority): the amounts were of a capital nature. Although purchased as
stock-in-trade, a change of intention by the company had converted the properties into
capital assets.
Centlivres CJ: A company is an artificial person with no body to kick and no soul to damn, and
the only way of ascertaining its intention is to find out what the directors, acting as such, intend-
ed. Their formal acts in the form of resolutions constitute evidence as to the intentions of the
company of which they are directors but where a company has only one director, who is also the
managing director and the sole beneficial owner of all its shares. I can see no reason in principle
why it should be incompetent for him to give evidence as to what was the intention of the com-
pany at any given time. In such a case it is, perhaps, not going too far to say that his mind is also
the mind of the company. Caplan [the sole director and sole beneficial shareholder of the tax-
payer] gave evidence before the Special Court as to the intention of the respondent at the end
of 1948 and that evidence was accepted by the Court. That was a finding of fact . . . It cannot
therefore be attacked on appeal even although it may be as difficult to change from a trader to
an investor for taxation purposes ‘as it is for a rope to pass through the eye of a needle (Gunn’s
Commonwealth Income Tax).224
This case must therefore be decided on the footing that although the fifteen properties in ques-
tion were originally bought for re-sale at a profit, they were afterwards held as an investment.
That the character of assets held by a company can be altered by a change of intention in regard
to those assets is clear from the case of CIR v Leydenberg Estates Ltd,225 where the Court decided
________________________

224 4th ed sec 583.

225 1929 AD 137 at 144 and 147; the citation of this case should read Leydenberg Platinum Ltd.
300 Income Tax in South Africa: Cases and Materials

that there was a change of policy by the company concerned which resulted in capital assets
becoming the stock-in-trade of the company. See too New Mines Limited v CIR.226 . . .
Counsel for the Commissioner contended that, in deciding the question in issue, one must look
at the purpose the respondent had when it originally acquired the fifteen properties. Here the
original purpose was to re-sell at a profit and the respondent achieved that purpose when it re-
sold at a profit in 1951. For this contention counsel relied on CIR v George Forest Timber Co Ltd 227
228
and Lace Proprietary Mines Ltd v CIR. But in neither of those cases had there been the factor
which exists in the present case, viz a decision by the company to hold assets which it previously
held as stock-in-trade, as capital.
Counsel for the Commissioner further contended that if there was a change of intention at the
end of 1948 as a result of which the fifteen properties became capital assets, then there was
equally a change of intention in the fiscal year when the respondent decided to sell those prop-
erties; that a further change of intention again changed the nature of the fifteen properties
which then again became stock-in-trade. I do not think that this contention is sound. At the end
of 1948 the respondent decided to hold the fifteen properties as capital assets: the mere fact that
it decided in the fiscal year to sell them is not proof that it decided thenceforth to hold them as
stock-in-trade. The Special Court found as a fact that the reason for that decision was the an-
nouncement made by the Minister of Native Affairs and it is a fair inference from the judgement
of that Court that that was the only reason. The decision to sell capital assets and the fact that a
taxpayer decides to sell capital assets at a profit cannot per se make the resulting profit subject to
tax.
There are a number of cases which appear to draw a distinction between a company and an indi-
vidual when the question at issue is whether profits made attract tax. I refer to such cases as CIR
v Korean Syndicate Ltd:229 IRC v Westleigh Estates Company Ltd 230 and COT v British Australian Wool
231
Realization Association Ltd. In the last-mentioned case Lord Blanesburgh, in delivering the
judgment of the Judicial Committee said:
‘The distinction, where it exists, arises of course from the fact that whereas the capacities of a natural per-
son have no limitation so that any particular transaction need not be referred to any of them, a company is
so bounded by its memorandum that it may be both permissible and essential to consider its authorised
objects in connection with the actual transaction in question and even to seek for the principal purpose of
its formation.’
If the reason for the distinction is the one stated by Lord Blanesburgh, then it seems to me that
the reason does not apply in the present case where it has not been disputed that the respond-
ent can under its memorandum of association hold land both as stock-in-trade and as a capital
asset.
Another case to which I may refer is Punjab Co-operative Bank Ltd, Amritsar v Commissioner of Income
Tax 232 where it was held that profits resulting from the realization by a bank of securities in order
to meet withdrawals by depositors are subject to tax. The reason for the decision appears where
it was said:233
‘that this is a normal step in carrying on the banking business, or in other words that it is an act done in
what is truly the carrying on the banking business’.
This case does not seem to me to be in point because the realization of its securities by the bank
was regarded ‘as a normal step in carrying on the banking business’. In the present case it can-
not be said that from the terms of the memorandum of association of the respondent or from its
actions in regard to the fifteen lots after the end of 1948 it was more normal for it to buy for re-
sale than to hold its assets as capital for revenue producing purposes.

________________________

226 1938 AD 455 at 460-461.

227 1924 AD 516 at 523.
228 1938 AD 267 at 277.
229 1921 (3) KB 258 at 273.
230 1924 (1) KB 390 at 417.
231 1931 AC 224 at 250 and 251.
232 1940 AC 1055.
233 At 1073.
 Trading or Carrying on Business and Schemes of Profit-Making 301

In my opinion the appeal should be dismissed with costs.

FAGAN JA, REYNOLDS JA and BRINK JA concurred in the above judgment.
Schreiner JA: (dissenting) One must not lose sight of the true nature of the inquiry in cases of
this kind. There is no legislative provision that makes the intention of the taxpayer decisive of
whether the receipt or accrual was of a capital nature or not. The decision of this Court have
recognised the importance of the intention with which property was acquired and have taken
account of the possibility that a change of intention or policy may also affect the result. But they
have not laid down that a change of policy or intention by itself effects a change in the character
of the assets. The test has been variously expressed but it is enough to say that the profits of a
company business activities are generally speaking part of its income. Where, as here, a company
is formed to carry on land-jobbing and land-letting, these are simply alternative methods of us-
ing the company’s money to make a business profit, each method having advantages over the
other according to circumstances . . .
But the exceptional cases, assuming them to exist, are not brought into existence simply by an
intention to hold the asset indefinitely or for a long time; they would be cases where property
has been made part of the permanent structure of the company, on which its business rests; such
property would in effect be taken out of the field of the company’s business where decisions are
made from time to time on how best to make a profit. In contrast with such properties, which
might be said to be truly fixed capital, is property which the company would use in its business
operations, which it would deal with or hold as the prospects of profitable user dictated that
would be its floating capital.
...
It was argued on behalf of the company that the Special Court’s conclusion was a finding of fact
in its favour . . . Here, as it seems to me, the Special Court has decided the case by asking itself
simply whether there was a change of intention or policy in 1948 – 49. That was in my view only a
part of the matter to be investigated and no Court could reasonably reach the conclusion that
the change of intention or policy, once found, provided an answer to the question to be decid-
ed. The Special Court’s decision was accordingly wrong in law . . . I would allow the Commis-
sioner’s appeal and declare the profits in question to be taxable.

Notes
This decision lays down the important principle that the intention of a company is to be
found not only in its ‘formal acts’ (for example, resolutions of the general meeting or
board of directors). Centlivres CJ said that in the case of a ‘one-man company’, the state
of mind of its controller was the state of mind of the company, and that person could
give oral evidence of the company’s intention. This principle was taken further in [187]
Trust Bank, where the intention of the company’s management committee was regarded
as the intention of the company, and oral evidence on thecommittee’s intention was
permitted.
The dissenting judgment of Schreiner JA has been very influential, and his dictum that
a mere change of intention by the taxpayer does not, of itself, change the nature of an
asset from stock-in-trade to capital (or vice-versa) has been endorsed several times by the
Appellate Division.234
In Richmond Estates, Schreiner JA held that all the taxpayer had done was to undergo a
subjective change of mind in relation to the properties. That, said Schreiner, was not
enough; if assets were to change from stock-in-trade to capital, they must be ‘made part
of the permanent structure of the company’. In other words, the change of intention
must have been implemented in some demonstrable way.
________________________

234 See CIR v Strathmore Consolidated Investments Ltd 1959 (1) SA 469 (A) at 478A-C; John Bell and Co (Pty) Ltd v
SIR 1976 (4) SA 415 (A) at 426F-427G; Elandsheuwel Farming (Edms) Bpk v SBI 1978 (1) SA 101 (A) at 118B.
302 Income Tax in South Africa: Cases and Materials

This principle was adopted and taken further in [173] John Bell, which laid down that,
before assets can change from capital to stock-in-trade or vice-versa, there must be ‘some-
thing more’ than a mere subjective change of intention. For a clear example of the
application of this principle, see [178] Greenband Properties.

[181]
Natal Estates Ltd v SIR
1975 (4) SA 177 (A), 37 SATC 193
The taxpayer, Natal Estates Ltd, was formed in 1920 and acquired, as a going concern an
established business involving the growing and milling of sugar cane in Natal. The assets
included some 20 000 acres of land. The cost of the land was about R6 per acre. From
1921 the taxpayer continued and expanded this business, and for this purpose acquired
more land over the years. All of the land suitable for cultivation was under cane.
The taxpayer’s board of directors was aware, from an early stage of the company’s ex-
istence, of the probably irresistible pressure to part with some of its canefields for devel-
opment as residential townships.
In October 1962 the taxpayer was taken over by Huletts Ltd, which was itself taken
over a short time later. In the same month, a firm of estate agents reported to the tax-
payer on the potential for the development on the company’s land of a township to be
known as La Lucia and its subdivision into 2 000 lots in La Lucia Township. In November
1962 the new board of directors of the taxpayer decided to instruct town planners to
prepare plans to develop the township of La Lucia. In January 1963 consulting engineers
and architects were appointed and a sub-committee was established to consider matters
of finance. Other committees were appointed to oversee various other aspects. A plan
was drawn up envisaging the establishment of a new city on 22 000 acres of the compa-
ny’s land.
In the years 1965 – 1970 the company disposed of some 5 000 acres of land. It contin-
ued its business as a grower and miller of sugar cane and made a substantial profit. In
1966 and 1967 it made a profit of some R8 million from the sale of land
Issue: was the decision of the Special Court, that the profit of R8 million derived by the
taxpayer from the sale of land during the tax years in issue was of a revenue nature,
correct in law?
Held: in the affirmative. On the facts found by the Special Court, the taxpayer had
originally acquired the land as a capital asset but had thereafter changed its intention
and embarked on a trade or scheme of profit-making using the land as stock-in-trade.
Holmes JA: In this court the first and main contention on behalf of the appellant, in regard to
sales of land in Umhlanga Rocks and La Lucia, was that there never was a change of the original
intention that all of the land represented a capital investment; and that the appellant’s admitted
business activities, in regard to the land which it sold, represented no more than the business of
realizing part of its capital assets to the best advantage; and therefore that the profits were not
accruals of income. This was a different presentation from that in the court a quo. It lays its axe
at the root of traditional legal concepts in regard to a change of intention and the effect thereof.
It takes its stand forthrightly on the thesis that an original intention to regard land as a capital
investment is decisive, for it can never change (save in special circumstances not here relevant);
and that subsequent development and sales of such land, however businesslike, fall under the
umbrella of realizing a capital asset to the best advantage.
The foundation of this argument was the Special Court’s finding that the appellant ‘clearly pur-
chased “as a going concern” its predecessor’s assets, including the mill and the cane-lands, with
the object and intention of employing them as capital assets for the purpose of an income-
producing business, and it has in fact carried on that business for the past half-century and still
carries it on’.
 Trading or Carrying on Business and Schemes of Profit-Making 303

Before proceeding with the argument on this basis, it is necessary to deal with a contention by
counsel for the respondent. He attacked the foregoing finding to this extent: he submitted that
the assets were acquired in 1921 with a dual intention, the other one being that of resale at a
profit by way of subdivisional development of residential land. I rather think that this submission
equates the post hoc with the propter hoc, for there is no evidence, contemporaneous with the
acquisition in 1921, to support the contention . . .
Continuing with his contention in regard to an initial dual intention, counsel for the respondent
referred to the fact that the appellant’s memorandum authorises it to carry on the business of
dealing in property for gain. As to that, I agree with the reply by counsel for the appellant to the
effect that it is not the law that where a company has among its objects both dealing and hold-
ing, a profit made on the realization of assets will necessarily be income; that the mere fact that a
company has power to sell a particular asset or all of its assets does not imply that it is part of the
business of the company to sell that particular asset or its assets; that most people of sound mind
and understanding have power to dispose of their property, but it does not follow from that that
they carry on the business of dealing if they sell any property which they possess. In African Life
Investment Corporation (Pty) Ltd v Secretary for Inland Revenue 235 it was said that ‘the mere fact that
the appellant is . . . empowered to realize its assets by sale or otherwise – a power ordinarily in-
herent in ownership – does not imply that dealing in shares is part of its business’ . . .
It is undoubtedly correct that if, on the facts of a given case, the most that can be said is that the
taxpayer was merely realizing a capital asset to the best advantage, the proceeds do not become
part of his gross income. Several judicial decisions to this effect were cited. In COT v Booysens
Estates Ltd 236 Innes CJ, while recognizing237 that in England the relevant provisions as to income
tax were not identical to those in our then Income Tax Act 28 of 1914, said:238
‘The line of enquiry under our Act therefore approaches so close to the English test, that in a case like the
one before us there is no practical difference. And that being so, we are free to refer for guidance to the
239
English decisions. The general rule approved by the Privy Council in COT v Melbourne Trust was thus
240
stated in the Californian Copper Syndicate v Inland Revenue . . .
‘It is quite a well-settled principle in dealing with questions of income tax, that where the owner of an ordi-
nary investment chooses to realize it, and obtains a greater price than he originally acquired it at, the en-
hanced price is not profit . . . assessable to income tax. But it is equally well established that enhanced
values obtained from realization or conversion of securities may be so assessable where what is done is not
merely a realization or change of investment, but an act done in what is truly the carrying on or carrying out of a
business’ (my italics).
The words italicized appear to be the genesis of the distinction consistently drawn by this court
under our subsequent Income Tax Acts (despite some change in wording in the relevant provi-
sions since the 1914 Act) between –
(a) Realizing a capital asset. A simple example would be that of a manufacturer selling a redun-
dant warehouse; or a pensioner selling his family house to live in a flat; or a farmer selling a
portion of his land which has become isolated from the farm by the construction of a rail-
way line. In such cases the gain will not be income and is not taxable.
(b) Selling an asset in the course of carrying on a business or embarking on a scheme for profit.
A simple example would be that of a speculative builder buying plots for the purpose of
erecting houses thereon and selling them at a profit. The latter would be income, and sub-
ject to tax.
As a matter of interest, the Scottish Californian Copper Syndicate case of 1904 (supra) has remained
good law in England; see eg General Reinsurance Co Ltd v Tomlinson.241 And in the same year, in a
Privy Council appeal from Australia, Lord Donovan applied the ‘governing principle’ formulat-
ed in the Californian Copper Syndicate case; see McClelland v COT.242
________________________

235 1969 (4) SA 259 (A) at 270C.

236 1918 AD 576.
237 At 593, commencing in fin.
238 At 595.
239 [1914] AC at 1010.
240 1904 41 Sc LR 691.
241 [1970] 2 All ER 436 at 442.
242 [1971] 1 All ER 969 at 975D.
304 Income Tax in South Africa: Cases and Materials

The foregoing principle has been followed and developed in this court over the years . . .
Cases in this court . . . recognize the relevance of a change of intention on the part of the owner,
that is to say, a change from the original intention when acquiring the asset; see CIR v Leydenberg
243
Platinum Ltd where Stratford JA said:
‘For, even though it be assumed that these properties were originally acquired for the purpose of carrying
on the business of mining, the subsequent events to which I have referred point to a clear change of policy
in regard to the use to which they were put . . . In the present case, a new factor did intervene of a decisive
character, namely the deliberate adoption of the policy of selling the company’s properties to make prof-
its.’
In this court counsel on both sides closely analysed the facts in the foregoing case, each to illus-
trate his own submission. However, the principle just stated was recognized by this court in CIR v
244
Richmond Estates (Pty) Ltd in which Centlivres CJ said:
‘That the character of assets held by a company can be altered by a change of intention in regard to those
245
assets is clear from the case of CIR v Leydenberg Estates Ltd where the court decided on p 147 that there
was a change of policy by the company concerned which resulted in capital assets becoming the stock-in-
trade of the company.’ (The citation of the respondent should be Leydenberg Platinum Ltd.)
Schreiner JA, in his dissenting judgment, also recognized the relevance of a change of intention.
246
The learned judge of appeal expressed himself thus:
‘The decisions of this court have recognized the importance of the intention with which property was ac-
quired and have taken account of the possibility that a change of intention or policy may also affect the
result. but they have not laid down that a change of policy or intention by itself effects a change in the
character of the assets.’ (My italics.)
That passage was approved by this court in CIR v Strathmore Consolidated Investments Ltd 247 . . .
248
The principle was again stated by Centlivres CJ in Yates Investments (Pty) Ltd v CIR, namely, that
249 250
it is clear from CIR v Leydenberg Platinum and from New Mines Limited v CIR that a change of
intention can take place, ie to change from a trader to an investor, and vice versa. . . .
Counsel on both sides were at one that, on the Act as it stands, there is no way of taxing the prof-
its on the excess of today’s prices over the value as at the date when an owner decides and starts
to go into the business of selling land for profit, with his land as his stock-in-trade. Counsel re-
ferred to s 22. I express no view on the correctness or otherwise of counsels’ approach. It might
be conceivable that, if the owner proves the amount by which the land appreciated in value
while he held it as a capital asset, the exclusion of that amount from the profits might be upheld
under the Act as it stands, as being a capital accrual and not gross income, as defined. No opin-
ion is expressed. However, if there is the inequity contended for, that is a matter which might
well engage the attention of the legislature.
One could continue to cite relevant decisions of this court with regard to the appellant’s main
contention, but I think that it would be heaping Pelion upon Ossa . . .
The second and alternative contention by counsel for the appellant was that any change of orig-
inal intention on the part of the appellant, involving a decision to sell a portion of its land (ie in
Umhlanga Rocks and La Lucia), did not transmute the character of that land from capital to
stock-in-trade. In this connection counsel conceded that the appellant was engaged in business
in Umhlanga Rocks and La Lucia, but only in the context of realizing capital assets to the best
advantage, the proceeds thereof being of a capital nature. The argument was that it is only when
a taxpayer carries on the business of buying land for resale and then selling it (ie as a land-jobber)
that the land can be regarded as stock-in-trade and the proceeds as income. That was not the
position here, so the argument continued, because the appellant already owned the land before

________________________

243 1929 AD 137 at 144 at 148.

244 1956 (1) SA 602 (A) at 607.
245 1929 AD 137 at 144.
246 At 610D.
247 1959 (1) SA 469 (A) per Ogilvie-Thompson JA at 478B.
248 1956 (1) SA 612 (A) at 616 in fin.
249 1929 AD 137 at 148.
250 1938 AD 455 at 460-461.
 Trading or Carrying on Business and Schemes of Profit-Making 305

it changed its intention and decided to sell it. Thus it did not, and did not have to, buy in land
for resale and then sell it. Therefore it was not a land-jobber, carrying on business with land as its
stock-in-trade. It was merely realizing a capital asset. Thus the argument.
In my view the fact that a taxpayer is doing land-jobbing (ie buying land for resale and then sell-
ing it at a profit) may establish (a) that he is not merely realizing a capital asset to the best advan-
tage; and (b) that, on the contrary, he is engaged in the business of selling land for profit, with
251
land as his stock-in-trade. As was said by Russell LJ in Taylor v Good:
‘If of course you find a trade in the purchase and sale of land, it may not be difficult to find that properties
originally owned (for example) by inheritance, or bought for investment only, have been brought into the
stock-in-trade of that trade.’
It does not necessarily follow, however, that proof of land-jobbing (buying land for resale and
selling it) is the only way of establishing that a taxpayer is engaged in the business of selling land
for profit, using it as his stock-in-trade. Nor is the argument in my view well attended by logic, for
it was conceded (correctly) that the character of land can change from stock-in-trade to capital
in consequence of a changed intention to hold it as an investment. It was also conceded (cor-
rectly) that the character of land can change from that of capital to that of stock-in-trade by a
change of policy whereby the land is merged with the stock-in-trade of an existing trading con-
cern. I agree with counsel for the respondent in his submission that it is not a definitive charac-
teristic of carrying out a scheme for profit-making in land that there should be a buying-in for
the purpose of a resale at a profit; that that feature may often be present but, on the other hand,
the taxpayer may find it unnecessary to buy in for purposes of resale; that he may have at hand
such a stock-in-trade of hitherto capital assets that he does not need to buy in further stock; and
that to say that there must always be buying-in for purposes of resale at a profit is in effect to say
that capital assets immutably remain capital assets in the hands of the acquirer.
As was said by Farwell LJ in The Hudson Bay Co Ltd v Stevens (Surveyor of Taxes):252
‘It is clear, therefore, that a man who sells his land, or pictures, or jewels, is not chargeable with income
tax on the purchase-money or on the difference between the amount that he gave and the amount that he
received for them. But if instead of dealing with his property as owner he embarks on a trade in which he
uses that property for the purposes of his trade, then he becomes liable to pay, not on the excess of sale
prices over purchase prices, but on the annual profits or gains arising from such trade, in ascertaining
which those prices will no doubt come into consideration.’
I draw attention to the words ‘embarks on a trade in which he uses that property for the purpos-
es of his trade . . .’
To sum up with regard to counsel’s alternative argument, it cannot be upheld.
The third contention by counsel for the appellant was that its business operations in regard to
the sales of land in Umhlanga Rocks and La Lucia related only to the realization of a capital
asset to the best advantage; and that it was not using its land as stock-in-trade in a profit-making
business.
In deciding whether a case is one of realizing a capital asset or of carrying on a business or em-
barking upon a scheme of selling land for profit, one must think one’s way through all of the
particular facts of each case. Important considerations include, inter alia, the intention of the
owner, both at the time of buying the land and when selling it (for his intention may have
changed in the interim); the objects of the owner, if a company; the activities of the owner in
relation to his land up to the time of deciding to sell it in whole or in part; the light which
such activities throw on the owner’s ipse dixit as to intention; where the owner subdivides the
land, the planning, extent, duration, nature, degree, organization and marketing operations of
the enterprise; and the relationship of all this to the ordinary commercial concept of carrying on
a business or embarking on a scheme for profit. Those considerations are not individually deci-
sive and the list is not exhaustive. From the totality of the facts one enquires whether it can be
said that the owner had crossed the Rubicon and gone over to the business, or embarked upon a
scheme, of selling such land for profit, using the land as his stock-in-trade.

________________________

251 [1974] 1 All ER 1137 (CA) at 1144.

252 (1909) 5 TC 424 at 437.
306 Income Tax in South Africa: Cases and Materials

Finally, one does not lose sight of the incidence of the onus of proving non-liability, imposed by
s 82 of the Act, on the person claiming such non-liability, -in this case the appellant.
The Special Court substantially followed the foregoing approach. I have already indicated that it
was common cause that the Special Court, by the clearest implication, held that the appellant
had changed its intention to hold its land as a capital investment and had decided to sell some of
it. The judgment of Miller J proceeds to make the following findings. For convenience I have
paragraphed and lettered the passages:
‘(a) It is very clear that the appellant’s operations were on a vast scale. Preparatory to selling, intensive
planning and organization took place . . . It appears to me that it must have been very obvious to any
objective observer at that time that the appellant had entered the field of township development and
the marketing of township land on a grand scale. The appellant had, to put it plainly, gone into
business. I do not know of any more appropriate words to describe what it was doing . . .’
These factual findings . . . are unequivocal. They are unappealable unless vitiated by misdirec-
tion, irregularity or the absence of any evidence reasonably warranting them . . .
To sum up with regard to the profits from sales of land at Umhlanga Rocks and La Lucia . . . on
all the facts the Special Court was entitled to find that the appellant, with its elaborate and sus-
tained scheme and expertise, was doing much more than merely realizing a capital asset to the
best advantage in a businesslike manner; and that by any canons of commerce it had gone be-
yond that field: it had crossed the Rubicon and committed itself on a grand scale to the course
and business of selling land for profit, using the land as its stock-in-trade. On those factual findings
the Special Court’s conclusion, that the profits were receipts or accruals of income and taxable,
is correct in law.
The fourth contention on appeal was that certain sales of land in bulk in the foregoing coastal
areas should have been regarded as realizations of capital assets, and that the proceeds were not
income. As to that, the judgment of Miller J said this:
‘It is true . . . that the appellant itself later discontinued the actual planning and development of the town-
ship and extensions, and the direct sale of lots therein and sold, instead, land in bulk within the townships
to the group companies . . . But the sale of its land to such companies was to enable them, instead of itself,
to develop the township and construct houses and was clearly done in pursuance of the business or
scheme it had evolved for profitable dealing in land; only the details and machinery for the fulfilment of
the object were varied.’
. . . To sum up on this issue, once it is recognized that, on the facts, the land in Umhlanga Rocks
and La Lucia became stock-in-trade, it does not matter whether the sales therein were in retail or
in bulk. In either event the proceeds are referable to gross income. The Special Court found as a
fact that the bulk sales were clearly in pursuance of the business or scheme which the appellant
had evolved for profitable dealing in land. Standing that factual finding, the Special Court’s
conclusion, that the proceeds of the bulk sales were referable to gross income, is correct in law.
In the result, the appeal on this issue cannot succeed.
TROLLIP JA, MULLER JA, CORBETT JA and GALGUT AJA concurred.

Notes
The Commissioner argued that the taxpayer had originally acquired the land in question
with a dual intention. The court rejected this argument, but held that, in selling the
land, it had ‘crossed the Rubicon’ and embarked on a trade or scheme of profit-making
using the land as its stock-in-trade. It is clear that the taxpayer would have escaped if it
had not sub-divided the land before selling it. The taxpayer could then have persuasively
argued that all that it was doing was disposing of a capital asset.
Indeed, if the taxpayer had done no more than sub-divide the land prior to sale, it
would probably still have been regarded as a mere realisation to best advantage. (Com-
pare [179] Stott and [151] Berea West).253 However, the extensive and elaborate activities
________________________

253 However, if the sale of the land (even in an undivided state) had occurred after the take-over by Hulett’s,
it is arguable – on the basis of the majority judgements in [164] Elandsheuwel – that the proceeds of the
continued
 Trading or Carrying on Business and Schemes of Profit-Making 307

of the taxpayer in developing a township on the property and the selling of the land
following Hulett’s take-over of the company led the court to conclude that it had
‘crossed the Rubicon’ and embarked on trade or scheme of profit-making using the land
as its stock-in-trade.
An interesting question is whether, if the taxpayer had sold the land, undivided, to a
development company and – as was suggested above, escaped income tax on the grounds
that it was merely realising a capital asset – it would have been safe for the taxpayer to
hold shares in that development company. The Commissioner could argue that there
was a scheme of profit-making between the taxpayer and the development company, or
he could attempt to invoke s 103(1).

[182]
Elandsheuwel Farming (Edms) Bpk v SBI
1978 (1) SA 101 (A), 39 SATC 163
The taxpayer company was formed in 1964 and purchased the farm ‘Elandsheuwel’ for
R26 040. The farm was situated on the outskirts of Krugersdorp. The initial shareholders
were three members of the K family. The taxpayer leased the farm to one of its share-
holders for farming purposes and he farmed it until about 1967; thereafter the taxpayer
leased it to a partnership which farmed the land.
In November 1969 all the shares in the taxpayer were bought by de Villiers and his
wife for R52 080. For the purposes of this transaction, the land was valued at R250 per
morgen which was a realistic price for farming land. Later that same month, de Villiers
and his wife sold 80% of their shares, at the same price as they had paid the K family, to
four persons. As a result, de Villiers and his wife and these four persons (‘the de Villiers
group’) each held 20% of the shares. All of these shareholders had previously been
involved in companies which had made profits by the purchase and sale of land.
In January 1970 the taxpayer entered into negotiations to sell the land for R600 per
morgen. These negotiations did not lead to a sale. In November 1970 the taxpayer
offered the land to the Klerksdorp municipality which bought it for R135 411, thereby
yielding a nett profit of R107 850 to Elandsheuwel Farming (Edms) Bpk. The taxpayer
company lent this sum to its shareholders, and no interest was ever paid by or debited to
them in respect of this loan.
The Commissioner included the sum of R107 850 in the taxpayer company’s gross in-
come and assessed it accordingly. The Special Court upheld the assessment on the
grounds that, shortly after the de Villiers group acquired their shares, a change of policy
took place whereby the company decided to carry on business using the land as stock-in-
trade, and that consequently the profit made by the company on the sale of the land
constituted income.
The Special Court made the following findings of fact: the new shareholders were
speculators in land; de Villiers could not be believed when he said that he had acquired
the farm ‘Elandsheuwel’ in order to farm it; when de Villiers bought the shares in the
taxpayer and when the taxpayer held its first general meeting thereafter, the shareholders
had only one intention, namely to acquire the ground, develop it, and sell it at a profit;
they went about this by buying the shares of the taxpayer in order to gain control of the
land; and their purpose in so doing was to engage in speculation.

________________________

sale would be taxable. But the majority judgements in Elandsheuwel have been severely criticised and the
concept, propounded in the judgement of Wessels JA, of a scheme of profit-making between a company
and its own shareholders has not been adopted in any subsequent reported decision.
308 Income Tax in South Africa: Cases and Materials

Issue: whether the Special Court could reasonably have found that the proceeds of the
sale of the farm were income in the taxpayer’s hands.
Held: (by a majority) in the affirmative. The Special Court could reasonably have
found that the sale took place in the course of a trade or scheme of profit-making by the
taxpayer.
Wessels JA: [translated] The core of the factual finding of the court a quo is that when the new
shareholders took over the control of the company, the company’s policy in regard to the prop-
erty in question underwent a change, and that the initial intention to hold it as a capital asset
was replaced by an intention to trade with in order to derive a profit . . .
Where a court in a specific case is called on to decide whether the transaction in question was
purely the realisation of an asset of a capital nature, or whether it is a case where a trade was
conducted with the asset as stock in trade in order to derive a trading profit, attention must be
given to the totality of the facts. Consideration must also be given to the guidelines laid down in
various decided cases. Finally, it must be remembered that the taxpayer bears the onus of proof
in respect of his contention that the relevant receipt was one of a capital nature and thus not
subject to tax. See for example Natal Estates Ltd v SIR 254 en John Bell & Co (Pty) Ltd v SIR.255
As regards the present case, appellant contended that the court a quo did not give sufficient
weight to the fact that the appellant as a juristic person had its own identity which was separate
from its shareholders. See Ochberg v CIR.256 In this regard, it must however be remembered that the
acts and omissions of a juristic person are controlled by living beings and that they are the brain
and the ten fingers of that juristic person. It appears from the judgement of the court a quo that
this aspect of the case was not overlooked.
Appellant contended further that, taking into account the fact that the property in question was
originally acquired and retained as a capital asset, it does not appear that the appellant, after con-
trol was taken over by the new shareholders in November 1969, carried out any act directed to
profit-making. In this regard, refererence was made to the judgement in CIR v Stott 257 to which
Holmes JA referred in the Natal Estates-case (supra)258 and also to the dicta in John Bell & Co (Pty)
Ltd v SIR (supra)259 as follows:
‘Moreover, my understanding of the cases that deal with the matter is that the mere change of intention to
dispose of an asset hitherto held as capital does not per se subject the resultant profit to tax. Something
more is required in order to metamorphose the character of the asset and so render its proceeds gross in-
come. For example, the taxpayer must already be trading in the same or similar kinds of assets, or he then
and there starts some trade or business or embarks on some scheme for selling such assets for profit, and,
in either case, the asset in question is taken into or used as his stock-in-trade.’
The above-named factual findings of the court a quo justify, in my opinion, the following infer-
ences:
(1) the new shareholders were property speculators or prospective property speculators;
(2) on account of the location of the property in question, particularly in respect of the built-up
part of Klerksdorp, the new shareholders thoroughly appreciated its potential for future
township development;
(3) the new shareholders consequently devised a scheme by which they could derive a consid-
erable profit by exploiting that potential;
(4) for the execution of the scheme, it was necessary to get control of the property by purchas-
ing the shareholding in the appellant from the Kropman family at a price based on the value
of the land in question as agricultural land and thereafter, as shareholders and directors, to
arrange the appellant’s actions so that, instead of farming the property or leasing it for
farming purposes, the company would dispose of it for township development and they
would divide the resultant profit amongs themselves;
________________________

254 1975 (4) SA 177 (A) at 202G-203A.

255 1976 (4) SA 415 (A) at 426F-427G.
256 1931 AD 215 at 232.
257 1928 AD 252 at 264.
258 At 199E-G.
259 At 429C-D.
 Trading or Carrying on Business and Schemes of Profit-Making 309

(5) the scheme was carried out by the new shareholders, and the resultant profit of R107 850
was divided amongst them by way of interest-free loans to themselves, probably because the
appellant’s memorandum of association prohibited the distribution of profits by way of div-
idends.
With reference to the above facts, the court a quo could, in my view, reasonably come to the con-
clusion that the appellant, after the taking over of control by the new shareholders, changed its
intention regarding the application of the property in question, namely that instead of realising
it simply as a capital asset, it would be disposed of in carrying out the scheme of the new share-
holders to sell the property in question at a commercial profit, in other words, by dealing with
the property in question as trading stock. The resultant profit would thus be taxable. See Natal
Estates (supra).260 If the new shareholders had carried out their scheme by purchasing the appel-
lant’s property and selling it at a profit, or had purchased the Kropman family’s shareholding in
the appellant and sold it at a profit, the profit would undoubtedly have been taxable. It seems
thus somewhat strange to me, if the submission of the appellant is accepted, that the scheme of
the new shareholders, that was apparently directed to profit-making, nonetheless resulted in
a non-taxable profit purely because, in carrying out the scheme, they acquired control of the
appellant and implicated the latter as a party in the carrying out of the scheme.
It was contended by the appellant that that the new shareholders were entitled to arrange the
carrying out of their scheme, if this could lawfully be done, so that the profit would not be taxa-
ble as part of the appellant’s gross income. See, inter alia, CIR v Estate Kohler.261 The question is,
however, whether the new shareholders achieved such a result purely because they implicated
the appellant, a separate juristic person, in their scheme. The point in issue was, in the main,
one of factual nature. Where that is concerned, the court a quo, with reference to the above-
mentioned facts, found that the new shareholders had not succeeded in achieving that result. I
have already said that the court a quo could, in my opinion, reasonably make such a finding of
fact. As such a finding, it cannot be contested on appeal. Although the appellant, as a juristic
person, has its own identity that is separate from its shareholders, it can nonetheless reasonably
be inferred from the relevant facts that the new shareholders implicated the appellant as a party
to the carrying out of their scheme. Where the new shareholders were in full control of the ap-
pellant, it is nearly unthinkable that the appellant, as regards the carrying out of the scheme,
could stand aloof from it. The intention of the new shareholders would in my view, unavoidably
be attributed to the appellant. Compare SIR v Trust Bank of Africa Ltd.262
The new shareholders, who were property speculators, intended to trade in the property in ques-
tion by means of the appellant, with the object of selling it at a profit. That also became the ap-
pellant’s intention. To put it differently, the appellant’s memorandum of association authorised
three alternative ways in which the property in question could be used, namely to lease it, to use
it for farming purposes, or to trade with it. While the Kropman family was in control of the com-
pany, the property was leased for farming purposes. With the entry of the new shareholders, the
appellant abandoned this method of using it and decided on the third method, namely to use
the property as trading stock and to dispose of it at a profit. Compare LHC Corporation of SA (Pty)
Ltd v CIR.263
In conclusion, the fact that the proceeds of the sale of the property in question were not applied
to acquire other investments of a capital nature (as per the appellant’s memorandum of associa-
tion) and that the profit was divided amongst the shareholders by way of interest-free loans also
indicates, in my view, that the transaction was not just the realisation of a capital asset.
The appeal is dismissed . . .
HOFMEYER JA concurred in the judgment of Wessels JA.
Trollip JA: I agree that the appeal should be dismissed with costs . . .
This is a borderline case, the border being the Rubicon, as described and postulated by Holmes
264
JA in the Natal Estates case (supra) thus:
________________________

260 At 429D.
261 1953 (2) SA 584 (A) at 591-592.
262 1975 (2) SA 652 (A) at 669B-C.
263 1950 (4) SA 640 (A) at 646A-D.
264 1975 (4) SA 177 (A) at 202-203.
310 Income Tax in South Africa: Cases and Materials

‘From the totality of the facts one enquires whether it can be said that the owner had crossed the Rubicon
and gone over to the business, or embarked upon a scheme, of selling such land for profit, using the land as
his stock-in-trade.’
The court a quo decided that the appellant, with its new, land-speculating shareholders at the
helm, had made the crossing. In my view, for reasons given by Wessels JA, that was a conclusion
which it could reasonably have reached on all the facts, or in any event, the appellant, on whom
the onus rested, did not prove that it did not make the crossing.
Counsel for appellant relied, inter alia on the dicta of Wessels JA in the John Bell case (supra).265
. . . Of course, every decision by an owner to dispose of an asset held as a capital asset does in-
volve a change of intention: hitherto his intention has been to retain it as such: now he changes
that intention by deciding to dispose of it. According to the above-mentioned dicta a mere
change of intention of that kind does not per se subject any resultant gain to tax; something
more is required for that to happen. That additional factor is usually something indicating that
the disposal is in reality in pursuance of some trade or business or scheme for making profit.
The intervention of such an additional factor may be indicated by the circumstances surround-
ing the change of intention or in the way in which it was manifested or carried out. Thus, sup-
pose that the appellant, when the new shareholders took it over in November 1969, had formally
resolved and recorded that henceforth it would not use or let the property for farming purposes,
but, having regard to the then prevailing climate of the property market in the Klerksdorp area,
it would trade in land, using the property as its stock-in-trade. There could then have been no
doubt that the profits realized on the sale of the property would have been taxable in its hands
. . . True, in the present case there was no such formal resolution. But the court a quo found
(and on all the facts it was reasonably entitled to find) that in substance and effect that is pre-
cisely what appellant, through the unanimity of its new shareholders, did decide to do. That its
decision was not recorded in a formal resolution is, in the circumstances, of no moment (SIR v
Trust Bank of Africa Ltd).266 Now that decision did not manifest a mere change of intention on
appellant’s part from one of continuing to hold the property as a capital asset to one of realizing
it as such. If that only had been intended, the proceeds would have been reinvested in some
other appropriate capital asset (as clause 2(a) of appellant’s memorandum envisages) or they
would have been distributed on a liquidation of appellant (its substratum having fallen away).
Neither method was adopted or was apparently even contemplated, since there is no mention of
any such contemplation in the stated case or judgment. That appellant’s change of intention
went further than that or was different from that, namely, to trade in land and use the property
as stock-in-trade, can reasonably be inferred from all the facts, in particular, the absence of any
other reason or need for disposing of the property, the new shareholders were land speculators,
and soon after taking over appellant, they took the initiative in trying to sell the property for
township purposes . . . [A]s the court a quo found, appellant had no intention of using it for
farming, it was obviously ripe for such development, and three of its new shareholders had re-
cently and profitably done something of that kind in their other company, Vaalrivier Beleggings
(Edms) Beperk.
As to the onus of proof. Ordinarily, when a capital asset is realized, its proceeds are regarded as a
capital receipt or accrual and not gross income –
‘unless some other factor intervenes to show that when the article was sold it was in pursuance of a scheme
of profit-making.’
(per Wessels JA in CIR v Stott).267 When, however, the evidence indicates the possible intervention
of such an additional factor, the onus is on the taxpayer to negative it and to prove on the bal-
ance of probabilities that the disposal was merely a realization of capital (see s 83 of the Income
268
Tax Act 58 of 1962; Goodrick v CIR). Here the advent of the new, land-speculating shareholders
of appellant with a full appreciation of the potentiality of its property for township development
was undoubtedly the intervention of an additional factor that influenced the disposal of its
property. The court a quo found affirmatively that as a result of that intervention the proceeds of
________________________

265 1976 (4) SA 415 (A) at 429C-D.

266 1975 (2) SA 652 (A) at 668G-669A.
267 1928 AD 252 at 264.
268 1959 (3) SA 523 (A) at 528H-529A.
 Trading or Carrying on Business and Schemes of Profit-Making 311

disposing of the property were not received as capital. In my view that was a conclusion that it
could reasonably have reached on all the facts. But if, as counsel for the appellant contended, it
was not a reasonable conclusion, then, at the very least, I think that appellant did not discharge
the onus of proving that the proceeds were received as capital.
HOFMEYER JA also concurred in the judgment of Trollip JA.
Corbett JA: (dissenting)Where a taxpayer sells property, the question as to whether the profits
derived from the sale are taxable in his hands by reason of the proceeds constituting gross in-
come or are not subject to tax because the proceeds constitute receipts or accruals of a capital
nature, turns on the further enquiry as to whether the sale amounted to the realization of a capi-
tal asset or whether it was the sale of an asset in the course of carrying on a business or in pursu-
ance of a profit-making scheme. Where a single transaction is involved it is usually more
appropriate to limit the enquiry to the simple alternatives of a capital realization or a profit-
making scheme. In its normal and most straightforward form, the latter connotes the acquisition
of an asset for the purpose of reselling it at a profit. This profit is then the result of the produc-
tive turn-over of the capital represented by the asset and consequently falls into the category of
income. The asset constitutes in effect the taxpayer’s stock-in-trade or floating capital. In con-
trast to this the sale of an asset acquired with a view to holding it, either in a non-productive state
or in order to derive income from the productive use thereof, and in fact so held, constitutes a
realization of fixed capital and the proceeds an accrual of a capital nature. In the determination
of the question into which of these two classes a particular transaction falls, the intention of the
taxpayer, both at the time of acquiring the asset and at the time of its sale, is of great, and some-
times decisive, importance. Other significant factors include, inter alia, the actual activities of the
taxpayer in relation to the asset in question, the manner of its realization, the taxpayer’s other
business operations (if any) and, in the case of a company, its objects as laid down in its memo-
randum of association. The aforegoing principles are trite and require no supportive citation of
authority . . .
While the normal type of profit-making scheme, relating to the acquisition and subsequent sale
of an asset, contemplates a continuing and unchanging purpose from acquisition to sale, the
courts have recognized the possibility of an intervening change of purpose or intention. Thus,
an asset may have been acquired with the intention of reselling it at a profit but thereafter the
owner’s intention may change and he may decide to hold it as an income-producing capital asset
or investment . . . Conversely, an asset originally acquired to be held as an income-producing
investment may by reason of a subsequent change of purpose or intention on the part of the
owner become the subject-matter of a profit-making scheme so that the proceeds of an ultimate
realization constitute gross income (see eg Natal Estates Ltd v SIR.).269 . . .
In conjunction with what has been stated in regard to change of intention, particularly the kind
of change which converts a capital asset into stock-in-trade, must be read the principle that
where a taxpayer wishes to realize a capital asset he may do so to best advantage and the fact that
he does just this cannot of itself convert what is a capital realization into a business or a profit-
making scheme (see Natal Estates case (supra).270 John Bell case (supra).271 There are, however,
limits to what a taxpayer may do in order to realize to best advantage. The manner of realization
may be such that it can be said that the taxpayer has in reality gone over to the running of a
business or embarked upon a profit-making scheme. The test is one of degree. (Natal Estates case
(supra).272 . . .
These are some of the principles relevant to the present case but, in applying them in this court,
it must be borne in mind that the procedure by way of a stated case does not admit of an appeal
on any question of fact. This court is, therefore, bound by each of the findings of the court a quo
as to both primary and secondary facts, unless it appears that it is erroneous in law in the sense
that there is no evidence to support the finding or it is one which could not reasonably have
been reached on all the evidence (see Strathmore Holdings (Pty) Ltd v CIR).273 The findings and
reasons of the court a quo therefore merit close attention.
________________________

269 1975 (4) SA 177 (A).

270 At 199, 201-202.
271 At 428-429.
272 At 199.
273 1959 (1) SA 460 (A) at 467-468.
312 Income Tax in South Africa: Cases and Materials

With regard to the purpose or intention with which the property was originally acquired by
appellant, the court a quo found itself unable to reach any positive conclusion, one way or the
other. The statutory onus being upon appellant, this negative conclusion must be taken to
amount to a finding that the evidence did not establish that the property was originally acquired
as a fixed capital asset. Here I agree, with respect, with Wessels JA that this conclusion is not one
which could reasonably be reached on the evidence; and that on all the relevant material before
the court the only reasonable conclusion was that appellant acquired the property as a fixed
capital asset and that it continued to hold and use it as such, at any rate, during the Kropman
regime, ie until 11 November 1969 . . .
What emerges clearly from these passages, in my view, is that . . . the court a quo failed properly
to distinguish between the intentions of the De Villiers group in acquiring their shares in the appel-
lant company and the intentions manifested by them as directors, in the conduct of the affairs of
the company. It may be accepted without reservation that, as found by the court a quo, the De
Villiers group were upon speculation bent when they acquired these shares. From their point of
view, however, the modus operandi was to buy the shares and loan account for R52 080 . . . to mar-
ket the property in the name of the company; to sell it for a ‘profit’, ie an amount in excess of
what they paid for the shares and loan account; and to receive the proceeds by way of loans to
shareholders. Even from the shareholder’s point of view this is hardly a profit-making scheme in
any accepted sense. What they purchased, viz the shares and loan account, they at all material
times retained. There was no resale of these items of property, either at a profit or at all. What
was eventually sold was property belonging to the appellant company and the proceeds of this
sale accrued not to the shareholders but to the company . . .
But, in any event, it is not from their point of view but from the point of view of the appellant
company that the existence or otherwise of a profit-making scheme must be adjudged. And from
the company’s standpoint all that happened was that the change in shareholding which oc-
curred on 11 November 1969, and the resultant reconstitution of the board of directors, led to a
decision to market and sell a capital asset, viz the property . . .
Having regard to this analysis it seems to me, with respect, that the court a quo erred and indeed
misdirected itself when it (i) in effect merged the activities and intentions of the De Villiers
group in their personal capacities and the activities and intentions of the company, under the
direction of the De Villiers group; and (ii) by reason thereof, took into account irrelevant facts
and circumstances in dealing with the question as to whether the company had engaged upon a
profit-making scheme . . .
It must be remembered that all that happened after the take-over by the De Villiers group was
that early in 1970 a decision was taken to put the property on the market; that negotiations were
thereafter entered into with Rutstein for the sale of the property as a whole; that these negotia-
tions proved abortive; that the property as a whole was offered to the municipality; and that to-
wards the end of the year the municipality purchased the property. Had all this happened under
the regime of the Kropman family there could be no question, to my mind, that all that had
occurred was the realization of a fixed capital asset.
The degree of activity, in addition to a mere change of intention, which is required to ‘meta-
morphose the character of the asset and so render its proceeds gross income’ (see John Bell case
(supra))274 is illustrated, for example, by the facts of the Natal Estates case (supra) where the ap-
pellant company had in relation to certain of its properties gone to very great lengths in the
marketing thereof, thereby ‘crossing the Rubicon’ and embarking on the business of selling land
for profit, using its properties as its stock-in-trade (see at 204). As this court subsequently pointed
out (see Berea West Estates (Pty) Ltd v SIR),275 this had occurred ‘to a degree not paralleled in any
reported case’. It was this degree of activity which took the case outside the realm of a taxpayer
merely realizing his capital asset to best advantage. And as illustrations (on this side of the Rubi-
con) of what a taxpayer may do in his efforts to realize to best advantage without being dubbed a
trader, land-jobber or profit-maker, reference may be made to the facts in CIR v Stott 276 and the

________________________

274 At 429.
275 1976 (2) SA 614 (A) at 635.
276 1928 AD 252.
 Trading or Carrying on Business and Schemes of Profit-Making 313

Berea West case (supra). In the present case appellant’s manner of realization was so straight-
forward and simple that it even fell far short of that degree of activity, illustrated by the two cases
just cited, which is generally treated as constituting a mere realization to best advantage.
Does it make any substantial difference that the decision to market the property and the subse-
quent negotiations and sale thereof took place under the regime of the De Villiers group? In my
view, it does not . . .
The two misdirections which I have described go to the very heart of the matter and obviously
coloured the whole approach of the court a quo to the question in issue. In my view, they vitiate
the court’s finding that the appellant changed its policy and embarked upon a profit-making
scheme, using the property as its stock-in-trade (see CIR v Strathmore Consolidated Investments Ltd
(supra);277 Natal Estates case (supra)278 and, taking into account all the other facts and circum-
stances, render it one which could not reasonably be made . . .
For these reasons, I am of the view, that the conclusion of the court a quo that, under the direc-
tion of the De Villiers group, appellant changed its policy with reference to the property in such
a way as to cause it to embark upon a trade or a profit-making scheme was vitiated by misdirec-
tion and in all the circumstances was one which could not reasonably have been reached. Put
positively, the only reasonably conclusion, in my opinion, is that the property, acquired as a fixed
asset, retained that character until its realization in 1970 and that there was nothing in the
manner of realization to alter the position. It follows that the proceeds of the realization consti-
tuted an accrual of a capital nature and were therefore, wrongly included in the appellant’s gross
income by the respondent.
KOTZE JA concurred in the judgment of CORBETT JA.

Notes
This decision came before the Appellate Division under the ‘old’ s 86, in terms of which
an appeal lay from decisions of the Special Court (now called the Tax Court) on matters
of law, but not of fact. (The new s 86A provides for a full appeal, on facts and law.) The
issue was therefore not whether the Appellate Division agreed with the decision of the
Special Court, but simply whether that decision was one which could reasonably have
been reached.
The crux of the majority judgment lies in Wessels JA’s observation that, given the find-
ings of fact by the Special Court, that court could reasonably have concluded that the tax-
payer had not merely realised the property, but had sold it in the course of a scheme of
profit-making, which involved dealing with the property as stock-in-trade. He concluded
that this finding, being one of fact, could not be set aside on appeal. (Note the observa-
tion by Wessels JA that ‘the point in issue [in this case] was, in the main, one of a factual
nature.
However, the unsatisfactory aspects of the majority judgment cannot be completely
explained away on this basis. There was no evidence before the court that the de Villiers
group had done any more than simply decide that the company should sell the property.
The fact that the taxpayer did not sub-divide the land prior to sale made the circum-
stances of Elandsheuwel far removed from those in [181] Natal Estates. It is important to
note that Wessels JA accepted that the law requires, as laid down in John Bell, that there
must be ‘something more’ than a mere subjective change of intention. He found this
additional factor, inter alia, in the assumption of control by new shareholders.
The proposition, put forward in the judgment of Wessels JA, that the shareholders of
this company and its shareholders were joint parties to a scheme of profit-making was
novel. Moreover, the suggestion in Wessels JA’s judgement that shareholders in a company
________________________

277 At 477-478.
278 At 203-204.
314 Income Tax in South Africa: Cases and Materials

trade in property ‘deur middel van’ (by means of) the company is startling. (See Wessels
JA’s proposition that, ‘The new shareholders, who were property speculators, intended
to trade in the property in question by means of the appellant, with the object of selling
it at a profit.’) The orthodox company law principle is that a company, being a separate
legal persona, carries on business in its own right, and that its shareholders do not carry
on the business in question ‘by means of’ the company.
The conclusion drawn by Wessels JA that the de Villiers group ‘ acquired control of
the appellant and implicated the latter as a party in the carrying out of the scheme’ is
also startling – in other words, the proposition that the shareholders of Elandsheuwel
Farming (Pty) Ltd made the company a party to their scheme of profit-making, when the
only factual evidence before the court was that those shareholder-directors decided that
the company would sell the property which it had hitherto been holding as a capital
asset.

[183]
CIR v Strathmore Exploration Ltd
1956 (1) SA 591 (A), 22 SATC 213
The taxpayer company had the power in terms of its memorandum both to hold and to
deal in immovable property. Up to the year of assessment in question its main activities
had been dealing and investing in shares. In 1941 the mother of John Scott, the control-
ling shareholder, bequeathed the company a legacy of certain properties, together with
the mineral rights, including a township laid out on one of the properties. In 1947 the
company disposed of the mineral rights in the properties bequeathed to it for £141 750,
and in 1948 it sold the township for £50 000. The purchasers of both properties were
companies controlled by the taxpayer, and the consideration took the form of shares in
the purchasing companies. Prior to disposal of the properties, the taxpayer did not
develop the properties, but carried on farming operations on the land at a loss.
Issue: were the proceeds of the sale of the properties ‘income’ in the hands of the tax-
payer?
Held: in the affirmative. The bequest took the form it did at the instigation of Jack
Scott, the majority shareholder in the recipient company, to enable the company to
dispose of the properties in the course of its business operations. The acquisition and
sale of the properties were part of a carefully arranged and business-like plan. In dispos-
ing of the inherited properties, the company used its business connections.
Centlivres CJ: [T]he mere fact that the property was acquired by the respondent company by
way of inheritance is not per se sufficient in law to justify a decision that no part of the proceeds
of realisation is subject to tax . . . At first sight it may seem extraordinary that a person should
bequeath land to a company but when one has regard to all the facts such a bequest is not sur-
prising. The bequest by Mrs Scott to the respondent company was, it seems, designed to benefit
her son, Jack Scott, who held the bulk of the shares in the respondent company. It is, I think, an
inescapable inference that Mrs Scott’s bequest took the form it did on the suggestion of Jack
Scott. The respondent company through its business organization was, no doubt, in a better
position to dispose of the properties on advantageous terms than Jack Scott himself. And so ad-
vantage was taken of the fact that the memorandum of the respondent company enabled it to
acquire property in any manner, and there can be little doubt that the whole idea of bequeath-
ing the properties to the respondent company was to enable it to dispose of the properties in the
course of business operations for the purpose of making a profit. There is no evidence that the
respondent company acquired the properties for ‘purposes of investment’ in terms of its memo-
randum. On the contrary the stated case says that it held the inherited land until such time as a
suitable opportunity occurred for the profitable disposal of it. This is exactly what a company
does while carrying on a business of land-jobbing. In these circumstances it seems to me it is of
little importance that the respondent company acquired the properties not by way of purchase
. . . The respondent company did not dispose of its legacy lock-stock-and-barrel . . . In so disposing
 Trading or Carrying on Business and Schemes of Profit-Making 315

of its inherited properties it used its business machinery which it had readily at hand and no
special organization was necessary . . . It is . . . clear that the respondent company used its busi-
ness connections in disposing of part of its inheritance. To sum up on this part of the case both
the acquisition of the inheritance and the subsequent disposal of it in part are suggestive of a
carefully arranged and business-like plan.
...
For the reasons which I have already given, if one looks at the constitution of the respondent
company and at its actual operations in connection with the inherited properties there can, in
my opinion, be no doubt that the fact that that was an isolated transaction as far as dealing in
land is concerned is by no means decisive of the point in issue. When all the other facts are tak-
en into account it seems to me that the ‘only one true and reasonable conclusion’ is that the
profit made by the respondent company was made by it in the course of its business activities. Cf
Edwards v Bairstow.279 If this is so, it follows that those profits attracted tax.

Notes
Usually, an inheritance is a windfall gain, and thus a receipt of a capital nature, and the
proceeds of the sale of inherited property would also be of a capital nature. But this is
not a fixed rule and if the heir or legatee were to sell the inherited property in the
course of a trade or scheme of profit-making, the proceeds of the sale would be income
in his hands.
The judgment in Strathmore comes close to holding that, in this particular case, the
bequest of the property to the company and its subsequent sale was a scheme of profit-
making entered into between the testator, Jack Scott (the majority shareholder) and the
company. (See Centlivres CJ’s observations that, ‘It is, I think, an inescapable inference
that Mrs Scott’s bequest took the form it did on the suggestion of Jack Scott’ and that,
‘Both the acquisition of the inheritance and the subsequent disposal of it in part are
suggestive of a carefully arranged and businesslike plan’.) The essence of the judgment is
that the sale of the inherited properties by the company was effected in the ordinary
course of the company’s business, and the proceeds were therefore income.
Elementary tax planning could, of course, have avoided liability to tax. If the property
had been bequeathed to Jack Scott and he had sold it, then – even if he had sub-divided
it before sale 280 – it is doubtful whether he would have been taxed. If the company had
not used its own business contacts to sell the property, but had (for example) given an
estate agent a mandate to sell the property, the company would probably not have been
taxable on the proceeds. The fatal tax-planning error was to allow the company to ‘dis-
pose of the properties in the course of business operations’, in other words, to deal with
the inherited property as though it were part of its ordinary stock-in-trade.

To sell property which was acquired for the purpose of profitable resale constitutes ‘a scheme of profit-
making’ and the proceeds of the sale are income and taxable as such. In determining whether there
was a purchase with the intention to resell at a profit, the court will have regard to the ‘juristic
nature’ of the underlying facts.

[184]
CIR v Wyner
[2003] 4 All SA 541 (SCA), 60 SATC 1
The taxpayer had a written agreement of lease with the Cape Town City Council (‘the
Council’) in respect of a seaside bungalow at Clifton since 1 October 1973. The lease was
________________________

279 [1955] 3 WLR 410 at 423.

280 Compare Berea West Estates (Pty) Ltd v SIR 1976 (2) SA 614 (A), 38 SATC 43.
316 Income Tax in South Africa: Cases and Materials

originally for one year, and was thereafter terminable by either party on one month’s
notice. She lived in the bungalow as her home for the next 21 years.
Prior to 1994 the properties at Clifton belonged to the Council which permitted the
lessees to dispose of their bungalows to third parties. When this occurred, the Council
entered into leases with those third parties. The lessees were loosely referred to as ‘bun-
galow owners’.
In 1986 the Council advised the taxpayer that the property would be offered to her at a
price of R228 000 but no such offer was made. After passing further resolutions in 1994,
the Council advised the taxpayer that she could purchase the property for R802 000.
At the time she received this offer, the taxpayer did not have the funds to purchase the
property. Investec Bank Ltd provided her with bridging finance for a period of 12 months
to enable her to purchase the property and find a buyer for it. At this time, she and her
husband intended to purchase the property with a view to reselling it within a year.
On 29 August 1995 the taxpayer signed an agreement to purchase the property know-
ing that she could sell the property for well in excess of the purchase price of R802 000.
On 5 October 1994 she took transfer of the property; in March 1995 she gave a mandate
to estate agents to sell the property, and on 4 September 1995 she sold the property for
R2 850 000.
On receipt of the purchase price, the taxpayer repaid Investec, paid the purchase
price of another property in Clifton which she had bought, and invested the balance of
the proceeds with an investment company.
The taxpayer made a net profit on the purchase and resale of R1 530 947 on which
SARS levied tax of R701 132,96.
Respondent objected to the assessment on the grounds that the profit in question was
of a capital nature, arising from the sale of a capital asset. The Commissioner disallowed
the objection.
On appeal, the Tax Court held that the purchase and sale of the property had been a
scheme of profit-making and confirmed the assessment. The Full Bench of the Cape
High Court thereafter upheld the taxpayer’s appeal, holding that her profit on resale was
of a capital nature.
On a further appeal, the Supreme Court of Appeal held that the purchase and profit-
able resale had been a scheme of profit-making, and that the proceeds of the sale were
income and thus taxable.
Southwood AJA: In upholding the [taxpayer’s] appeal the Full Court [of the Cape High Court]
noted that usually the purchase of a property with the intention of reselling it as soon as possible
would indicate a scheme of profit-making which would make the proceeds of the transaction
subject to tax. However, the court reasoned that there was a public law or public policy dimen-
sion to the case which the Special Court had overlooked. This was that the Council of the City of
Cape Town (‘the Council’) from whom the respondent leased the property had decided for
policy and developmental reasons not to give notice of termination to the respondent. The Full
Court found that while the respondent did not have common law ownership of the property, the
mix of private rights and public forbearance that she enjoyed gave her a sui generis claim to the
property that was close to ownership and that, had the respondent been the owner of the prop-
erty and sold it at the time she did, the proceeds would without a doubt have been of a capital
nature. The Full Court found that the respondent was to all intents and purposes entitled to
treat the property as her own. The respondent should therefore notionally be put in the same
category as one who, by force of circumstance, is forced to sell her home. The view of the Full
Court was that the respondent was compelled to sell the property because in the circumstances
which had developed and over which she had no control the respondent could no longer afford
to keep it. Her primary concern was to salvage what she had invested in the property. She had
nothing but the property and could not afford to lose it. It is the correctness of these findings
which must be decided in this appeal . . .
 Trading or Carrying on Business and Schemes of Profit-Making 317

Although there is no single all-embracing test of universal application for determining whether a
particular receipt is one of a revenue or capital nature, it is well established that if the receipt is
‘a gain made by an operation of business in carrying out a scheme of profit-making, then it is
revenue derived from capital productively employed and must be income; Overseas Trust Corpora-
tion Ltd v CIR;281 CIR v Pick ’n Pay Employee Share Purchase Trust 282 and the cases there cited. This
means that receipts or accruals will bear the imprint of revenue if they are not fortuitous, but were
designedly sought for and worked for; CIR v Pick ’n Pay Employee Share Purchase Trust, supra.283
Two factors which are always of great importance in deciding whether the proceeds of the sale of
property are of a revenue or capital nature are the intention with which the taxpayer acquired
the property and the circumstances in which the property was sold ‘ Malan v KBI;284 Berea Park
Avenue Properties (Pty) Ltd v CIR.285 . . .
Both parties relied on the [same] passage from the judgment of Corbett JA in Elandsheuwel
Farming (Edms) Bpk v SBI.286 . . . It is clear from this passage that the acquisition of an asset for the
purpose of reselling it at a profit ‘ even if it is a single, isolated transaction ‘ will usually be
regarded as a profit-making scheme . . . [A]s appears from the passage, the asset acquired for the
purpose of resale at a profit constitutes the taxpayer’s floating capital and it is not necessary that
the taxpayer be characterised as a trader.
[T]he respondent’s counsel argued that the purchase and sale of the property was not a scheme
of profit-making and that the respondent was merely disposing of the interest which she had in
the property . . .
[The judge summarised the history of the matter which culminated in the Council’s offering to
sell the property to the taxpayer and continued:]
It is clear from these facts that when the respondent accepted the Council’s offer to purchase
the property for R802 000 she knew that the property was conservatively valued at R2 550 000
and that if she could find a buyer she would be able to realise a profit on the sale of the proper-
ty; and that the respondent and Investec had devised a scheme whereby the respondent could
realise that profit . . . It is also clear that the respondent acted in accordance with that scheme:
(1) she obtained the necessary financial assistance from Investec to purchase the property and
hold it for a sufficiently long period to enable her to find a buyer;
(2) she purchased the property with the fixed intention of reselling it at a profit within a period
of 12 months;
(3) she set about achieving her objective of making a profit soon after she purchased the prop-
erty ; on 19 September 1994, before she had taken transfer of the property, she gave her
particulars to the estate agent and in March 1995 she gave the estate agent a mandate to
sell the property;
(4) she sold the property on 4 September 1994 for R2 850 000;
(5) she did not purchase the property to live in it.
On the face of it this was a scheme of profit-making as described by Corbett JA in the Elandsheuwel
case.
Notwithstanding these facts . . . the respondent’s counsel argued that the respondent had not
engaged in a scheme of profit-making . . .It is immediately apparent that a number of arguments
raised by the respondent’s counsel are in direct conflict with the facts. [T]he respondent’s own
evidence [was] that when she purchased the property she had the intention of reselling the
property within a period of 12 months. She knew that she could make a (considerable) profit
and she intended to make such a profit. She did not purchase the property to live in it and she
intended to sell the property as this was an essential part of the scheme. She required the proceeds
to repay Investec and pay for the other property in Clifton which she had purchased . . .
________________________

281 1926 AD 444 at 453.

282 1992 (4) SA 39 (A) at 56H-57G.
283 At 57F-G.
284 1983 (3) SA 1 (A) at 10B.
285 1995 (2) SA 411 (A) at 413J-414A.
286 1978 (1) SA 101 (A) at 118A-E.
318 Income Tax in South Africa: Cases and Materials

The real issues are therefore whether the respondent had a sui generis interest in the property
that was close to ownership and whether the respondent was obliged to realise this interest in
order to salvage what she had invested in it.
The respondent’s counsel was unable to define the nature of the interest which the respondent
allegedly had other than that disclosed in the documents. During the period 1973-1994 the
respondent was a lessee and after the first year she was a monthly tenant . . . The fact that the
respondent had incurred expenditure in rebuilding the bungalow and effecting other improve-
ments on the land did not alter the nature of her relationship with the Council or give her any
right in respect of the property. Her rights were determined by the terms of the lease agree-
ment. She had the right to use and enjoy the property against payment of the rental. She was not
the owner of the property and she had no other real rights in respect of the property. . . .
The respondent’s counsel suggested that the discounted offer made to the respondent gave her
an interest. He was not able to explain how this occurred. While this was obviously a very attrac-
tive offer it had no commercial value in itself. It was an offer made to the respondent only. It
could not be transferred to a third party . . . A further difficulty with the argument is that it
ignores the juristic nature of the transactions whereby the respondent made the profit. The
respondent did not purport to dispose of any (notional) interest which she may have had. She
purchased the property for a price, took transfer and became the owner, and then resold the
property for a much higher price, thereby realising the profit.
The argument that the profit was not designedly sought for and worked for and was fortuitous
cannot be accepted. A distinction must be drawn between the making of the discounted offer,
which clearly was fortuitous, and the acquisition of the property for resale, which was anything
but fortuitous . . . [T]he respondent devised a scheme whereby she could make the very large
profit which was inherent in the offer. She clearly seized the opportunity to make this profit . . .
In the present case the facts show clearly and unambiguously that in buying and selling the
property the respondent was indeed engaged in a scheme of profit-making.
I therefore do not agree with the reasoning and findings of the court a quo that the mix of pri-
vate rights and public forbearance gave the respondent a sui generis claim to the property which
was close to ownership, that the respondent was to all intents and purposes entitled to treat the
site as her own and that she should notionally be put in the same category as someone who by
force of circumstance is forced to sell her home. In my view this reasoning and the findings ig-
nored the juristic nature of the relevant transaction.
The appeal is therefore upheld . . . The assessment issued in respect of the respondent for the
1996 year of assessment is confirmed.
HOWIE P, NAVSA JA, NUGENT JA and CLOETE JA concurred.

Notes
Since the decision of the Supreme Court of Appeal in 1992 in CIR v Pick ’n Pay Employee
Share Purchase Trust,287 the concept of a ‘scheme of profit-making’ has provided the deter-
minative criteria for establishing whether the proceeds of the realisation of property are
of a capital or a revenue nature.
In terms of these criteria, a crucial factor is the intention with which the taxpayer ac-
quired the property in question.
In this case, the court held that it was clear that when the taxpayer accepted the Coun-
cil’s offer to sell the property to her for R802 000 she knew that she would be able to
immediately sell it at a profit. The court said that, with the help of a bank she devised a
scheme that would provide her with the bridging finance to enable her to realise that
profit. On the face of it, said the court, this was a scheme of profit-making as described
by Corbett JA in Elandsheuwel Farming (Edms) Bpk v SBI, where he said that, ‘In its normal
________________________

287 1992 (4) SA 39 (A).

 Trading or Carrying on Business and Schemes of Profit-Making 319

and most straightforward form, [a scheme of profit-making] connotes the acquisition of

an asset for the purpose of reselling it at a profit . . .’
The court held that the taxpayer’s profit on her purchase and resale of the property
had been designedly sought for and worked for and was not fortuitous. The fact that she
was offered the property at below market price was fortuitous, but her acquisition of the
property for resale was not.
Central to the judgment is the court’s rejection of the proposition that was the basis of
the judgment of the Cape High Court in favour of the taxpayer, namely that, given the
unusual history of the Clifton bungalows and their lessees, the taxpayer, before she
purchased the property, had a sui generis right in the property that was close to owner-
ship. The Supreme Court of Appeal held that her only rights were those under the lease;
she was not the owner of the property and had no real right in the property.
In short, the Supreme Court of Appeal regarded this as a straightforward scheme of
profit-making of the kind described by Corbett JA in Elandsheuwel, namely the acquisition
of property with the intention of selling it at a profit. Hence, the proceeds of the sale
were income and not capital.
A noteworthy aspect of the judgment is that the court refused to look beyond the
‘juristic nature’ of the underlying facts – in particular, that the taxpayer had previously
been a lessee, and not the owner of the property, and that her actions consisted of
a purchase and almost immediate resale of the property. The court did not regard it
as relevant that, in the practical sense, she had for some 20 years been more than a
mere lessee. Thus, for example, the Cape Town Council did not in practice exercise
its rights to give the lessees of the Clifton bungalows a month’s notice terminating
their lease, and in practice, the Council allowed the lessees to transfer (in effect, to
sell) their rights to third persons, with whom the Council would then enter into a
new lease. What the taxpayer in this case had done was, in effect though not in legal
form, was to realise – to convert to money – her idiosyncratic ‘rights’ in respect of
the bungalow that she had lived in as her home for 20 years. None of this was regarded
by the court as relevant because none of it involved legal rights in the strict sense. The
‘juristic nature’ of the underlying facts was that the taxpayer had purchased property
with the intention of almost immediately reselling it at a profit, and had carried out this
plan.

§9 Share dealing and schemes of profit-making involving shares

The following are extracts from leading cases as to what constitutes a ‘trade’ or ‘scheme
of profit-making’ in relation to shares.

[185]
African Life Investment Corporation (Pty) Ltd v Secretary for Inland Revenue
1969 (4) SA 259 (A), 31 SATC 163
The African Life Assurance Society Ltd (‘Talas’) carried on the business of long-term
insurance. In 1961, following the example of certain other insurance companies,
Talas decided to divest itself of its share portfolio, and in that year it formed the taxpayer
company for the purpose of making over its share portfolio to it. Talas’s portfolio of
shares was transferred to the taxpayer at the commencement of the latter’s business
as a package deal at the cost price paid by Talas. Thereafter, the taxpayer was involved
in the purchase and sale of a large variety of shares on the stock market. These trans-
actions yielded a surplus of R8 865 in 1963, R301 292 in 1964, and R142 923 in 1965.
The Commissioner included these amounts in the taxpayer’s gross income for these tax
years.
320 Income Tax in South Africa: Cases and Materials

Issue: were the profits made by the taxpayer on the purchase and sale of shares during
the tax years in question income, or were they of a capital nature? In other words, was
the taxpayer an investment-dealing company or an investment-holding company?
Held: these amounts were not of a capital nature, as the taxpayer was carrying on the busi-
ness of buying and selling shares. It was an investment-dealing company.
Steyn CJ: It is common cause that the appellant was not incorporated for the purpose of avoid-
ing income tax on such gains, should they be made by Talas itself. It had all along been the under-
standing of the respondent and of life insurance companies that such companies were not under
s 28 of the Income Tax Act, 1962, liable for tax on profits from the realization of shares in which
their life insurance funds had been invested. In relation to such investments, insurance com-
panies have, apparently, not been assessed as if they are also dealers in shares . . .
. . . In the normal course, any surplus derived from the sale of shares was to be carried to a special
reserve and was not to be distributed by way of dividend to Talas, ‘save in exceptional circum-
stances’ . . . In regard to ‘exceptional circumstances’, the following paragraph in the stated case
appears to have a bearing on what was contemplated:
‘The appellant in conducting its affairs was also influenced by the desire to pay annual dividends of not
less than 6 per cent on its issued share capital in order to assist Talas to declare bonuses to its policy hold-
ers which were competitive with bonuses declared by rival insurance companies.’
...
The availability of such profits for the payment of bonuses to shareholders of Talas in such circum-
stances was not the only purpose which these surpluses were intended to serve. The investment
committee, which had been formed to handle, inter alia, the appellant’s portfolio of shares, also
liked to feel, for publicity purposes, that the portfolio was showing surpluses on the realization of
shares in the first few years of its existence . . .
In so far as the appellant is concerned, the investment committee followed what is described as
an active investment policy, as distinguished from a passive investment policy. The latter is said
to imply
‘a practice of acquiring shares and securities with a view to retaining them indefinitely and only realizing
them or switching them after a course of time should they prove to have depreciated’.
An active policy is said to mean:
‘seeking a portfolio of sound shares or securities, well spread over a number of business fields, which
would show rising dividends over the years, watching the portfolio the whole time and watching critically
every share comprised in the portfolio and effecting realizations of shares or securities from time to time,
whether at a profit or a loss, whenever reasons exist for supposing that the investor could do better by
switching to other shares or securities’.
During these years, this active policy was pursued in a favourable market, with the general level
of prices on the stock exchange continually rising, and the appellant knew, in each year, that
although losses might also be incurred – its equity investments being risk investments – its real-
izations would on balance reflect profits. It was inherent in this policy that shares acquired by the
appellant would not be regarded as permanent investments. They would be sold regularly from
time to time . . . Each share was continually watched critically to determine whether or not it
should be disposed of, and the proceeds of those that were sold were consistently re-employed
forthwith in the acquisition of other shares . . .
These, in broad outline, ware the more salient features of this case. Before the court below it was
contended, on behalf of the appellant, that it is an investment-holding company and not an
investment-dealing company; that its portfolio of shares is to be regarded as a unit of capital
assets acquired in order to derive the highest possible yield thereon and not for the purpose of
making a profit on the disposal thereof; that shares sold were disposed of, regardless of profits
and losses, as a mere change of capital investments in the course of the maintenance and
improvement of the portfolio as a whole and not in the course of carrying out a scheme for prof-
it-making; and that the amounts in question were accordingly receipts of a capital nature. The
contention on behalf of the respondent was that dealing in investments was an essential feature
of the appellant’s business; that the profits were made in the ordinary course of its business; and
that they accordingly constituted gross income not of a capital nature.
 Trading or Carrying on Business and Schemes of Profit-Making 321

The learned judge in the court below stated the issue raised by these contentions to be whether
the appellant was an investment-dealing company or an investment holding company . . .
In coming to the conclusion that the amounts here in question constitute income, he stated no
explicit finding that the appellant was an investment-dealing company and not an investment-
holding company, but having regard to the specific reference to this as the issue and to the
observations mentioned above, such a finding must, I think, be inferred. It is clearly implicit in
these observations. As I understand them, they amount to findings, at least implicitly, that the
appellant bought and sold shares with the intention of making a profit, that it did so as part of its
business operations, and that the shares in its portfolio were assets held for trading. Their com-
bined effect is to make the appellant also an investment-dealing company, and it is, apparently,
on that basis that the Court’s ultimate conclusion was arrived at. All these findings are, as an
explicit finding on the stated issue would have been, findings of fact, which this Court will not
disturb except on the ground of lack of evidence on which they could reasonably have been
made.
Before this Court the main contention of counsel for the appellant was that the dominant and
overriding purpose of the appellant in acquiring shares was to obtain dividend income, and that
the profits made on realizations were no more than incidental to changes of investment effected
to ensure an overall dividend income at a satisfactory level. The purpose of realizations, he sub-
mitted, was not to produce profits, but to change investments and to maintain and improve divi-
dends. He conceded that if the central and most important fact is not the basic desire of the
appellant, mentioned above, to hold good shares in a portfolio which would show a rising divi-
dend over the years, that would be the end of his case.
In emphasizing the intention with which the shares were acquired, counsel relied on COT v
Levy.288 In that case there had been a single purchase and sale, and it was accepted that the
respondent, although he had in mind, when he purchased the shares, that they would appreciate
in value, was really interested in obtaining a good revenue and had from the outset agreed with
the proposals of the other shareholders to develop the property of the company with a view to
obtaining a better return from it. The criterion adopted in that case, on the assumption that the
taxpayer must prove affirmatively that his intention was to hold and not to resell for profit, ap-
pears from the following statements:289
‘. . . where the purposes of an individual taxpayer are mixed the only course, on principle as well as for practi-
cal reasons, is to seek and give effect to the dominant factor operating to induce him to effect the purchase
. . . unless one were to hold, what the legislature could not have intended, that the taxpayer must exclude the
slightest contemplation of a profitable resale of the property, it seems to me that the only test to apply is that
of the main or dominant purpose.’
That was also the test applied in CIR v Paul.290 These cases concerned individual taxpayers, and,
291
earlier in the judgment in Levy’s case it was pointed out that, according to CIR v Leydenberg
Platinum Ltd 292 the test to be applied in the case of an individual is not quite the same as the test
in the case of a trading company, but I shall assume, for present purposes, that the criterion
adopted would in a proper case also be applicable where the taxpayer is a company.
Whether or not a purpose is dominant in the sense that another co-existing purpose may be
effected at a profit without attracting liability for tax, is a matter of degree depending on the
circumstances of the case. A purpose may be a main purpose without being dominant in this
sense. I shall not attempt a precise definition of the distinction, but there would, I consider, be
such a main purpose where there is a further purpose simultaneously pursued by way of an addi-
tional, albeit subsidiary, activity calculated and intended to yield a profit. Where, for instance, a
company whose main concern as an investor is an income from dividends, confines its purchases
to sound equities with the highest dividend yield, but, at the same time, intends, in order to in-
crease its income, to sell whenever it is able to do so at a substantial profit, that intention, alt-
hough so closely connected with its main object that it may be said to be inseparable from it,
________________________

288 1952 (2) SA 413 (A).

289 At 421.
290 1956 (3) SA 335 (A) at 341 and 343.
291 At 420.
292 1929 AD 137 at 145.
322 Income Tax in South Africa: Cases and Materials

would not ordinarily rank as merely incidental to such a dominant purpose. As far back as in
COT v Booysens Estates Ltd 293 it was pointed out that, whatever the primary objects of a company
may be, it is quite possible that it may derive income in the ordinary course of business from
carrying out its secondary objects. Where the sale of shares held as an investment is in fact
contemplated as an alternative method of dealing with them for the purpose of making a profit
out of them, or, in the case of a company, where it is one of the ‘appointed means of the com-
pany’s gains’ (cf Overseas Trust Corporation Ltd v CIR;294 LHC Corporation of SA (Pty) Ltd v CIR) 295 it
can make no difference, I consider, that it is a secondary or subsidiary purpose of their acquisition.
It would nevertheless be part of the business operations contemplated for the production of
income, and the profit gained, would be ‘revenue derived from capital productively employed’ . . .
In support of such a dominant purpose in the present case, counsel for the appellant relied on
various considerations. The first is the express provisions in the memorandum to the effect that the
appellant shall not have power to deal or traffic in shares and may acquire them for purposes of
investment only, with a view to receiving income therefrom; that its investments shall not constitute
its stock-in-trade; and that its business shall not consist in dealing in shares. These provisions are no
doubt of importance, and it is true also that the mere fact that the appellant is at the same time
empowered to realize its assets by sale or otherwise – a power ordinarily inherent in ownership –
does not imply that dealing in shares is part of its business. Provisions such as these may well be
regarded as providing at least a prima facie indication that the company concerned, if it should
realize assets, is not engaged in a scheme for profit making; but they are admittedly not conclusive.
As pointed out in CIR v Strathmore Consolidated Investments Ltd 296 they cannot be considered in vacuo
or regarded as per se decisive, and the Court must, despite such provisions, consider all the circum-
stances of the case . . .
Of more importance, in the present case, than the provisions of the memorandum, are the mo-
tives underlying the purchases and sales and the manner in which they were conducted. I have
already mentioned the contention as to the dominant purpose. The argument here is, in effect,
that the manner in which purchases and sales were conducted is fully accounted for by the re-
quirements of an active investment policy directed at ensuring and preserving a durable yield of
dividends at the best general level. As a means to this end and because of their fluctuating values
and the risks involved, it was necessary to keep a constant critical watch on the shares in the port-
folio, to weigh the prospects and continually to effect such substitutions of investments as ap-
peared to be advisable. That would naturally entail frequent realizations and reinvestments, but
the object would not be the gathering of gains but the achievement and maintenance of sound
dividend investments.
It must be conceded, I think that whether or not the appellant set out to deal in shares for prof-
it, the varying of its many risk investments would be an inherent feature of its activities. It may be
that such variations, however gainful, need not in themselves, in the case of an investment com-
pany, necessarily lead to the conclusion that resultant profits are to be regarded as income. On
the other hand it might also be said that, because an investment company has of necessity, as
dictated by the nature of its assets, to deal in shares, and knows in advance that it will have to do
so, such variations are an essential feature of its business, that the profits therefrom arise in the
ordinary course thereof, and that they should accordingly be regarded as part of its contemplat-
ed income. On that approach, the shares might not inappropriately be described as property
‘which the company would use in its business operations, which it would deal with or hold as the prospects
of profitable user dictated; that would be its floating capital’
(CIR v Richmond Estates (Pty) Ltd).297 The present case, however, need not be narrowed down to
such considerations alone. There are also other circumstances of substantial importance.
It must be accepted, in terms of the stated case, that the basic desire of the appellant was to hold
good shares which would show a rising dividend over the years; but that was not its only desire.
In conducting its affairs (which would include the purchase and sale of shares), so it is stated, it
________________________

293 1918 AD 576 at 602 and 604.

294 1926 AD 444 at 456.
295 1950 (4) SA 640 (A) at 646.
296 1959 (1) SA 469 (A) at 479.
297 1956 (1) SA 602 (A) at 610
 Trading or Carrying on Business and Schemes of Profit-Making 323

was also influenced by the desire to pay an annual dividend to Talas which would assist the latter
to declare a competitive bonus to its policy holders. For that very reason a clause restricting the
distribution of profits on sales was deliberately omitted from its memorandum. In addition, both
the investment committee and the directors, as a matter of policy, during these years, wanted the
appellant to show surpluses on the realization of shares. For both these reasons, there must,
right from the inception of the appellant’s business, have been a co-existent intention to
achieve, on balance, a profit on realization. Because it was desirable to have such a profit in re-
serve in case Talas should need it, and because it would, presumably, improve the public images
of both Talas and the appellant, there was a distinct added purpose calling for profitable trans-
actions. It cannot be said, therefore, that there was no element of seeking after profits in the
sales effected by the appellant. As indicated above, moreover, the appellant, in view of the rising
trend of the stock market, knew beforehand that variations in investments would in all proba-
bility yield profits. There was more than a mere hope or expectation that the shares might rise in
value. This is not therefore, a case of ‘fortuitous and unforeseen enhancement’ in the values of
its investments (cf Overseas Trust Corporation Ltd v CIR).298 Profits were anticipated and fully ex-
pected and, in making them, the appellant had in mind a definite purpose, distinguishable
from, although not unconnected with, the purpose directed at dividends. In pursuit of what
might be described as a composite purpose, it used its powers of realization to secure better
dividends and also to make profits on sales. In my opinion we do not here have a dominant pur-
pose into which the regular dealing in shares is absorbed as a merely incidental activity. It would
be more in accordance with fact, I consider, to regard the dealing in shares as a secondary object
of the appellant, ie as part of the appellant’s business . . .
If it was, as appears to be the case, part of the business of the appellant, even though it be a sec-
ondary part, to deal in shares, profits on sales effected while the intention to show a surplus per-
sisted would not escape assessment for income tax, except, possibly, if it is shown that sales in a
particular category fall outside that intention. I am not satisfied that that has been shown in re-
gard to any category.
In the result I am unable to say that on the evidence there is no basis for the factual findings of
the court below. On the contrary, there appear to be good and sufficient reasons for them, and
in my opinion the conclusion that the profits here in question are income, is justified.
HOLMES JA and TROLLIP JA concurred in the above judgment.

Notes
In terms of s 28 of the Act, long-term insurers such as ‘Talas’ were not liable for income
tax on profits from dealing in shares in which their life insurance funds had been invest-
ed. However, the taxpayer company was not a long-term insurer and its activities were
not conducted under the protective umbrella of s 28. Consequently, its tax liability was
determined under ordinary principles. And, under ordinary principles, its self-confessed
policy of ‘active portfolio management’ was virtually a definition of share-trading. From a
tax-planning point of view, the taxpayer’s actions were disastrous. No tax on the share
transactions would have been paid if they had been channelled through Talas. Moreover,
by transferring the shares to the taxpayer at cost instead of market value, the taxable
profits were artificially inflated.
The taxpayer argued that the profits which it made on the realisation of shares were
merely incidental to changes of investment effected to ensure a satisfactory level of
dividend income and that the purpose of such realisations was not to produce profits,
but to maintain and improve dividend yields.299 The Appellate Division found that, quite
apart from seeking a high dividend yield, the taxpayer had a definite purpose of selling
at a profit, that was distinguishable from its seeking after dividends.300 The court held that
________________________

298 At 453.
299 At SATC 175.
300 At SATC 178.
324 Income Tax in South Africa: Cases and Materials

the taxpayer’s intention to achieve a high dividend yield was not ‘a dominant purpose
into which the regular dealing in shares is absorbed as a merely incidental activity’; on
the contrary, said the court, it was more in accordance with the facts ‘to regard the
dealing in shares as a secondary object of the appellant, ie as part of the appellant’s
business’.301
The approach adopted in African Life was followed in [186] Tod and [188] Barnato
Holdings. In CIR v Nussbaum302 the court said that the principles laid down in African Life
in regard to secondary or subsidiary purposes were applicable to individuals as well as
companies.
A taxpayer who, in the course of managing his share portfolio, buys and sells shares for the purpose
of making a profit on such sales, will be assessable to tax on such profits, unless the sales were purely
incidental to a dominant purpose of maximising his dividend income.

[186]
CIR v Tod
1983 (2) SA 364 (N)
The taxpayer, who was retired, lived almost entirely on the dividends from his shares.
During the tax years 1976 – 1979 he made substantial profits from the sale of shares,
which the Commissioner included in his gross income. From 1948 – 1974 the taxpayer
had acquired a large number of shares in four major listed companies. This the court
called Phase 1. In 1976 the taxpayer’s accountant, P, acting with the taxpayer’s authority,
started to diversify the taxpayer’s portfolio, by selling substantial numbers of his shares
and purchasing others. This resulted in considerable profits. This was Phase 2. There-
after, up to February 1978, P embarked on a plan (Phase 3) designed to increase the
taxpayer’s annual dividends. He would purchase a share on which a dividend was immi-
nent and, as soon as the dividend had been declared, he would sell the share, usually at a
profit, and repeat the procedure. P maintained that the profit on selling the share was
not a material consideration; he was satisfied so long as its original cost was recouped.
Later, the taxpayer’s accountant became aware that the Department of Inland Revenue
might try to tax transactions such as the Phase 3 operations. As a result, he put an end to
the Phase 3 operations, and thereafter embarked on Phase 4 in which shares were sold
only for some really cogent reason.
Issue: whether the profits on the sale of the shares during phases 1, 2 and 3 were in-
come or capital.
Held: the profits on sales prior to phase 3 were of a capital nature. The profits on sales
during phase 3 were income, because the taxpayer had not shown that dominant pur-
pose during this phase was to hold shares more or less permanently so as to produce
income.
Milne JP: As it was put by Grosskopf J in Bloch v SIR,303 in order to prove that the profit on the
sale of shares fell within the expression ‘receipts or accruals of a capital nature’, the taxpayer
had to prove ‘. . . that the shares were an item of fixed capital in his hands. This turns on the
purpose with which he acquired and held them. The essence of fixed capital, as distinct from
floating capital, is “’n element van permanentheid, in die sin dat daar ’n bedoeling is om die
betrokke bate min of meer permanent te hou met die doel dat dit inkomste moet voortbring”.
(SBI v Aveling304).’ He goes on:305
________________________

301 At SATC 178.

302 (1996) 58 SATC 283 (Appellate Division) at 292.
303 1980 (2) SA 401 (C) at 406H, 42 SATC 7 at 13-14.
304 1978 (1) SA 862 (A) at 880, 40 SATC 1 at 17-18.
 Trading or Carrying on Business and Schemes of Profit-Making 325

‘In the present case we are dealing with the profit on the sale of the appellant’s shares. To show that this
was a receipt of a capital nature, the appellant therefore had to show that his dominant purpose in hold-
ing the shares was to hold them more or less permanently so as to produce income.’
That, in my view, correctly states the test to be applied. . . .
I think it is fair to sum up the evidence thus far, by stating that up until Phase 3 commenced,
there is no reason whatever to doubt Purnell’s evidence to the effect that although the taxpayer
spread the risk in his portfolio by shedding some shares, reducing his holding in others and
acquiring still others, one is looking at a portfolio of shares that was held for long-term invest-
ment purposes. In Barnato Holdings Ltd v SIR 306 Trollip JA referred to shares which were (in that
case) not ‘acquired for better or for worse, or, relatively speaking “for keeps” (ie only to be dis-
posed of if some unusual, unexpected or special circumstance warranting or inducing disposal,
supervened), which is the usual badge of a fixed capital investment’. I have no difficulty in hold-
ing that that was the nature of the taxpayer’s investment in his share portfolio up to the stage
when Phase 3 commenced. From this it follows, in my view, that all the ‘profits’ reflected in Ex-
hibit C were accruals of a capital nature and were not taxable . . .
. . . No doubt it was the main purpose of the taxpayer to maximise his dividend income. That
does not mean that such a purpose was dominant ‘in the sense that another co-existing purpose
may be effected at a profit without attracting liability for it . . . A purpose may be a main purpose
without being dominant in this sense.’ Per Steyn CJ in African Life Investment Corporation v
Secretary for Inland Revenue.307 The Chief Justice continues:
‘I shall not attempt a precise definition of the distinction, but there would, I consider, be such a main
purpose where there is a further purpose simultaneously pursued by way of an additional, albeit subsidiary,
activity calculated and intended to yield a profit. Where, for instance, a company whose main concern as
an investor is an income from dividends, confines its purchases to sound equities with the highest dividend
yield, but at the same time intends, in order to increase its income, to sell whenever it is able to do so at a
substantial profit, that intention, although so closely connected with its main object that it may be said to
be inseparable from it, would not ordinarily rank as merely incidental to such a dominant purpose.’
For there to be an ‘absolving dominant purpose’, it must be shown that ‘the pursuit of an over-
riding main objective of securing a dividend income merely provides the occasion for what is no
more than a purely incidental change of investment . . .’308 Ogilvie-Thompson JA held that in all
the circumstances, the proper conclusion was that it was an integral, albeit secondary, part of the
business of the taxpayer to deal in shares and that consequently the profits in issue were liable to
tax. Rumpff JA approached the matter somewhat differently, while agreeing with the result. He
held309 further that in order to ensure the level of dividends, it was the object of the company
(which it duly achieved) to deal in shares. He held further that, as the purchase and sale of
shares was not simply a change of capital assets on certain occasions, but a sine qua non in order
to reach and maintain the highest possible dividends, such purchase and sale was ‘’n inherente
eienskap van die aard van die besigheid van die maatskappy’, and that it was accordingly unnec-
essary to deal with the question of a dominant or main intention.
The mere fact therefore, that the main object of the Phase 3 operations was to maximize the
taxpayer’s dividend income, does not really solve the problem. The question is how that object
was intended to be attained, and how it was in fact attained. Now what in fact occurred during
the Phase 3 operation? In the first place, virtually all the shares that were sold during the rele-
vant tax years were sold at a profit. Purnell conceded in cross-examination that there was a ‘rapid
change of shares during 1978’ . . . Thus there were approximately fifty share transactions in the
year ended February 1978, twenty-seven in the year ended February 1977 and thirty in the year
ended February 1976. Some of the shares were only held for a few months at a time. These are
all relevant factors. What is of even greater importance however, is the stage at which counters
acquired during the Phase 3 operations, were sold. What was the criterion adopted by Purnell on
the taxpayer’s behalf at the stage at which it would be appropriate to sell a particular share? This
is nowhere fully explored in the evidence. It does however clearly appear that it was never the
________________________

305 At 407D, 42 SATC 7 at 14.

306 1978 (2) SA 440 (A) at 454A, 40 SATC 75 at 91.
307 1969 (4) SA 259 (A) at 269E, 31 SATC 163 at 175.
308 At 270A, 31 SATC 163 at 176.
309 At 277D, 31 SATC 163 at 184.
326 Income Tax in South Africa: Cases and Materials

intention to sell shares at a loss . . . Strictly speaking, of course, even if the shares were sold at a
loss, that would not and could not reduce the appellant’s income on that share. All it would do,
would be to reduce the amount of capital available for the purpose of purchasing other shares to
acquire the dividends on those shares . . .
To sum up, it was necessarily inherent in the Phase 3 operation:
(a) that comparatively frequent purchases of shares would be made in order to acquire the
dividend about to be or recently declared on such shares;
(b) that comparatively frequent sales of shares would be made to finance such purchases;
(c) that shares would not be sold at a loss.
It is quite clear, in fact, that during this phase Purnell bought dividend-ripe shares which he
expected to rise in price and which he intended to sell (at a profit) as soon as the taxpayer had
plucked the dividend. I say he intended to sell them at a profit, since the circumstances in which
he would be able to sell at the right time at precisely the figure necessary to recoup his capital out-
lay plus brokerage charges and no more, would be rare indeed. He bought the shares he believed
would be likely to appreciate, so that when an opportunity arose to buy other dividend-ripe
shares, he would be reasonably certain to be able to sell the original shares, at a price from
which he could comfortably recover his initial outlay plus expenses. An examination of the
schedule in the dossier reveals that, in fact, he did nearly always sell at a figure which was appre-
ciably more than the initial cost plus expenses . . . The profit was ‘. . . no fortuitous and unfore-
seen enhancement. It followed from facts which were within the knowledge of the contracting
parties, and the resulting benefits must have been within their contemplation and intention.
The profits of such a transaction are not of the nature of capital. They are plainly income.’ Over-
seas Trust Corporation Ltd v CIR.310 It is of course true, that the mere fact that shares are purchased
with the intention of reselling them, does not mean that the profit on resale is taxable. For ex-
ample there may be a variation in investments in order to maintain the value of capital. This
311
point is clearly made in the Australian case of Trent Investments (Pty) Limited v FCT. In that case
the court rejected the argument of the Commissioner to the effect that the management of a
share portfolio was a business, so that the making of any profit from that business was of the
nature of income and therefore taxable. In that case, however, the Commissioner did not con-
tend that what the taxpayer was doing was a trade. What the Commissioner there submitted was
that if a portfolio was systematically ‘managed’, it is ‘necessarily not concerned simply with
considerations of maintaining or increasing income yield from assets but involves of its nature
the variation of the investments held according to the dictates of those principles’. The court
held, in that case,312 that it was consistent with investment principles ‘eg that an asset will be sold
and the proceeds invested in another asset because, inter alia, it is seen that the asset purchased
is likely to be more valuable than that sold. I do not think that the principles which have been
established require that the investor, in considering whether to hold or dispose of an invest-
ment, should not have regard to the fact that a prospective investment will become of greater
capital value than the one presently held. The difficulty of drawing the line between a sale and a
purchase for that purpose and one for the purpose of realization at a profit does not, in my
opinion, mean that the investor must ignore the opportunity to improve as well as maintain the
value of his capital.’ I am not certain that the reasoning of the learned judge in that case, and in
particular his separation into two distinct categories, as if they could not co-exist, of ‘whether the
intention which the investor had was maintenance of capital or that of trading’, is consistent with
the principles of our law. These clearly envisage that the maintenance or enhancement of in-
come may be the main object of the taxpayer, but that this is not necessarily inconsistent with a
finding that he is trading or dealing in shares. Cf the African Life case supra and Barnato Holdings
Ltd v SIR.313 . . .

________________________

310 1926 AD 444 at 453, 2SATC 71 at 76.

311 1976 (6) ATR 201 at 206.
312 At 207.
313 1978 (2) SA 440 (A) at 453G to 454E, 40 SATC 75 at 90-91.
 Trading or Carrying on Business and Schemes of Profit-Making 327

. . . Now the Phase 3 operation lasted from some time in about February 1976 until about Febru-
ary 1978 . . . It cannot, in my view, be said . . . that there was not, from the inception of the Phase
3 operation ‘a co-existent intention to achieve on balance a profit on realization’; see the African
Life case, supra.314 . . .
I am, accordingly, by no means satisfied that the taxpayer’s dominant purpose in acquiring and
holding the shares during the Phase 3 operations, was to hold them more or less permanently so
as to produce income.
. . . Clearly, if it is a proper conclusion on the evidence that the taxpayer became a dealer in
shares once the Phase 3 operations started, then the profits realised by him in respect of the
share transactions for those tax years were correctly assessed as part of his gross income for those
years. That applies furthermore to the proceeds of the shares acquired during the Phase 2 opera-
tion, but only disposed of after the commencement of the Phase 3 operations. This would follow
from the fact that the taxpayer had changed the intention with which he held the shares. Even if
the evidence does not warrant a finding that the taxpayer became a dealer in shares once the
Phase 3 operation commenced however, it does not seem to make any difference. Here, as in the
African Life Investment Corporation cased, the appellant knew beforehand that variations in invest-
ments would, in all probability, yield profits. There was more than a mere hope or expectation
that the shares might rise in value . . . Once he embarked upon the Phase 3 operation and so
long as that phase continued, he held all the shares on the basis that any of them might be used
for the purpose of purchasing shares in order to obtain dividends, and in due course, in turn,
potentially to be realised at a profit for the purpose of obtaining still further shares together with
the dividends on them. Cf the African Life case.315
In the result, the appeal fails with regard to the setting aside of the assessment for the year of
assessment ended 29 February 1976, and succeeds in respect of the years of assessment ended
28 February 1977, 1978 and 1979 . . .
PAGE J and NIENABER J concurred.

Notes
This decision addresses the important question of how actively a taxpayer can manage
his share portfolio without crossing the Rubicon and embarking on a trade or scheme of
profit-making. (Compare [185] African Life where the taxpayer’s policy of ‘active port-
folio management’ took it across the Rubicon.) Ultimately, the judgment in Tod rested
on the taxpayer’s failure to discharge the onus of proving that the shares were held ‘more
or less permanently so as to produce income’ 316 – the criterion laid down in SBI v Aveling.317
However in its examination of the taxpayer’s Phase 2 activities, Tod provides useful
guidance in its conclusion that a taxpayer who holds shares as a capital investment and
who sells some of those shares with the intention of diversifying his portfolio in order to
spread the risk remains on the safe side of the Rubicon – he is merely changing one
capital asset for another. Tod also addresses the question of ‘co-existing purposes’, and
endorses the distinctions drawn in [185] African Life between ‘main purpose’ and ‘dom-
inant purpose’. The basis of this distinction is as follows. A taxpayer may have two co-
existing ‘main’ purposes, for example (a) to manage a share portfolio so as to maximise
dividend income and (b) to sell shares at a profit when the opportunity to do so arises. A
sale of shares effected in terms of main purpose (b) will yield income. To escape tax on
the sale of shares, a taxpayer must have a ‘dominant purpose’ (which the judgment also
calls ‘an overriding main objective’) of maximising dividend income; any selling of
shares by him must be ‘purely incidental’ to this objective. In other words, the selling of
________________________

314 At 271.
315 At 272E-H, 31 SATC 136 at 178-179.
316 See Tod at SATC 14.
317 1978 (1) SA 862 (A) at 880, 40 SATC 1 at 17-18.
328 Income Tax in South Africa: Cases and Materials

shares at a profit must not be an integral, even if secondary part of the taxpayer’s busi-
ness. This seems to mean that, for the taxpayer to escape tax on the profits from the sale
of a share, the sale must have been effected for the purpose of improving the taxpayer’s
dividend income (eg with a view to using the proceeds of the sale to purchase another
share with better dividend prospects), and not for the purpose of making a profit on the
sale. In Tod the taxpayer claimed that his decision to sell a share was based on dividend
considerations, and not on whether the sale would yield a profit. If, on the other hand, a
share is sold for a co-existing main purpose of obtaining a profit on re-sale, the proceeds
of the sale will be income.
It is also noteworthy that in Tod the taxpayer was taxed on the proceeds of shares
which were sold during Phase 3 although he had purchased them in Phase 2; the reason
was that, when he sold them, he had by then become a dealer in shares.318 The same
unfortunate result befell the taxpayers in [181] Natal Estates and [169] Leydenburg
Platinum, who were taxed on the sale of land which had been acquired as a capital asset,
because it was later sold in the course of a scheme of profit-making.
The question whether the proceeds derived from the sale of shares are income or capital depends
primarily on the taxpayer’s intention on acquisition. If the taxpayer’s dominant intention was not
re-sale at a profit, but the strengthening of the income-earning structure of his business, the proceeds
on resale will be of a capital nature.

[187]
SIR v Trust Bank of Africa Ltd
1975 (3) SA 652 (A), 37 SATC 87
The taxpayer company was incorporated in 1954, was registered as a general bank under
the Banks Act, and carried on the business of banking throughout the Republic. Its
business was governed by a board of five to eleven directors which met regularly. The
day-to-day running of the taxpayer’s business was entrusted to a management committee
consisting of the taxpayer’s chief executive officers. From its inception the taxpayer
invested some of its surplus funds in listed shares as well as in Government and munici-
pal stocks, as it was authorised to do under its memorandum of association. The taxpay-
er’s investment advisory department had full authority as regards the buying and selling
of specific stocks and shares on behalf of the taxpayer. From 1964 to 1969 the taxpayer
purchased and sold stocks and shares on a fairly substantial scale and, in addition to an
annual income in the form of dividends, it made annual profits on the realisation of such
stocks and shares. Such profits had always been returned by the taxpayer as income
subject to tax under the Income Tax Act. The taxpayer carried on the business of share-
dealing as an ancillary to its main banking business.
In the 1969 tax year, the Commissioner included in the taxpayer’s income a profit of
some R8 million made by it on the sale of certain shares in National Fund Holdings (Pty)
Ltd. The taxpayer objected to the inclusion of these profits in its taxable income on the
grounds that they were of a capital nature.
Issue: were the profits made by the taxpayer on the acquisition and sale of the said
shares of a capital nature, or were they income derived from trading or a scheme of
profit-making?
Held: the profits were of a capital nature. Although the taxpayer was a dealer in shares,
it had acquired these particular shares, not for re-sale at a profit, but in order to gain
certain collateral benefits and advantages which strengthened its profit-making structure.
________________________

318 At SATC 9.
 Trading or Carrying on Business and Schemes of Profit-Making 329

Botha JA: Shortly after the promulgation of the Unit Trusts Control Amendment Act 65 of 1963,
certain influential businessmen . . . endeavoured to interest a number of powerful financial insti-
tutions in the formation of a growth fund in the Republic . . . With this object in view the
respondent was offered a 10% interest in the proposed management company and the
appointment as an agent for the sale of units in the proposed growth fund. Dr Jan Marais,
to whom the offer was made, stressed the point that, as the respondent had the selling net-
work available for the sale of the units, the respondent should also be appointed as banker to the
proposed growth fund. This was agreed to subject to the approval of the board of directors of
the proposed management company . . .
Participation by the respondent as a shareholder in the formation of the proposed management
company was considered by Dr Marais as a necessary and useful addition to the respondent’s
banking framework, and the respondent’s management committee was persuaded by a consid-
eration of the following factors to recommend to its board of directors acceptance of the offer
made –
(a) the merits of such a participation as an investment;
(b) the banking business which it was expected would accrue to the respondent by reason of its
participation, particularly also in the Transvaal where the proposed growth fund was to be
based;
(c) the prestige value of being associated with the other participants in the fund and of being a
banker to the fund;
(d) the advantage of obtaining what was termed as ‘priority agency’ for the sale of the units of
the proposed growth fund; and
(e) the benefit of being able to provide clients of the respondent with another investment facil-
ity, which fitted into its ‘one-stop’ service concept.
These factors were stressed in a memorandum prepared by Home [a chief executive officer of
the taxpayer] and submitted to the respondent’s board of directors in support of the manage-
ment committee’s recommendation that the offer made be accepted.
On 30 March 1965 the respondent’s board passed a resolution ‘approving’ the acquisition by the
respondent of a 10 per cent interest in the proposed management company at a total capital
outlay of R60 000. There is no documentary evidence of the considerations which led to the
adoption of this resolution; but it is clear from the stated case that, in the debate which preced-
ed the adoption of the resolution, the collateral benefits which were expected to accrue to the
respondent in its banking business from such a participation, apart from the merits of such a
participation as an investment, were emphasised by Dr Marais.
On 17 June 1965 the proposed management company, Fund Advisers Ltd, was incorporated with
an authorised share capital of R1 000 000 divided into 2 000 000 shares of 50 cents each . . .
On 1 December 1967 a company known as Fund Holdings (Pty) Ltd was incorporated and
shareholders in Fund Advisers Ltd were allotted, upon an exchange basis, shares in Fund Hold-
ings (Pty) Ltd in the ratio of one share in Fund Holdings for every 100 shares held in Fund Ad-
visers . . .
Towards the end of December 1968 the respondent decided to establish its own growth fund . . .
Abramson and the other directors of National Fund Holdings saw in this move an opportunity
for persuading the respondent to sell its shares in National Fund Holdings in order that the
wishes of the Standard Bank and Volkskas for greater participation in National Fund Holdings
could be satisfied to the advantage of National Growth Fund.
After prolonged negotiations and hard bargaining . . . a price of R8 166 066 was agreed to for
respondent’s shares [in National Fund Holdings] which in the end were taken up only by the
Standard Bank and the other shareholders of National Fund Holdings.
It appears from the stated case that the following collateral advantages foreseen by the respond-
ent’s management committee in 1965 in fact accrued to the respondent by reason of its share-
holding in National Fund Holdings, viz.
(a) the establishment and operation of a number of valuable current banking accounts pertain-
ing to the National Growth Fund group at certain branch offices of the respondent particu-
larly in the Transvaal;
330 Income Tax in South Africa: Cases and Materials

(b) the short-term investment of funds of the National Growth Fund with the respondent upon
which low rates of interest were payable and which constituted a valuable source of funds
for banking purposes;
(c) the close association in the National Growth Fund with well established and prominent
financial institutions which proved to be of great value to the respondent which had just
embarked upon the business of commercial banking;
(d) the acquisition of a ‘priority’ agency for the sale of National Growth Fund units which,
apart from enabling the respondent to earn a considerable amount byway of commission
on the sale of the units, also enabled the respondent’s canvassers to solicit banking business
for the respondent;
(e) the fact that the respondent was enabled to offer a further investment facility to its clients
and potential clients.
The question whether the profits realised on the sale of the shares in National Fund Holdings
constituted a revenue or capital accrual depended, so the learned president of the Special Court
put it –
‘upon whether the purchase, holding and sale of these shares were steps in a scheme of profit-making, ie
to make a profit by the re-sale of the shares at an enhanced price; or whether the sale constituted the reali-
sation of a capital asset acquired and held for purposes other than such a profit-making scheme . . .’
After a detailed consideration of this evidence in the light of the authorities, the Court a quo
concluded that:
‘In the present case we have accepted the evidence that it was predominantly the prospect of the so-called
collateral advantages which induced appellant (now respondent) to acquire the interest in NGF; and we
have concluded that, as far as the future profitability of the interest was concerned, both as to income
production and capital appreciation, the general thinking must have been that, although the venture had
a reasonable prospect of being successful, it was somewhat speculative in character. Moreover, there is no
evidence to suggest that the interest was acquired with a view to a profitable re-sale: such evidence as there
is on this point is to the contrary and the circumstances, eg the ‘partnership’ concept, the clogs on trans-
ferability, the collateral benefits, etc., tend to confirm this. No doubt re-sale was never entirely ruled out as
a future possibility, given a sufficiently tempting offer – and indeed that is in fact what occurred – but as
remarked earlier, a taxpayer is not obliged to exclude the slightest contemplation of a profitable re-sale.
. . . [W]e have come to the conclusion that . . . the dominant purpose underlying the purchase of shares in
the NGF was the acquisition of the various collateral benefits previously referred to . . . Furthermore, it
seems to us that these collateral benefits were calculated to – and did in fact – extend the bank’s frame-
319
work or, to use the phraseology of Kitto J (in National Bank of Australia Ltd v FCT ) add to its profit-
making structure . . .’
It was assumed by both counsel that the question whether the profits realised on the sale of the
shares in question constitute receipts of a capital or revenue nature, was a question of law in
contrast to one of fact. The Special Court’s finding of fact may, however, in determining that
question, prove wholly decisive for, in those cases where the dominant issue is one of the taxpay-
er’s intention, the conclusion of law may automatically follow upon the findings of fact. (SIR v
Cadac Engineering Works (Pty) Ltd).320 The Special Court’s conclusion that the profits realised con-
stituted receipts of a capital nature and were, therefore, not taxable in appellant’s hands, fol-
lowed automatically on the facts as found by the Special Court, particularly its finding as to the
intention with which the shares were acquired and held, namely, as a capital asset and not for re-
sale or as part of a profit-making scheme.
. . . [It] was contended [that] the Court erred in the manner in which it sought to ascertain the
respondent’s intention and attached undue weight to the intention as so ascertained.
I cannot agree that the Special Court approached the enquiry before it in the manner suggested.
What the Court, in the context of the whole of its judgment, did convey was that the question
whether the purchase and sale of the shares were steps in a scheme of profit-making, or whether
the sale constituted the realisation of a capital asset acquired for purposes other than such a
profit-making scheme, was, in the case the Court was considering, ‘fundamentally a question of
intention’, in other words, that the intention with which the shares were acquired was of the
________________________

319 15 ATD 220.

320 1965 (2) SA 511 (A) at 520.
 Trading or Carrying on Business and Schemes of Profit-Making 331

utmost importance, but not necessarily decisive. And that must necessarily have been so. The
respondent is a general bank primarily carrying on the business of banking in the Republic. The
other objects which it was authorised to pursue, such as dealing in shares, were merely ancillary
to its banking business. (Cf COT v Booysens Estates Ltd 321). The investment of its surplus funds in
equities quoted on the Stock Exchange and thus readily realisable was in accordance with nor-
mal banking business (cf Punjab Co-operative Bank Ltd, Amritsar v Commissioner of Income Tax,
Lahore).322 In these circumstances the intention with which, or the purpose for which, the shares
were acquired was, therefore, fundamental to the question whether they were acquired in
order to extend or add to the permanent structure upon which the appellant’s banking
business rested, or whether they were merely acquired in the ordinary course of its share dealing
operations.
It may be that in the case of an investment-dealing company whose business it is ‘to deal in
shares at a profit’, or, which means the same thing, whose ‘appointed means of the company’s
gains’ include ‘the gaining of profit by selling shares at higher prices than was paid for them’,
(LHC Corporation of SA (Pty) Ltd v CIR 323 and cf Durban North Traders Ltd v CIR),324 the objective
factors, such as the objects of the company as set out in its memorandum of association, the
actual nature of the company’s business, the normal business carried on by companies of that
type, and the nature of the transaction, may, in an enquiry as to the purpose for which specific
shares were acquired by such a company, assume greater significance than the intention with
which those shares were acquired. (LHC Corporation case, supra;325 CIR v Strathmore Consolidated
Investments Ltd).326 The business of such an investment-dealing company is to make a profit on
shares either by holding or selling them.
‘These are merely alternative methods of dealing with the shares for the purpose of making a profit out of
them. In either event there would be ‘a productive use of capital employed to earn profits’.’
(per Solomon JA in Overseas Trust Corporation Ltd v CIR)327 In such a case it would be extremely
difficult for the company to show that a particular share transaction nevertheless falls outside its
normal trading activities in the sense that the shares were not acquired for a profitable re-sale
but to be held purely as an investment. (CIR v Richmond Estates (Pty) Ltd.)328 Where, however, as
in the present case, share dealing is carried on by a banker ancillary to its banking business the
question whether a particular share transaction falls within its ordinary share dealing operations,
or was intended as an extension of or addition to its banking business and not as a dealing in
shares, is a question of an entirely different kind, in the determination of which the intention
with which the share transaction was entered into must necessarily be fundamental, even though
it may not be decisive.
The respondent being a company, the Special Court held that its intention in regard to the
share transaction in question had to be sought in the thoughts and acts of the persons who
control and manage its affairs. That would ultimately be the board of directors but, because
the evidence showed that considerable powers were conferred by the board upon the manage-
ment committee consisting of Dr Marais and Messrs Burger and Home, the Special Court
concluded that the intention of the management committee would, to some extent, represent
the intention of the company, and in regard to matters submitted to and decided on by the
full board, the thinking of the management committee, as reflected in its reports and
recommendations to the board would represent an important indication of the intention of the
board. . . .
Counsel for the appellant, in challenging the manner in which the Special Court sought to
ascertain the respondent’s intention, submitted that, with certain immaterial exceptions not
relevant in this case,
________________________

321 1918 AD 576 at 598.

322 (1940) 4 All ER 87 at 95.
323 1950 (4) SA 640 (A) at 645-646.
324 1956 (4) SA 594 (A) at 604.
325 At 645-647.
326 1959 (1) SA 469 (A) at 477-478.
327 1926 AD 444 at 457.
328 1956 (1) SA 602 (A) at 607.
332 Income Tax in South Africa: Cases and Materials

‘the only way of ascertaining its (a company’s) intention is to find out what its directors acting as such in-
tended’,
(CIR v Richmond Estates (Pty) Ltd)329 and that (again with immaterial exceptions not relevant in
this case) the only way to find out what a company’s directors acting as such intended is from
their formal acts. For this proposition counsel relied on the following statement of Benjamin J in
Wilson v CIR:330
‘The company being an artificial entity, its intentions must be determined from its formal acts. There was
nothing in the resolutions of the company to indicate an intention to capitalise the £25 000 requisite for
the payment of the dividend.’
I do not think that Benjamin J intended to lay down a general rule that a company’s intention or
purpose in regard to any particular transaction cannot be ascertained in any other way than by
its formal acts. I certainly would not be able to subscribe to such a proposition, for it is clear that
it could lead to injustice and grave difficulties if the Special Court were, in an enquiry as to the
company’s intention, to be bound by the formal acts, in the form of resolutions, of that compa-
ny, particularly where such resolutions may be incorrectly recorded, either deliberately or mis-
takenly, or where such resolutions are inconsistent with each other or with other relevant facts.
Just as there cannot in the case of a one-man company be any reason in principle why it should
be incompetent for him to give evidence as to what the intention of his company at any given
time was, (CIR v Richmond Estates (Pty) Ltd, supra)331 so I can see no reason in principle why the
persons who are in effective control of a company cannot give evidence as to what was the inten-
tion or purpose of the company in relation to any matter at any given time. That the manage-
ment committee was for practical purposes in effective control of the affairs of the respondent
bank is clear from the evidence. It was under its leadership that the respondent’s business activi-
ties had been diversified to such an extent that, in addition to ordinary commercial banking, it
had become engaged in a number of other incidental business activities as indicated above. I
cannot find any reason in principle why the intention of the members of the management
committee in regard to any matter in which it was concerned on behalf of the respondent can-
not be taken to indicate the intention of the respondent. Confirmation for this principle is to be
found in the passage in Gower, Modern Company Law332 cited by the learned president of the Spe-
cial Court, and I cannot find anything in the judgment of the House of Lords in Tesco Supermar-
kets Ltd v Nattrass333 to which we have been referred by counsel for the appellant, which in this
regard is in conflict with that passage. In an enquiry as to the intention with which a transaction
was entered into for the purpose of the law relating to income tax, a court of law is not con-
cerned with that kind of subjective state of mind required for the purposes of the criminal law,
but rather with the purpose for which the transaction was entered into. (CIR v Paul.)334 Why that
purpose cannot, in the case of a company, be proved, inter alia, by evidence as to the state of
mind or intention of the persons in effective control of the affairs of the company is not clear,
and the exclusion of such evidence would in my view be insupportable in law. While such evi-
dence will, therefore, always be admissible, the weight thereof must necessarily depend upon the
circumstances.
...
It is true that, although the Special Court found that there was no evidence that the shares in
question were acquired with a view to profitable resale, it nevertheless took into account that re-
sale was never entirely ruled out as a future possibility . . . No one, however, readily buys property
if he expects that he will eventually have to sell it at a loss, and the taxpayer is not required to
exclude the slightest contemplation of a profitable re-sale of the asset. (COT v Levy.)335 Although
the possibility of a profitable resale of the shares in question was not excluded as a factor in their
acquisition, the Special Court found that the dominant factor which induced the respondent to
acquire the interest in the formation of the management company of the proposed growth fund

________________________

329 1956 (1) SA 602 (A) at 606.

330 1926 CPD 63 at 70.
331 At 606.
332 3 ed 148-149.
333 (1971) 2 All ER 127.
334 1956 (3) SA 335 (A) at 340-341.
335 1952 (2) SA 413 (A) at 420-421.
 Trading or Carrying on Business and Schemes of Profit-Making 333

was the prospect of the collateral benefits to its banking business. (Levy’s case, supra 336 and Afri-
can Life Investment Corporation (Pty) Ltd v SIR.)337
The question whether any amount received by a taxpayer is a capital or revenue accrual for the
purpose of the definition of ‘gross income’ in the Income Tax Act is essentially a question to be
decided upon the facts of each case. (Cf CIR v African Oxygen Ltd).338 The Special Court found on
the facts that the shares in question were acquired for the purpose of extending respondent’s
income producing concern and not for the purpose of a profit-making scheme. They constituted,
therefore, a source of profit or a capital asset the proceeds of the sale of which were accordingly
an accrual of a capital nature. Its findings of fact, reasonably supported as they are by the evi-
dence, are not assailable in this Court, and I am not persuaded that the Special Court in arriving
at its conclusion committed any error in law. The appeal is accordingly dismissed with costs.
HOLMES JA, TROLLIP JA, MULLER JA and GALGUT AJA concurred.

Notes
The taxpayer in this case was a banker, but it was also admittedly a dealer in shares – its
memorandum authorised it to deal in shares, and it had in the past disclosed its share-
dealing profits as income in its tax returns. The question was whether the particular
shares in issue in this case – the NFH shares, sometimes called the NGF shares – were
acquired and sold as part of its business of share-dealing; in other words, was its profit on
the re-sale of these shares income or capital? This depended primarily on the intention
of the company in relation to those particular shares. The Commissioner argued that the
intention of a company can be determined only from its ‘formal acts’, in other words
from resolutions. (Trust Bank had not passed any resolutions recording its intention vis-
à-vis these shares.) The court rejected this argument, and held that, just as in a one-man
company, member can give evidence as to what the intention of the company was, in a
case like the present those persons who were in control of the company could give oral
evidence as to the intention of the company on a particular matter. In this case the
management committee was for practical purposes in control of the taxpayer company,
and hence its intentions were the intention of the company. Intention, said the court,
did not mean the same as in criminal law, where it means the person’s subjective state of
mind. In tax law, intention means the purpose for which the transaction was entered into.
Counsel for the Commissioner argued that the taxpayer, like finance companies generally,
made profits on shares either by selling them at a profit or by holding them for divi-
dends, these being alternative methods of profit-making. The court found that this was not
so in the present case. The crucial finding of the court in this regard was that the taxpayer’s
dominant intention in acquiring the NFH shares was not to re-sell them at a profit (alt-
hough this was within the taxpayer’s contemplation) but to derive certain ‘collateral’ benefits
or advantages which would strengthen the income-earning structure of its banking
business. As to the fact that the taxpayer did contemplate an eventual profitable re-sale,
the court said that no-one readily buys property if he expects to sell it at a loss and a
taxpayer is not required to exclude the slightest contemplation of a profitable re-sale.

[188]
Barnato Holdings Ltd v SIR
(1978 (2) SA 440 (A), 40 SATC 75
In 1961 the taxpayer became a wholly-owned subsidiary of Johannesburg Consolidated
Investments Ltd (‘JCI’) a well-established mining house and entrepreneur. In 1963 JCI
________________________

336 At 421.
337 1969 (4) SA 259 (A) at 269-270.
338 1963 (1) SA 681 (A) at 688 and 691.
334 Income Tax in South Africa: Cases and Materials

decided that the taxpayer would henceforth be a vehicle for holding permanent invest-
ments of fixed capital. The taxpayer’s memorandum of association was amended to
reflect this purpose. In 1963 the taxpayer wrote to the Secretary for Inland Revenue,
stating that the company would not deal in shares but would hold them as permanent
investments for their dividend yield. Despite this policy, the taxpayer did in fact from
time to time sell some of its shares. Before 1969 the Revenue authorities treated the
taxpayer’s profits on share transactions as being of a capital nature. In October 1989 the
Revenue authorities informed the taxpayer that, after examining its sales of shares, they
had decided to regard it and to assess it with effect from the 1969 tax year as a dealer in
shares. The Secretary also issued revised assessments for the 1968 tax year. The taxpayer
conceded that certain sales of shares in Stellenbosch Wine Trust Ltd (‘SWT’) were
indeed trading transactions, and that it had properly been assessed in relation to the
profits on those transactions.
Issue: whether the Special Court could reasonably have found that the profit made by
the taxpayer during the 1968 and 1969 tax years from the sale of shares was income, in
that the taxpayer was trading in shares.
Held: the Special Court could reasonably have found that the taxpayer had failed to
discharge the onus of proving that the profits were of a capital nature. In particular, the
Special Court could reasonably hold that the taxpayer was dealing in shares as a second-
ary but integral part of its business.
Trollip JA: This is an income tax appeal. During the years of assessment that ended on 30 June
1968 and 1969 appellant made surpluses of R1 600 658 and R1 775 619 respectively through
disposing of some of its shareholdings in other companies. The Transvaal Special Income Tax
Court (Margo J presiding) held that those surpluses were income subject to tax under the In-
come Tax Act 58 of 1962 (‘the Act’), since appellant had not proved, as it alleged, that they were
accruals of a capital nature. Appellant has appealed against that decision direct to this court with
the consent of the respondent (‘the Secretary’).
The main facts leading to the dispute can be summarized as follows: [The judge here summa-
rised the facts, and continued:]
...
I think that the true interpretation of the judgment [of the Special Court] is this: . . . the court a
quo decided . . . that appellant’s general, primary business was and remained the holding of long-
term investments . . .; but it found . . . that it was also an integral, albeit secondary, part of appel-
lant’s business to deal in shares . . . and it concluded . . . that while each of the relevant share
transactions during the 1967, 1968, and 1969 tax years, ‘considered in isolation’, might per se be
regarded as merely a change in the holding of an investment . . . when the totality of those
transactions (ie their circumstances, nature, extent and frequency) was regarded, appellant
failed to prove that any of them fell within its primary business . . . and they must all therefore be
accepted as falling within its secondary business . . .
At the outset I should observe that, according to the African Life case (supra),339 an investment
340
shareholding company may also carry on a secondary business of dealing in shares for profit.
Whether or not it does so depends entirely upon the facts. In the present case it must be accept-
ed that the shares disposed of by appellant during the tax years of 1967, 1968 and 1969 were
originally acquired in and after 1962 with the intention that their retention would be constantly
and fairly often reviewed . . . and that they would normally be disposed of if any of the circum-
stances relating to their expected performance, enhanced market value or price and comparative
yields . . . or any similar circumstances, supervened. That such circumstances were likely to su-
pervene from time to time – shares being given to fluctuations in both fortune and value – must
have been foreseen. Indeed, appellant conceded that the switching out of such share investments
form time to time for any of those reasons was unavoidable and always contemplated as being part

________________________

339 1969 (4) SA 259 (A), 31 SATC 163.

340 At 269E-270A, 271D-F.
 Trading or Carrying on Business and Schemes of Profit-Making 335

of its business . . . That would tend to indicate prima facie that those shares were not acquired
for better or for worse, or, relatively speaking, for ‘keeps’ (ie only to be disposed of if some unu-
sual, unexpected, or special circumstance, warranting or inducing disposal, supervened), which
is the usual badge of a fixed, capital investment (see SBI v Aveling 341 . . . and the authorities there
cited). Hence a formidable and difficult onus rested on appellant to convince the court a quo
that the shares disposed of during the relevant period were nevertheless originally acquired and held
as fixed capital, or putting it another way, that those shares were not disposed of in the course of
appellant’s conducting an additional, secondary business of dealing in those shares for profit.
Now the table in para (8) affords cogent evidence that, prima facie at any rate, appellant did in-
dulge in share-dealing during the tax years of 1967, 1968, and 1969. That appears from the num-
ber of counters of shares it disposed of during those years as compared with previous years, the
proportion they annually constituted of appellant’s total shareholdings, and the fact that they had
not been held for very long (some at the longest since 1962, others for shorter periods). There is
also appellant’s concession, already mentioned, that disposals of shares in appropriate circum-
stances constituted part of its business. Lastly, the facts concerning the SWT transaction show that,
to the extent mentioned, appellant did trade in the latter shares during that period. There were
facts, therefore, to support the finding of the court a quo that dealing in those shares was, at the
relevant time, an integral, albeit secondary, part of appellant’s business.
Nor does appellant’s memorandum of association assist it in showing that the transactions were
mere changes or realizations of capital investments. For while paras (a) to (e) empower appel-
lant to carry on the business of an investment holding company, para (i), as a separate inde-
pendent object, according to para (r), empowers it to carry on the business of share-dealing (see
para (2) of the summary above). As the court a quo correctly observed:
‘the retention of the power to engage in share-dealing undoubtedly qualified the otherwise unequivocal
expressions of intention on behalf of appellant (in paras (a) to (e)), in the sense that such power permit-
ted a change of or departure from such intention.’
Could it also reasonably have been held that such dealing was for making profits? Counsel for
appellant relied heavily on the statement in the stated case that whether a profit would be
achieved or a loss sustained was not a factor that appellant took into account in deciding wheth-
er or not to dispose of any shares . . .; he maintained that the finding of the court a quo that the
share transactions were for profit was therefore not supportable at all. on this point there does
seem to be a conflict between the stated case and the finding of the court a quo. The general rule
is that if such a conflict cannot be reconciled, the finding of the court a quo in its judgment must
prevail (see W F Johnstone & Co Ltd v CIR;342 Goodrick v CIR).343 The above apparent conflict can be
reconciled, I think, in this way. The statement in the stated case relates to the disposal of shares
as a realization of a capital investment in the course of appellant’s primary business of holding
such investments, while the finding of the court a quo relates to appellant’s disposals of shares in
the course of its secondary business as a share-dealer during the tax years of 1967 to 1969. There
is evidence that reasonably supports the latter finding . . .
On all the aforegoing facts I think that the court a quo could reasonably find that appellant, in
acquiring and disposing of the shares in question, was prima facie dealing in them for an overall
profit as a secondary but integral part of its business, ie that appellant had not discharged the
formidable and difficult onus resting on it of proving the contrary. It was contended for appel-
lant that if it were so dealing in shares it could and would have sold a far greater number of
shares when the market was favourable. But the answer to that is that its primary business was
investment holding, not share-dealing, and it wished to retain that character. That some shares
were sold at a loss was not in the circumstances significant, as the court a quo rightly observed,
since it was the overall profit motive that was important in conducting its secondary business –
see the African Life case (supra).344 . . .
. . . It is true that whether or not an investment holding company also carries on a secondary
business or share-dealing is essentially a question of fact depending upon the totality of the
________________________

341 1978 (1) SA 862 (A), 40 SATC 1.

342 1951 (2) SA 283 (A) at 290B-D.
343 1959 (3) SA 623 (A) at 529F-H.
344 At 272E.
336 Income Tax in South Africa: Cases and Materials

circumstances. Hence a decision resolving the problem in one case is unlikely to be of assistance
in another case. But the broad, fundamental facts of the African Life case so closely resemble
those in the present case that I think the court a quo rightly relied on it for general guidance as
to the correct approach to adopt.
It follows that the conclusion of the court a quo that appellant failed to prove that any of the net
profits it derived from the disposals of shares in the 1969 tax year were capital accruals is unassaila-
ble and the appeal must fail. . . .
The appeal is dismissed . . .
MULLER JA, KOTZE JA, MILLER JA and DIEMONT JA concurred.

Notes
This involved an appeal under the ‘old’ s 86, in which an appeal lay only on questions of
law. Hence, the question before the Appellate Division was not whether it agreed with
the decision of the Special Court, but whether, on the facts, that decision could reasona-
bly have been reached.345 The Special Court had relied heavily on the decision in [185]
African Life and, on appeal, the Appellate Division said that, in view of the close similari-
ty of its facts, such reliance was correct.346 On the facts, the Special Court had found that
the taxpayer in acquiring and disposing of the shares in issue, had prima facie been
dealing in them for an overall profit as a secondary but integral part of its business, and
had not discharged the onus of proving the contrary.347 The Appellate Division held that
this was a conclusion which it could reasonably have reached.
In this kind of analysis, a crucial question is – what is the criterion according to which
the taxpayer decides to sell a particular share? (In [185] African Life no evidence was led
on this crucial question.)348 In Barnato Holdings, the taxpayer conceded that, if the market
value of a share rose without a corresponding increase in its dividend yield, its policy was
to sell it. Ex hypothesi, that share would be sold at a profit. Hence, on the taxpayer’s own
admission, its business policy involved selecting for sale shares which would inevitably
yield a profit on such sale.349

Where a company is a trader (for example, in fixed property), its members may hold their shares on
capital account, with the result that the profit on the sale of their shares is capital, not income.

[189]
Bloch v SIR
1980 (2) SA 401 (C), 42 SATC 7
The taxpayer and several other persons formed a company, Parow Development Cor-
poration Ltd, and this company purchased an area of land called ‘Sonnendal’ for the
purpose of sub-dividing it into a residential township and selling the stands to the public.
The company was formed in November 1966 with 200 R1 shares which were allotted to
16 persons. Because of the spread of shareholdings, no individual shareholder could
alone determine the policy of the company. It was common cause that the company was
a land-jobbing company and would have to pay tax in respect of sites sold by it.
Towards the end of 1968, property prices suddenly leaped upwards. On 21 May 1969
the shareholders of the company accepted a ‘fantastic’ offer from Nasionale Bouvereniging
________________________

345 At SATC 90.

346 At SATC 93.
347 At SATC 92.
348 See African Life Investment Corp Ltd 1969 (4) SA 259 (A), 31 SATC 163 at 182.
349 At SATC 92
 Trading or Carrying on Business and Schemes of Profit-Making 337

Versekeraars Beperk to purchase all the shares in Parow Development Corporation for
R572 000. At this time, none of the residential sites had been sold nor had any agents
been appointed to handle the sales. The profit made by the taxpayer on the sale of his
shares was R21 292 00. The Secretary for Inland Revenue included this amount in the
taxpayer’s gross income.
Issue: was the share of the profits received by the taxpayer on the sale of his shares in
Parow Development Corporation Ltd, income or capital?
Held: the profits in question were capital. Although the company was a dealer in land,
the taxpayer held his shares in the company on capital account.
Grosskopf J: This is an appeal . . . against a decision of the Special Court for hearing income tax
appeals . . . The point at issue is whether a surplus on the sale of ten shares in a private company,
Parow Development Corporation (Pty) Ltd (‘the company’), was a capital gain or a revenue
profit. The president of the Special Court (Van Winsen J) held that it was a capital gain. The
other two members held, however, that the appellant had failed to discharge the onus that he
bought and held the shares as an investment, or that he sold them to liquidate his investment, or
that he did not buy, hold and sell them in a scheme of money-making. The appellant now ap-
peals against this decision.
...
In my view this appeal raises the following questions:
What did the appellant have to prove in the Special Court?
In what respects did the Special Court find against him?
On what basis can we interfere with the Special Court’s finding?
When these questions have been answered, there remains the final one – is interference war-
ranted in the circumstances of the present case?
The answer to the first question may be simply stated – the appellant had to prove that the profit
on the sale of the shares fell within the expression ‘receipts or accruals of a capital nature’ as
used in the definition of ‘gross income’ in s 1 of the Act. To prove this he had to show that the
shares were an item of fixed capital in his hands. This turns on the purpose with which he ac-
quired and held them. The essence of fixed capital, as distinct from floating capital, is ‘’n ele-
ment van permanentheid, in die sin dat daar ’n bedoeling is om die betrokke bate min of meer
permanent te hou met die doel dat dit inkomste moet voortbring’ (SBI v Aveling).350 The purpose
with which a taxpayer acquires or holds an asset is a question of fact. Vide CIR v Paul;351 African
Life Investment Corporation v Secretary for Inland Revenue;352 Barnato Holdings Ltd v SIR.353
If the taxpayer has mixed purposes, it is his ‘dominant purpose’ which is decisive. (COT v Levy;354
CIR v Paul (supra)). Where there are mixed purposes, it may be difficult to determine whether a
particular purpose is ‘dominant’ in the sense in which this expression has been used in the cases.
355 356
See eg African Life Investment Corp case (supra); Durban North Traders Ltd v CIR; Barnato Hold-
ings case (supra).357 What is clear, however, is that a taxpayer need not exclude any thought of
possibly selling the asset in question before it can be considered an item of fixed capital. (Vide
Levy’s case (supra).)
In the present case we are dealing with the profit on the sale of the appellant’s shares. To show
that this was a receipt of a capital nature, the appellant therefore had to show that his dominant
purpose in holding the shares was to hold them more or less permanently so as to produce in-
come. This onus had to be discharged on the ordinary basis applied in civil cases, ie a balance of
probabilities. I emphasize this because, as I shall indicate, the majority members of the court
seem in my view to have required too high a standard of proof of the appellant.
________________________

350 1978 (1) SA 862 (A) at 880.

351 1956 (3) SA 335 (A) at 341.
352 1969 (4) SA 259 (A) at 268, 274.
353 1978 (2) SA 440 (A) at 453.
354 1952 (2) SA 413 (A) at 420-421.
355 At 269E-270A.
356 1956 (4) SA 594 (A) at 604.
357 At 455F-H.
338 Income Tax in South Africa: Cases and Materials

This brings me to the actual findings of the Special Court. The final conclusion in the judgment
is ‘that the appellant has failed to discharge the onus that he bought and held the shares as an
investment or that he sold them to liquidate his investment and that he did not buy, hold and
sell them in a scheme of money-making’.
...
. . . I shall assume without deciding that the [special] court’s conclusion . . . amounted to a find-
ing of fact that the evidence was insufficient to prove that the appellant had a dominant purpose
to buy, hold and sell the shares as an item of fixed capital. The question then is whether this is a
conclusion which could reasonably have been reached on all the evidence.
The appellant himself did not give evidence. This was because of ill health. No adverse inference
was accordingly drawn (or could be drawn) from his failure to give evidence, although such
failure necessarily reduced the quantum of evidence available to establish his state of mind. Evi-
dence was, however, given by two of the other shareholders, Messrs Israel and Aaron, that all the
shareholders had originally intended to develop the township and to sell off the individual plots
and to make their profit in the form of dividends received from the company. According to the-
se witnesses, the increase in land values in the area caused them to change their intention and to
dispose of their equity by accepting Nasionale Bouvereniging’s offer which they all felt was too
good to reject. According to the Statement of Case, ‘this evidence was not accepted in the major-
ity judgment of the Court’ . . .
...
I turn now to the reasons advanced by the majority for not accepting the abovementioned evi-
dence. At the outset I should state that no adverse findings were made on the demeanour or
credibility of these witnesses. The court was influenced rather by the objective circumstances of
the case in holding that the ipsi dixerunt of these witnesses was not sufficient to discharge the
onus resting on the appellant.
The approach of the majority was that the only purpose of the company was to buy and make a
profit on the sale of its sole asset. In these circumstances, they held, the onus is not easily dis-
charged that the shares were held as an investment, and that the shareholders did not intend to
profit from their purchase in any other way. With respect, it is difficult to see why this should be
so. Once the company’s sole asset was sold, which would occur over a period of time, the shares
would become valueless. This does not mean that the shares were not held for the purpose of
earning dividends while the company was operating actively . . .
...
. . . I must accept that the Special Court could not reasonably have found that the boom in land
prices did not have any bearing on the intentions of the shareholders.
The court then expressed the view that the financial relationships between shareholders and
company were more akin to venture than investment. The significance of this distinction is not
clear to me. I accept that the shareholders engaged in a joint venture. However, this took the
form of a company in which they invested their money and the question before the court was to
determine the purpose with which they held shares in this company. To describe the scheme as a
‘venture’ does not in my view assist in answering this question . . .
...
Mr Tebbutt also argued in the alternative, rather faintly it seemed to me, ‘that after October 1968
the appellant ‘crossed the Rubicon’ and decided to enter into a profit-making scheme with the
property (or his shares in the property-owning company) as his stock-in-trade’. (I quote from the
written heads of argument.) Suffice it to say that there is no evidence to support his contention
save the single fact that it was the appellant who approached the Nasionale Bouvereniging with a
proposal to buy the company. This fact, as I have indicated, is not inconsistent with an intention
to realize the appellant’s investment at the best possible price. I do not think therefore that
there is any warrant for holding that the appellant’s intention changed in 1968.
. . . The majority of the members of the court and Mr Tebbutt mentioned certain aspects which
tend to throw some doubt on the acceptability of the evidence relating to the purpose with
which the appellant, and other taxpayers, held the shares in the company. I find it impossible to
say that this doubt could not reasonably have been entertained. This is, however, a far cry from
 Trading or Carrying on Business and Schemes of Profit-Making 339

finding that an onus has not been discharged on a balance of probabilities. In my view the true
and only reasonable conclusion from the evidence set out in the Statement of Case contradicts
the finding of the majority (Cf Edwards (Inspector of Taxes) v Bairstow & another 358 – a formulation
which has often been followed in our courts). In other words, I consider that the only reasonable
conclusion that could be drawn from the evidence is that arrived at by the President, viz that the
appellant and the other shareholders entered upon the project with the object of investing their
capital, and sold their shares as a realization of their investment.
It follows that the appeal must be upheld with costs . . .
FAGAN J concurred with the judgment of GROSSKOPF J.
Vos J: I agree. I wish to question one point however. In SBI v Aveling359 fixed capital is described
as something held with an element of permanency and which will produce income for the hold-
er. What about a house, or a motor car? If these are used by the owner to live in or to drive in
they do not produce income, but only economic utilities. Yet they are normally capital goods.
Other examples are paintings and antique furniture. Hence, with respect, I would prefer to say
that capital is that which is held with an element of permanency and with the object that it
should produce an economic utility for the holder.

Notes
This decision holds that, to rebut an assessment, a taxpayer must prove affirmatively that
the amount received by him was of a capital nature, because the property in question was
fixed capital as opposed to floating capital in his hands. It would not, for example, be
sufficient for the taxpayer simply to cast doubt on whether the amount derived by him
was income. The taxpayer in Bloch succeeded in showing, in relation to his acquisition of
the shares, ‘’n element van permanentheid, in die sin dat daar ’n bedoeling is om die
betrokke bate min of meer permanent te hou met die doel dat dit inkomste moet
voortbring’ by proving that he intended to derive income by way of dividends on his
shares. The achilles’ heel of the taxpayer’s argument was the possibility of a co-existing
intention of selling the shares at a profit if it became expedient to do so. Whether there
was indeed a dual intention turned on the taxpayer’s intention in relation to the shares,
and the taxpayer succeeded in discharging the onus of proof that his intention was to
hold the shares indefinitely.
It is interesting to compare this decision with that in [182] Elandsheuwel. In Eland-
sheuwel a company which held land on capital account was taken over by dealers in land.
In Bloch the company was a dealer in land, and the shareholders held their shares on
capital account. In Elandsheuwel the majority judgments seem to recoil from the notion
that speculators in land can escape tax by channelling their property transactions
through their company, and Wessels JA reached the startling conclusion that the share-
holders had entered into a scheme of profit-making with their own company.
One would have thought that any worldly-wise person goes into a Bloch-type venture,
well aware that the profit can come in one of two ways: either the company will sell the
land and declare dividends, or some larger player will buy out his shares. Seasoned
business people like Bloch would find it hard to deny that this two-pronged possibility
was not firmly within their contemplation from the outset. In the event, it does not seem
from the reported decision that there was cross-examination on this point, and the ailing
Bloch’s eloquent proxy managed to convince the court that he and his colleagues had
had no such dual intention.

________________________

358 [1955] 3 All ER (HL) 48 at 57.

359 1978 (1) SA 862 at 880.
340 Income Tax in South Africa: Cases and Materials

An individual who acquires shares for the primary purpose of earning dividend income may have a
secondary purpose of dealing in shares, in which event the proceeds from the sale of shares is income
and taxable as such. The test for establishing the existence of such a secondary purpose in the case of
an individual is the same as applies to companies.

[190]
CIR v Nussbaum
1996 (4) SA 1156 (A)
The taxpayer was a retired schoolteacher. In 1946 he inherited certain shares quoted on
the Johannesburg Stock Exchange. Upon that foundation, with active and careful invest-
ment, he built a substantial portfolio of quoted shares during the ensuing years. For the
tax years 1982, 1983 and 1984 he disclosed in his tax returns share sales of a quantity and
profitability that prompted SARS, in an additional assessment for each of those years, to
subject the proceeds to tax. The taxpayer objected, contending that the proceeds of the
sales were of a capital nature.
On appeal to the Full Bench of the Cape of Good Hope Provincial Division, the assess-
ments were set aside.
On further appeal, the Appellate Division held that the taxpayer, despite having a
primary purpose of deriving dividend income, had a secondary purpose of dealing in
shares for profit. Hence the proceeds of the sale of shares, in the tax years in question,
formed part of his gross income.
Howie JA: Respondent was the only witness in the case. The salient evidence he gave may be
summarised as follows. Dealing first with share acquisitions, he said that during his working life
his annual income from investments and salary had always more than covered his living expens-
es. His surplus income therefore enabled him over the years consistently to add to the share
portfolio he had inherited in 1946. In addition, he from time to time acquired shares by way of
rights issues and he inherited shares on two further occasions.
Respondent said his investment decisions were always based on a pattern of expectations that
a share would pay ‘adequate’ dividends in the near term or ‘more than adequate’ dividends
later on. When he bought shares he did so with the intention to produce a sound and increasing
dividend income and to protect the capital thus invested from erosion by inflation. He had
never bought a share for profitable resale. His holdings represented investment in all the
major sectors of the share market and also comprised a good spread within each sector.
This diversity was reflected in the fact that at the close of the 1982 tax year he held shares in over
140 companies.
As far as share disposals were concerned, respondent distinguished the period prior to 1982
from the three tax years thereafter. Up till 1982 he tended to sell his shareholding in a company,
either partially or entirely, if he considered that a better dividend income could be achieved by
acquiring shares in some other company, or when the level of dividend he had anticipated when
buying the share was, for whatever reason, not achieved subsequently. He also sold shares when
he felt that his holdings in a particular company distorted the overall balance which he aimed to
achieve within the portfolio as a whole and within each individual sector or when rights issues
had landed him with what he referred to as ‘odds and ends’.
Respondent endorsed in evidence comments he had made in an annexure to his 1978 income
return in which he said that successful share investment necessitated ‘a constant watch . . . on
the portfolio’ and ‘changes . . . all the time to protect and enhance the quality and quantity of
earnings as conditions change’.
Referring to the three tax years in question, respondent said that his approach became decided-
ly different. He turned 60 during 1981 and resolved to build up some readily available cash re-
sources with which to meet expected future medical expenditure (he had suffered a heart attack
in 1976 and had no medical aid) and to cover the cost of buying himself a home, which he then
contemplated doing (he had lived for many years in a rented flat). By this time interest rates in
 Trading or Carrying on Business and Schemes of Profit-Making 341

the money market were unprecedentedly high. This not only rendered fixed interest investment
especially attractive but led him to think that dividend payments would decrease as companies
got into financial difficulties. Aiming to have about 15% of his investment capital in fixed inter-
est, he set about raising the necessary cash by selling shares ‘bit by bit’ over the next three years.
Having disinvested from the share market and having invested savings, he achieved this aim by
the end of the 1984 tax year. By that stage his holding of cash and stock in the money market
totalled some R750 000. This enabled him to earn twice as much from interest in the 1985 tax
year compared with his interest income in the 1984 tax year.
Respondent’s net disinvestment from the share market over the three tax years now in issue
amounted to R307 000. This, he said, was the only time he had deliberately embarked upon
share selling in order to realise net surpluses. What did remain the same as in previous years,
however, was the criterion on which he based his decisions to sell during these three years. That
was the consideration that a share was producing a poor dividend yield. If the yield was poor he
sold regardless of profit or loss. As he put it:
‘When selling a share I think it is a big mistake to look at cost because it is the future that counts and not
the past.’ . . .
That outline recounts the essence of respondent’s evidence-in-chief.
Under cross-examination respondent revealed that he was keenly competitive by nature and that
his share portfolio was his predominant interest in life. He said he enjoyed increasing his income
from it. He kept a close watch on his portfolio and never let it ‘sleep’ in his efforts to effect that
increase. However, he reiterated that he would sell, not for the profit to be made, but because
the shares concerned were giving a lower than warranted dividend return. It was always his pur-
pose to aim for the highest possible yield together with a good spread of investments. And by
yield – it is clear –he meant not merely the amount of the dividend but that amount expressed as
a percentage return not upon historic cost but upon current market value. However, there were
certain instances where disposal was unavoidable. This occurred where a company in which he
held shares was taken over and the shares were paid for in cash without an offer of fresh shares
in substitution . . .
As at the close of the 1984 tax year the portfolio comprised shares in 150 companies and its mar-
ket value was approximately R2,9 million . . .
In the judgment of the Court below [the full court of the Cape High Court] it was found that no
reasons existed for disbelieving respondent’s assertions that he had not sold shares pursuant to a
profit-making strategy. It was accordingly held that the profits he made were but incidental to his
‘primary object or dominant purpose of increasing his dividend income’.
Before this Court counsel for [SARS] accepted that prior to the tax years in question respondent
had bought shares solely for the purpose of investment and had held them as such. However, so
it was argued, by the start of the 1982 tax year he had changed his intention and had gone over
to holding them, if not also buying them, with a dual purpose. Although his main aim was still
investment, his secondary purpose was to use his portfolio as stock-in-trade and to sell shares for
profit whenever he felt it appropriate to do so.
For respondent it was contended that his purpose throughout was to buy and hold for invest-
ment purposes and that he only disposed of shares when forced by takeovers to do so or when it
was prudent to alter the nature of his investment by reason, for example, of the need to secure a
better dividend yield or to switch into fixed-interest investments.
The legal principles to be applied in resolving the present dispute are settled. The broad ques-
tion to be answered is whether the sales effected by respondent during the three years under
discussion amounted to the realisation of capital assets or the disposal of trading stock in the
course of carrying on a business: compare Elandsheuwel Farming (Edms) Bpk v SBI.360 However,
because appellant contended for respondent’s having had, contemporaneously with his main
investment purpose, a secondary profit-making purpose, the enquiry becomes more specific. It is
then whether respondent indeed had such a secondary purpose . . .

________________________

360 1978 (1) SA 101 (A) at 118B-C.

342 Income Tax in South Africa: Cases and Materials

The concept of a twofold object consisting of a primary or main purpose and a B secondary pur-
pose was first mooted in COT of Taxes v Booysens Estates Ltd.361 That was in relation to a corporate
taxpayer but the principle would be the same, in the present context, in the case of an individual
taxpayer. The difference usually highlighted is that continuity is a necessary element in the car-
rying on of a business in the case of an individual but not of a company: CIR v Leydenberg Plati-
num Ltd.362 (That the frequency of respondent’s transactions, viewing them purely in isolation at
this stage, provides evidence of such continuity is beyond doubt.)
The concept of a main and a secondary purpose was fully examined, defined and applied in
African Life Investment Corporation (Pty) Ltd v SIR.363 It was applied again in Barnato Holdings Ltd v
SIR.364 The question in both cases was whether an investment share-holding company had carried
on a secondary business of share-dealing for profit.
In African Life, Steyn CJ said the following:
‘Whether or not a purpose is dominant in the sense that another co-existing purpose may be effected at a
profit without attracting liability for tax, is a matter of degree depending on the circumstances of the case.
A purpose may be a main purpose without being dominant in this sense. I shall not attempt a precise defi-
nition of the distinction, but there would, I consider, be such a main purpose where there is a further
purpose simultaneously pursued by way of an additional, albeit subsidiary, activity calculated and intended
to yield a profit. Where, for instance, a company whose main concern as an investor is an income from div-
idends, confines its purchases to sound equities with the highest dividend yield, but, at the same time, in-
tends, in order to increase its income, to sell whenever it is able to do so at a substantial profit, that
intention, although so closely connected with its main object that it may be said to be inseparable from it,
would not ordinarily rank as merely incidental to such a dominant purpose. As far back as in Commissioner
of Taxes v Booysens’s Estates Ltd 1918 AD 576 at 602 and 604, it was pointed out that, whatever the primary
objects of a company may be, it is quite possible that it may derive income in the ordinary course of busi-
ness from carrying out its secondary objects . . .’
Apart from the fact that in the case of a company its declared objects and its manifestly being in
business to make profits will generally make it easier to infer the secondary purpose under
consideration than it would be in the case of an individual, there is no reason why the dictum in
African Life should not apply in principle also to an individual taxpayer.
Before proceeding to the conclusion to be drawn from the facts of the present case it is apposite
to refer again to the matter of Barnato Holdings, this time in connection with the onus.
In that matter the taxpayer, in the 1967, 1968 and 1969 tax years, sold its shares in one or more
of three situations. The first was where the performance of the company in which the shares
were held failed to reach or maintain the minimum expectations required of a satisfactory invest-
ment. The second was where the capital value of the shares had become such in relation to the
return on the shares that it was more economical to replace the investment with another from
which such capital would produce a substantially better return, for example, where the market
value had increased appreciably without a corresponding increase in dividend yield. And the
third was where, in the same field of investment, the performance of another company indicated
the desirability of a switch to that company to achieve a substantially better dividend yield. . . .
Having related these facts, the judgment proceeds:
‘That such circumstances were likely to supervene from time to time – shares being given to fluctuations in
both fortune and value – must have been foreseen. Indeed, appellant conceded that the switching out of
such share investments from time to time for any of those reasons was unavoidable and always contemplat-
ed as being part of its business. . . . That would tend to indicate prima facie that those shares were not ac-
quired for better or for worse, or, relatively speaking, for “keeps” (ie only to be disposed of if some
unusual, unexpected or special circumstance, warranting or inducing disposal, supervened), which is the
usual badge of a fixed, capital investment. . . . Hence a formidable and difficult onus rested on appellant
to convince the Court a quo that the shares disposed of . . . were nevertheless originally acquired and held
as fixed capital or, putting it another way, that those shares were not disposed of in the course of appel-
lant’s conducting an additional, secondary business of dealing in those shares for profit.’
It is clear from the evidence summarised earlier that all three abovementioned considerations
which motivated the taxpayer in Barnato Holdings motivated I respondent in the present case. He
was therefore saddled with a ‘formidable and difficult onus’.
________________________

361 1918 AD 576 at 604.

362 1918 AD 576 at 145.
363 1969 (4) SA 259 (A) at 269E-270B.
364 1969 (4) SA 259 (A) at 453G.
 Trading or Carrying on Business and Schemes of Profit-Making 343

Reverting to the facts, one is struck forcibly by the scale and frequency of respondent’s share
transactions. Those considerations are, of course, not conclusive but they are of major im-
portance. Compare London Australia Investment Co Ltd v FCT.365 There is also the fact that the
sales were almost without exception profitable. Indeed, respondent’s annual profits substantially
exceeded his annual dividend income. And the profits increased every year and markedly so in
the 1984 tax year.
Respondent attributed the profits he made to an inflationary climate and the fact that he had
held the shares concerned for many years. That explanation is unacceptable for two reasons. It
takes no account of the considerable number and frequency of those sales which concerned
shares held for only five years or less. The statistics set out above reveal the details. The profits
realised by way of those sales represent a significant, and in 1983 a telling, percentage of the
total profit for each year. Secondly, respondent’s having sold shares where their dividend yield
had become unacceptably low carries the following significance. Because dividend yield is de-
pendent, inter alia, on market value, dividend yield can only decline if the market value of the
share concerned goes up or if, without a fall in market value, the dividends themselves decrease.
In none of the instances with which respondent dealt in his evidence concerning the sale of low-
yielding shares did he allege that the fall in yield had been due to a decrease in the quantum of
the dividends as such . . . On the evidence, therefore, one must conclude that the reason for the
decreases in dividend yield to which respondent referred was the fact that the market value of
the shares had increased. It was essentially this factor, irrespective of the length of time for which
the shares had been held, which occasioned profit.
Given the close watch which respondent kept on his portfolio and on every shareholding within
it, and bearing in mind his meticulous attention to detail, it is most unlikely that he was unaware
of the profit implication in selling when dividend yield had fallen.
Respondent’s counsel argued, with reference to CIR v Pick ’n Pay Employee Share Purchase Trust,366
that the profits he made were merely incidental and not worked for. In that case, however, as
explained in the judgment, the evidence established that had the scheme involved there operat-
ed ideally and to its full potential there would have been no profits. There were also other fac-
tors which showed that profits were not inevitable. Apart from profits not having been intended,
they were not worked for and were purely fortuitous in the sense of being an incidental by-
product. The same conclusion cannot be drawn in the present case. Not only was profit inherent
in the sale of shares whose dividend yield had dropped but respondent manifestly worked for
it. He ‘farmed’ his portfolio assiduously. The number, frequency and profitability of sales,
especially of short-term shares, bears clear enough testimony to that . . .
One may conclude by saying that whilst an investor buys shares ‘for keeps’ and, generally, adds
to his portfolio by employing surplus existing income, respondent’s share transactions enlarged
the value of his portfolio (at cost) from some R904 000 at the start of 1982 to just over R1,3 mil-
lion by the end of 1984 and at the same time generated very considerable, annually increasing
funds over and above his existing income. Indeed, employment of his capital in this way consti-
tuted an additional method of earning income.
For all these reasons it follows that the Court a quo erred in holding that the profits in question
were merely incidental to respondent’s investment activities and that the onus was discharged.
That view is not defensible once one looks beyond his ipse dixit to all the facts in the case as the
Special Court rightly did. In my opinion respondent had a secondary, profit-making purpose. At
best for him he failed to discharge the onus of showing the contrary.
The appeal must therefore succeed . . . The order of the Court a quo is set aside and substituted
therefor is the following ‘The appeal is dismissed, with costs.’
CORBETT CJ, NESTADT JA, NIENABER JA and ZULMAN AJA concurred.

Notes
This was the first reported decision in which an individual, as opposed to a company, was
held to have a secondary purpose of dealing in shares, notwithstanding a primary purpose
________________________

365 7 ATR 757 at 770 and 772.

366 1992 (4) SA 39 (A).
344 Income Tax in South Africa: Cases and Materials

of earning dividend income. The decision holds that the test for establishing such a
secondary purpose in the case of an individual is the same as the test for a secondary
purpose in the case of a company, as laid down in African Life and Barnato Holdings.
Generally, where a taxpayer acquires an asset with several purposes, the law has regard
only to the dominant purpose and ignores the subsidiary purposes. However, in African
Life it was held that where a company has two purposes, it does not follow that one of
those purposes is dominant. A company can have two main purposes, which it pursues
simultaneously, in which event the second purpose is not merely subsidiary. Thus, for
example, a company which purchases shares for the main purpose of deriving income
from dividends, may have a further purpose of increasing its income by selling shares
whenever it is able to do so at a substantial profit. If the latter purpose is not merely
subsidiary, then the sales of shares will be part of its ordinary business, and the proceeds
of such sales will be taxable as income. In other words, a secondary purpose is not a
‘subsidiary’ purpose, but a purpose pursued in tandem with the main purpose.
In Nussbaum, these principles were held to be applicable to individuals as well.
It is worth noting that Nussbaum was not a case of the average individual investor in the
stock market who periodically reviews the portfolio and switches some shares. In this
case, an astute investor assiduously ‘farmed’ his vast share portfolio of some 150 different
counters.
The decision in Nussbaum has not changed the legal criteria for distinguishing be-
tween capital and revenue in relation to shares listed on the stock exchange. It merely
applied to an individual the tests, previously applied to companies, for determining
whether there was a secondary purpose of dealing in shares.

§10 Gambling profits and losses

Gambling profits are not taxable and gambling losses are not deductible unless the taxpayer was
carrying on a business of gambling.

[191]
Brajkovich v FCT
89 ATC 5227 (Full Federal Court of Australia)
The taxpayer was a life insurance salesman, real estate agent and property developer. In
1979, aged 36, he believed he was wealthy enough to retire from most of his business
activities and concentrate on gambling. From the end of 1979 he gambled heavily,
attending horse races two or three times a week, and usually betting on credit. He also
gambled at card games and on football games. He did not keep formal records of his
gambling, except for cheque stubs for the payment of his gambling debts. He owned a
number of racehorses which he regarded as ancillary to his gambling. The taxpayer
testified that by November 1982 he had lost almost $950 000 and had decided to scale
down his gambling. Thereafter he gambled for recreation only. For the years of assess-
ment the taxpayer claimed as a deduction the excess of his gambling losses over his wins.
He did not claim a deduction for his horse training expenses.
Issue: did the taxpayer’s gambling activities amount to a business, thereby entitling him
to deduct his gambling losses?
Held: in the negative.
 Trading or Carrying on Business and Schemes of Profit-Making 345

Pincus, French and Gunmow JJ: We think it convenient first to consider a group of High Court
cases dealing specifically with the question of gambling gains and losses. In Jones v FCT 367 a grazi-
er made substantial losses by betting at horse and pony racecourses. The appellant was unable to
say how much he won or lost because he ‘almost invariably lost’; in these respects, in our opinion
the case has some similarity to the present. Evatt J found that ‘the element of sport, excitement
and amusement was the main attraction’ and we think that was so here also. His Honour con-
cluded:
‘the appellant acquired and developed a bad habit which he was in a special position to gratify. I do not
think that the gratification of this habit was a carrying on of any business on his part, despite his many bets
and his heavy losses.’
Four years later, the same judge heard a similar case and distinguished Jones: Trautwein v FCT.368
The bases on which the taxpayer in Trautwein was held to be in a different position was that his
betting, which was described as ‘systematic’, was ‘part and parcel of the carrying on of a horse
racing business’, which included ownership of a stud farm and racing owned or leased horses
‘sometimes . . . to a very considerable extent’. Evatt J emphasised, in his reasons, the large and
organised scale of the taxpayer’s operations and concluded that his case was ‘much more analo-
gous to that of the bookmaker himself than to that of the mere punter at starting price . . .’369
In Martin’s case370 (referred to above), the successful appellant was a hotelkeeper and then a
farmer during the relevant period. He kept proper records of his wins and losses and in two of
371
the relevant years raced and bred racehorses. The Full High Court remarked:
‘The onus . . . is on the appellant to satisfy the Court that the extent to which he indulged in betting and
racing and breeding racehorses was not so considerable and systematic and organised that it could be said
to exceed the activities of a keen follower of the turf and amount to the carrying on of a business.’
The Court went on to point out that the taxpayer frequented only one racecourse and then only
372
on ordinary racing days; he averaged about one bet per race. The Court thought the evidence
illustrated:
‘The normal and usual activities and nothing nor of persons who derive pleasure from betting on the
racecourse and racing under their own colours.’
[In R v Connare]373 . . . McTiernan J remarked:374
‘Some trades are more adventurous or speculative than others, but trade or commerce as a branch of hu-
man activity belongs to an order entirely different from gaming or gambling. Whether a particular activity
falls within the one or the other order is a matter of social opinion rather than jurisprudence.’
His Honour then cited Dr Johnson for the propositions attributed to him by Boswell that:
‘Gaming is a mode of transferring property without producing any intermediate good. Trade gives
employment to a numbers and so provides immediate good.’
...
. . . It is true that the borderline between commerce on the one hand and gambling on the other
may seem uncertain, as to some activities. But there is no doubt into which category the present
appellant’s activities fell; he was merely gambling. Nor can it, in our view, be doubted that in the
proper use of language and for the purposes of income tax law, gambling as ordinarily conduct-
ed by members of the gambling public will but seldom be classified as a ‘business’, even where
there are large gains or losses.
The principle criteria by which questions of the present sort appear to have been judged are the
following:
1. whether the betting is conducted in a systematic, organised and ‘businesslike’ way;
2. its scale: i.e. the size of the wins and losses;
________________________

367 (1932) 2 ATD 16.

368 (1936) 56 CLR 196.
369 At 206-207.
370 (1953) 90 CLR 470.
371 At 479.
372 At 481.
373 (1939) 61 CLR 596.
374 At 631.
346 Income Tax in South Africa: Cases and Materials

3. whether the betting is related to, or part of, other activities of a businesslike character, e.g.
breeding horses.
4. whether the bettor appears to engage in his activity principally for profit or principally for
pleasure;
5. whether the form of betting chosen is likely to reward skill and judgment or depends purely
on chance;
6. whether the gambling activity in question is a kind which is ordinarily thought of as a hobby
or pastime.
...
On the question of skill and chance, some comment should be made. Gambling which involves a
significant element of skill, for example a professional golfer’s betting on himself, is more likely
to have tax consequences than gambling on merely random events. It is difficult to imagine
circumstances in which people in the latter category could be regarded as in a gambling business.
Particularly is that so where the form of gambling chosen is such that the ‘house’ takes a per-
centage, so that the overall result is necessarily a continual diminution of the collective funds of
the customers. Although many roulette players sometimes earn substantial sums by their efforts,
it is hard to see how one could characterise as a business playing a game in which the results are
(or should be) purely random and in which there is a high probability that each player will lose
in the long run . . .
We agree also with the learned primary Judge that, in his punting and card-playing activities, the
appellant was not engaged in any business. His evidence shows that he had from his youth a
simple passion for gambling on a large scale; on the authorities, merely indulging that, without
more, is not engaging in a business. And more as a matter of usage than logic, it may be said that
the gambler who seeks to demonstrate that he is thereby a businessman has more to show by way
of system and profit motive than those who engage in more conventionally commercial activities.
...
We respectfully agree with the conclusion arrived at by the learned primary Judge. The appeals
will be dismissed with costs.

§11 Trading stock

‘Trading stock’, as defined in the Income Tax Act, includes work in progress even if the property in
question is not saleable nor intended to be sold in its current state; its value must therefore be includ-
ed in income in terms of s 22.

[192]
Richards Bay Iron & Titanium (Pty) Ltd v CIR
1996 (1) SA 311 (A)
The coastal dunes in the vicinity of Richards Bay are rich in certain minerals. The two
taxpayer companies (whose appeals were consolidated in these proceedings) joined
forces to extract and exploit the minerals. This involved a number of operations which
ultimately yielded titanium slag and iron of high purity, both of which were marketable
as raw materials. In the course of the operations there were brought into existence, at
various stages, more than a dozen ‘stockpiles’ of materials. These stockpiles required
further processing before anything would emerge that was capable of being sold.
In their tax returns for the period 1987 to 1990, the appellants subtracted from their
trading income all the deductible expenses incurred in producing the stockpiles, but did
not include in their income the value of the stockpiles themselves. The appellants con-
tended that they had acted correctly in ignoring the economic and financial benefit
which had accrued to them as a result of that expenditure. The Commissioner contended
that the stockpiles constituted ‘trading stock’, as defined in the Income Tax Act, and that
s 22 obliged the appellants to include the value in their trading income. The Commissioner
 Trading or Carrying on Business and Schemes of Profit-Making 347

accordingly assessed the appellants on the basis that the value of the stockpiles (which he
termed ‘increase in work in progress stock’) must be included in their income.
Issue: were the stockpiles ‘trading stock’ as defined in the Income Tax Act?
Held: in the affirmative. The stockpiles in question constituted work in progress and
were ‘trading stock’ within the meaning of the definition (as it stood in 1989) even
though they were not saleable nor intended to be sold in their current state; their value
to the taxpayer had to be included in trading income in terms of s 22 in accordance with
generally the accepted in accounting practice which recognises that things which are still
in the process of being manufactured and are not yet saleable nonetheless have an
ascertainable value.
Marais JA: (CORBETT CJ, BOTHA JA, EKSTEEN JA AND HOWIE JA CONCURRING).
In the course of [the taxpayers’] operations, there are brought into existence at various stages what
are described by appellants as ‘stockpiles’ of material. It is the status in tax law of some of those
stockpiles, and the extent, if any, to which they are to be taken into account in assessing appellants’
taxable income, which require to be considered in this appeal . . .
In completing their income tax returns for the relevant tax years and, more specifically, when
calculating their trading income, appellants failed to take into account the value of certain of
the stockpiles. Appellants subtracted from their trading income all the deductible expenses in-
curred in producing these stockpiles, but failed to add to such income the value to appellants of
the stockpiles generated by a good deal of that expenditure. The economic and financial benefit
which had accrued to appellants as a result of such expenditure was simply ignored.
The questions which arise in this appeal are the consequence of the Commissioner adding to the
profits of appellants for the tax years in issue substantial amounts running into millions of rands
and representing what the Commissioner styled ‘closing stock in respect of work in progress’ for
the 1987 tax year, and ‘increase in work in progress stock’ in the tax years 1988, 1989, and 1990.
. . .In effecting these adjustments the Commissioner sought to rectify the failure of appellants to
reflect the value of the particular stockpiles when calculating their taxable income. Appellants
contend that they acted correctly in ignoring the relevant stockpiles. The Commissioner contends
that they did not.
The Commissioner’s contention is founded upon the provisions of s 22, read with the definition of
‘trading stock’ in s 1, of the Income Tax Act (‘the Act’) and the particular character of the stock-
piles in issue. Those provisions of s 22 of the Act which are directly relevant to the questions (I
omit those which are not) then read:
‘(1) The amount which shall, in the determination of the taxable income derived by any person during any
year of assessment from carrying on any trade (other than farming), be taken into account in respect of
the value of any trading stock held and not disposed of by him at the end of such year of assessment,
shall be the cost price to such person of such trading stock, less such amount as the Commissioner may
think just and reasonable as representing the amount by which the value of such trading stock, not being
shares held by any company in any other company, has been diminished by reason of damage, deteri-
oration, change in fashion, decrease in the market value or for any other reason satisfactory to the
Commissioner.
(2) The amounts which shall in the determination of the taxable income derived by any person during any
year of assessment from carrying on any trade (other than farming), be taken into account in respect of
the value of any trading stock held and not disposed of by him at the beginning of any year of assess-
ment, shall –
(a) if such trading stock formed part of the trading stock of such person at the end of the immediately
preceding year of assessment be the amount which was, in the determination of the taxable in-
come of such person for such preceding year of assessment, taken into account in respect of the
value of such trading stock at the end of such preceding year of assessment; or
(b) if such trading stock did not form part of the trading stock of such person at the end of
the immediately preceding year of assessment, be the cost price to such person of such trading
stock.
(3) (a) For the purposes of this section the cost price at any date of any trading stock in relation to any
person shall be the cost incurred by such person, whether in the current or any previous year of
assessment in acquiring such trading stock, plus, subject to the provisions of para (b), any further
costs incurred by him up to and including the said date in getting such trading stock into its then
existing condition and location.
348 Income Tax in South Africa: Cases and Materials

(b) The further costs which in terms of para (a) are required to be included in the cost price of any
trading stock shall be such costs as in terms of any generally accepted accounting practice ap-
proved by the Commissioner should be included in the valuation of such trading stock.’
Legislative alterations of s 22 have been made since, but without retroactive effect, and the
changes made have no bearing upon the questions raised in this appeal.
The definition of ‘trading stock’ in s 1 of the Act read at the relevant times:
‘ “Trading stock” includes anything produced, manufactured, purchased or in any other manner acquired
by a taxpayer for purposes of manufacture, sale or exchange by him or on his behalf, or the proceeds from
the disposal of which forms or will form part of his gross income.’ . . .
The rationale for the existence of these provisions is neither far to seek nor difficult to com-
prehend. The South African system of taxation of income entails determining what the taxpay-
er’s gross income was, subtracting from it any income which is exempt from tax, subtracting
from the resultant income any deductions allowed by the Act, and thereby arriving at the taxable
income. It is on the latter income that tax is levied. The concepts involved are defined in the
Act.375
Where a taxpayer is carrying on a trade, any expenditure incurred by him in the acquisition of
trading stock is deductible in terms of s 11(a) of the Act because it is expenditure incurred in
the production of income, and it is not of a capital nature. Income generated by the sale of such
stock is of course part of the trader’s gross income. Where in his first year of trading a trader has
bought, and thereafter sold, all the stock which he acquired during that year, no problem arises.
There will be a perfect correlation between the trading income earned and the expenditure
incurred in that particular year in purchasing and selling the stocks sold, and the difference
between the two sums will give a true picture of the result of the year’s trading. There will be no
stock on hand at the close of the year of which account need be taken. Contrast with that situa-
tion a situation in which the trader, having sold all the stock acquired earlier during that year at
a substantial profit, purchases large quantities of stock just prior to the close of his tax and trad-
ing year. If he were permitted to deduct the cost of purchasing that stock from the income gen-
erated by his sales, without acknowledging the benefit of the stock acquired, he would be
escaping taxation in that year on income which otherwise would have been taxable by the simple
expedient of converting it into trading stock of the same value. That process could be repeated
every year ad infinitum. It is true that there would ultimately have to be a day of reckoning when
trading finally ceases, but the fact remains that the taxpayer will have been enabled to avoid
liability for tax until that point is reached . . .
As applied to the business of a manufacturer of goods, accountants and commercial men, by
their use of the expression ‘trading stock’, denote not only the goods which he has manufac-
tured and holds for sale but his stock of raw materials, components and partly manufactured
goods. Whiteman and Wheatcroft on Income Tax,376 under the heading ‘Stock-in-Trade and Work in
Progress, say:
‘A manufacturer who buys raw materials, processes them and sells the finished product will normally have
on hand some unused raw materials, some partly manufactured goods and some finished goods awaiting
sale. The first and last are stock, the partly processed goods being sometimes called stock and sometimes
work in progress. In addition, a manufacturer may have on hand goods which he consumes in the course
of his manufacture, such as coal; this is also regarded as stock.’. . .
The view expressed by Whiteman and Wheatcroft is not a mere outgrowth of the United Kingdom
statutory definitions to which I have already referred. It is a reflection of commercial usage aris-
ing from the development of accounting principles over a long period of time . . .
The recognition by accountants and commercial men that raw material used for the purpose of
manufacture in a manufacturing business and partly manufactured goods form part of the trad-
ing stock of the business was an almost inevitable development. It enabled the value of raw mate-
rials and partly manufactured goods to be included in the value of trading stock at the
beginning and end of an accounting period and by this means it led to the making of a more
accurate calculation of the profit earned or the loss sustained in that period. It is not easy to see
how an accurate calculation of profit or loss could be made unless the value of raw materials and
partly manufactured goods was taken into account . . .
________________________

375 CIR v Nemojim (Pty) Ltd 1983 (4) SA 935 (A) at 946G-H.
376 2nd ed (1976) at 444.
 Trading or Carrying on Business and Schemes of Profit-Making 349

. . . A further submission made by counsel for appellant was that it was inherent in the concept
in the definition of ‘anything . . . the proceeds from the disposal of which forms or will form part
of his gross income’ that a saleable or realisable thing was contemplated because there could be
no talk of proceeds if that were not so, and –
‘to hold otherwise would mean that a taxpayer would be obliged to pay tax on the deemed value of some-
thing which at that stage is not realisable by him’.
It was contended that the particular stockpiles in issue did not comply with the interpretation of
the relevant provisions postulated by counsel for appellants and that they were therefore rightly
disregarded by appellants in calculating their taxable income.
. . . Counsel for appellants submitted that these stockpiles were not realisable or saleable assets in
the form in which they were and had no market value as such, that they represented no more
than particular phases of a continuous process of production or manufacture or ‘bulges in the
pipeline’, that they all required to be subjected to yet further processing before anything capable
of being sold or realised would emerge, and that it could never have been intended that this
continuous process should be notionally halted at the end of a tax year, and that these stockpiles
should be assigned a ‘completely artificial value’ . . .
An alternative argument was presented along the following lines. Even if a ‘strictly literal’ inter-
pretation be given to the definition, the stockpiles would still not fall within it because they were
not ‘created’ (counsel’s word) for the purpose of ‘manufacture, sale, or exchange’ (the relevant
words in the definition). None was created for sale or exchange. Stockpiles Nos 1, 2, 4 and 5
were created for the purpose of separating their contents into their constituent parts. That pro-
cess is not a manufacturing process but a mining process falling within the definition of ‘mining’
in s 1 of the Act. The same applies to stockpile 10 which is acquired by RBIT from Tisand for
beneficiation, namely conversion of the ilmenite to titania slag and high purity iron. The process
entails winning titania slag from ilmenite which is a constituent of the soil . . .
Because none of the stockpiles are disposed of in a way which will result directly in the receipt of
any ‘proceeds’, but are disposed of by being utilised in a further stage of a continuous process,
they cannot fall within that part of the definition which relates to ‘anything . . . the proceeds
from the disposal of which forms or will form part of his gross income’ . . .
In considering appellants’ contention that the stockpiles had no value for the purposes of s 22,
the Court a quo was prepared to assume that the material in the stockpiles was unsaleable in its
then condition and that there was no market for it. Even if the stockpiles could properly be de-
scribed as ‘bulges in the pipeline’ of production (which it doubted), the Court regarded that as
irrelevant because they would none the less fall squarely within the first part of the definition.
The assumed absence of any market for the stockpiles in the state in which they were was
thought to be of no consequence. So was the absence of any intent on the part of appellants to
sell them. That they had a considerable value to appellants seemed to the Court to be quite
plain, at least for as long as appellants continued their operations and did not terminate them
abruptly. The Court did not elaborate but I take it that what it had in mind was that appellants
had expended time, effort and money in accumulating what was in those stockpiles; they con-
tained materials which after further processing could be profitably marketed; if the stockpiles
were for any reason to be lost or destroyed, appellants would have sustained a loss occasioned by
the fact that the money, time and effort spent in establishing the stockpiles would have been
spent fruitlessly and the potential profit which they stood to make on the sale of their contents
after further processing would also have been lost.
The Court a quo went on to say that s 22(1) and (3) does not refer to the market value of trading
stock but to the cost price of such stock. Such cost price is defined in s 22(3)(a) as being –
‘the cost incurred . . . in acquiring such trading stock, plus, subject to the provisions of para (b), any fur-
ther costs incurred . . . in getting such trading stock into its then existing condition and location’.
The Court pointed out that those were the very costs which had been quantified by appellants
when respondent required the value of the stockpiles to be calculated. It concluded that the
stockpiles had at least that value for the purposes of s 22 . . .
Were the stockpiles trading stock
Some preliminary observations about the scope of the definition seem appropriate. As was ob-
served in the De Beers Holdings case, supra, the definition may be notionally and grammatically
divided into two parts. The first part lays emphasis upon the purpose for which anything may
350 Income Tax in South Africa: Cases and Materials

have been produced, manufactured, purchased or in any other manner acquired by a taxpayer.
The specified purposes are manufacture, sale or exchange by the taxpayer or on his behalf. The
second part makes no direct reference to any purpose which the taxpayer must have had at the
time of acquisition; it postulates an objective assessment, namely whether, if the thing under
consideration was disposed of, the proceeds would form part of his gross income. The first part,
in so far as it refers to the purpose of sale or exchange, envisages that upon disposal of the thing
in question something will be received in return, either money or some other quid pro quo. To
that extent, the definition is consistent with the general thrust of the argument of counsel for
appellants that what is contemplated is anything which has an independent existence and value
as a saleable or exchangeable article, product or commodity. But the argument falls foul of other
aspects of the definition. The first part of the definition also includes –
‘anything produced, manufactured, purchased or in any other manner acquired by a taxpayer for purpos-
es of manufacture . . . by him or on his behalf’.
Those words are quite plain and unambiguous. It is inherent in them that, in order to fall within
the definition, what the taxpayer produces, manufactures, purchases or otherwise acquires need
not be intended to be disposed of in the state in which it then is. It suffices that it is intended to
be used for the purpose of manufacturing something. Nor does it matter whether or not that
which is intended to be used is capable of realisation or sale in the state in which it then is.
Whether it is so realisable or not, there will be no contemplation of receiving any quid pro quo
for it in the state in which it then is. The fact that it may be saleable in its then state and have an
ascertainable market value is not what brings it into the first part of the definition because it was
not produced, manufactured, purchased or in any other manner acquired for sale or exchange.
What brings it into the definition notwithstanding that its sale or exchange was not contemplat-
ed is its intended use for purposes of manufacture.
To illustrate: a manufacturer of sewing machines may purchase or manufacture screws for the
sole purpose of using them in the manufacture of the sewing machines. The screws may have an
ascertainable market value and a functional existence separate from, and independent of, the
sewing machines, yet they would not be trading stock for the purposes of the definition, but for
their intended use in the manufacture of the sewing machines. The same manufacturer may
purchase or produce or manufacture for incorporation in the sewing machines a custom-made
part which is not capable of use by anyone other than himself, and has no value to anyone other
than himself. While it may have a separate physical existence, it has no independent functional
utility capable of being turned to account in any other way. It may even have no value as scrap.
Yet it falls within the plain and unambiguous language of the definition. Once it is obvious, as I
think it is, that the Legislature has deliberately chosen to extend the concept of trading stock
beyond its colloquial ambit so as to include things which the taxpayer has no intention of dispos-
ing of as separate entities, but intends to use solely for the purpose of manufacturing something
else in which he trades, there is little, if any, scope for a purposive interpretation of the provi-
sions. In any event, what, one may ask, is the more restricted purpose which is so apparent J that
effect should be given to it? In my view, there is none.
The suggested difficulty in identifying and ascribing a value to things in the process of being
manufactured on the last day of the tax year does not entitle the Court to disregard the plain
language of the definition. Moreover, the difficulty strikes me as being more apparent than real.
Certainly in other tax jurisdictions the legislators and the courts have not baulked at the concept
of valuing work-in-progress and there is no reason to suppose that the South African Parliament
was daunted by the prospect . . .
A fundamental weakness in the argument of counsel for appellants, in my view, is that it postu-
lates that something which is plainly trading stock by definition when acquired, purchased, pro-
duced or manufactured will cease to be regarded as such the moment it commences being
integrated or incorporated in that which is in the process of being manufactured. Once it is
clear (as it is) that, for example, raw materials purchased for purpose of manufacture must be
regarded as trading stock even although they have not been purchased for the purpose of selling
or exchanging them, and once it is clear (as it is) that the rationale for requiring them to be so
regarded is to obtain a more accurate calculation of the profit earned or the loss sustained dur-
ing the year, it would make little sense to ignore the value of the raw materials utilised in such
partly-manufactured goods as may be on hand. It would result, not in the true reflection of the
taxpayer’s trading fortunes which the legislation is designed to produce, but in a distorted reflec-
tion of them. In short, it entails ignoring work in progress despite the fact that it may have very
 Trading or Carrying on Business and Schemes of Profit-Making 351

great value, and despite the fact that the cost of producing it has not been ignored but, on the
contrary, brought to account as an expense incurred. I can find no warrant in the language used
by the Legislature for attributing any such inconsistency of approach to the Legislature . . .
A thing produced or manufactured for the purposes of manufacture is manifestly something
which is intended to be used in a process of manufacture, yet it plainly falls within the definition.
It will continue to be regarded as trading stock until the process of manufacture for use in which
it was itself manufactured is complete. Only then will its classification as trading stock in its own
right cease, and that will be simply because it will have become an integral part of the finished
product which, in its completed state, represents a newly created item of trading stock in which
the value of such trading stock as may have been used in its manufacture is subsumed.
Nor do I consider that the second part of the definition shows that in the first part only a prod-
uct saleable in its own right is contemplated . . .[N]othing in the language used by the Legisla-
ture would justify the drawing of a distinction between those things which are saleable and those
which are not and the regarding of only things saleable in their own right as trading stock. As
pointed out earlier, it would also be inimical to the attainment of the object which the legislation
is designed to achieve, namely a true reflection of the taxpayer’s trading fortunes . . .
The method of assessment of the value of trading stock as defined which is prescribed in s 22(1),
(2) and (3) also shows, I think, that the Legislature contemplated that the trading stock which
may have to be valued in a given case may consist of work in progress. Those provisions make the
cost price to the taxpayer of the trading stock the basic measure of value but recognise, firstly,
that ‘further costs’ may have been ‘incurred’ by the taxpayer, inter alia, ‘in getting such trading
stock into its then existing condition’ and therefore have to be included and, secondly, that
there exist generally accepted accounting practices by reference to which it may be determined
whether or not any particular further cost is one which should be included in the valuation of
the trading stock in question. It is common cause that there existed at the time, and still exists, a
generally accepted accounting practice approved by respondent and known as AC 108. hat pro-
vides for the valuation of ‘work in progress’ as a component of ‘stock’. It is described as stock ‘in
the process of production for sale’. The historical cost of stock is defined as ‘the aggregate of
cost of purchase, cost of conversion, and other costs incurred in bringing the stock to its present
location and condition’. The ‘cost of conversion’ is defined as ‘the cost that relates to bringing
the stock to its present location and condition’. It is clear from AC 108 that costs such as, for
example, materials and labour are to be taken into account when valuing stock. It is therefore
generally accepted in accounting practice that there will be an ascertainable value attaching to
things which are still in the process of being manufactured and are not yet saleable . . .
I conclude therefore that the Court a quo was correct in holding that the relevant stockpiles were
trading stock as defined.
 7
CAPITAL RECEIPTS AND ACCRUALS

§ Page
1 Introduction ............................................................................................................. 353
2 Capital receipts and accruals................................................................................... 353
[193] Bos v CSARS ................................................................................................ 354
[194] WJ Fourie Beleggings CC v CSARS ............................................................ 356
[195] Samril Investments (Pty) Ltd V CSARS ..................................................... 358
[196] Stellenbosch Farmers Winery v CSARS ..................................................... 361

§1 Introduction
For purposes of the Income Tax Act 58 of 1962, the question whether an amount is
capital or revenue is relevant to both incomings (that is to say, receipts and accruals) and
to the incurring of expenditure or losses.
On the incomings side, ‘gross income’, as defined,1 excludes ‘receipts and accruals of a
capital nature’. The Act does not define the expression ‘of a capital nature’ and its
interpretation must therefore be sought in judicial precedent.
On the outgoings side, the general deduction provision, namely s 11(a), permits the
deduction of expenditure and losses ‘provided such expenditure and losses are not of a
capital nature’.2

§2 Capital receipts and accruals

Compensation received for the termination of a contract that forms part of the taxpayer’s income-
earning structure – such as a partnership agreement – is of a capital nature, and must be
distinguished from compensation for loss of earnings, which would be of an income nature.

________________________

1 Income Tax Act 58 of 1962, s 1 sv ‘gross income’.

2 The Act does however, contain provisions in terms of which specific allowances or deductions are granted
in certain circumstances or in relation to certain kinds of assets, for example, s 11(e), (f), and (g).
Deductibility is then determined with reference to those specific provisions and not in terms of the
general provisions of s 11(a). Thus, a taxpayer whose capital expenditure is not deductible in terms of
s 11(a) may be entitled to deduct that expenditure under another provision, or may be entitled to an
allowance in which the expenditure is deductible, piece-meal, over several years of assessment; see for
example CIR v Manganese Metal Co (Pty) Ltd 1996 (3) SA 591 (T).

353
354 Income Tax in South Africa: Cases and Materials

[193]
Bos v CSARS
(2008) 70 SATC 187 (Transvaal Provincial Division)
The taxpayer, a chartered accountant, was a long-standing partner in a large accounting
firm. He received a lump-sum compensation payment for the premature termination of
his contractual right to remain as a partner of the firm.
Issue: was the compensation payment received by the taxpayer income or capital?
Held: the taxpayer had discharged the onus of proving that amount in issue was of a
capital nature. The taxpayer’s rights in terms of the partnership agreement were the
foundation of his income-earning structure. Hence, compensation for the
relinquishment of his rights under the contract was of a capital nature and was not part
of his gross income.
Hartzenberg ADJP: (SERITI J and EBERSOHN AJ concurring)
[1] This is an appeal against an order of the Income Tax Court. The court found that an
amount of R1 000 000 paid to the appellant on 31 January 2002 was income received during the
2002 tax year ... The appellant at all stages maintained that the amount received was of a capital
nature.’
[12] [After pointing out that the taxpayer was unlikely, if he went into practice on his own, to
earn at the level of his remuneration at Price Waterhouse, the judgement continues:] If one
wrongfully damages a taxi to such an extent that it has to be written off, the owner stands to lose
income. If he claims compensation from the wrongdoer to replace the taxi, that is clearly a
payment of a capital nature. If the taxi is out of operation for some time, the taxi owner may, over
and above his capital loss, suffer a loss of income during the period that the taxi cannot operate.
The appellant’s situation can be equated with that of a taxi owner whose taxi could carry twelve
passengers and who was forced to substitute it with one that can carry no more than six
passengers. He cannot earn the same income with the smaller vehicle, but has to accept the
difference in value between the two vehicles as compensation. Although he can still operate his
taxi, his income will in all probability be less than what he could generate with the bigger one.
That, in my view, does not change the position that his capital consisted of the value of the big
taxi and was reduced to the value of the smaller one, and that he suffered a capital loss equal to
the difference between the values of two vehicles.
[13] It was not only through his education, training, skill and intellect that the appellant was
able to receive a good income before termination of the agreement. Surely those aspects were
essential for him to have become a partner, but his position in the firm as entrenched in the
partnership agreement was primarily responsible for what he took home during a tax year. The
terms of the partnership agreement were the real foundation of his income earning structure.
[14] Where it is common cause that the appellant received the amount of R1 million, the onus
was on the appellant to prove that the amount was of a capital nature. There is no definition of
what constitutes receipts or accruals of a capital nature in the Act.
The courts have not attempted to give such a definition and have accepted that the question
whether an accrual is to be categorised as capital or income has to be decided on the facts of
each particular case.
3
It is generally accepted by our courts, on the strength of Burmah Steamship Co Ltd v IRC, that, in
each case, it is to be ascertained whether the accrual was received to fill a hole in the taxpayer’s
income or to fill a hole in his capital assets. It is evident that in order to answer that question it
sometimes becomes necessary to decide whether some intangible assets form part of the
taxpayer’s income-producing structure or not. If it does, the accrual in all probability will be
held to be of a capital nature, and the position is not changed even if there was4only a partial
sterilisation of the taxpayer’s income-producing structure and for a limited period.

________________________

3 (1930) 16 TC 67, 1931 SC 156.

4 Taeuber and Corssen (Pty) Ltd v SIR 1975 (3) SA 649 (A) at 663-664; 37 SATC 129 at 139-40.
 Capital receipts and accruals 355

[15] Instances of findings that intangible rights formed part of the taxpayer’s income producing
5
structure are relinquishment of a portion of its right to contract freely; relinquishment of a
6
permanent appointment as a director of a company; a partner’s right to share in the
7 8
partnership’s profits; and the right to trade freely.
Where it has already been found that the appellant’s rights in terms of the partnership
9
agreement formed the very foundation of his income producing structure it follows that the
remuneration for his relinquishment thereof was an accrual of a capital nature and that the
appellant has discharged the onus of proving it. It follows further that the appeal must succeed,
unless the accrual of the amount can on another basis be categorised as ‘gross income’.
[16] From the outset the appellant dealt with proviso (d) of the definition of ‘gross income’ and
contended that the proviso is not applicable as the appellant did not resign from any office or
employment or appointment and that he merely agreed to accept the termination of his rights
in terms of a partnership agreement. The respondent did not rely on the proviso, in this court or
in the court a quo. Mr Stevens made it clear that the respondent had abandoned reliance thereon
already at an early stage in the court a quo. It is therefore not necessary to pursue this aspect any
further.
[The court ordered that the assessment be referred back to the Commissioner for recon-
sideration on the basis that the R1 million received in terms of the separation agreement was not
part of the taxpayer’s gross income.]

Notes
The court held that it was through his education, skill and intellect that the taxpayer was
able to earn a good income whilst a partner in the firm, but that it was his position in the
firm that was primarily responsible for his high earnings.
This led the court to make the crucial finding (at para [13]) that the terms of the
10
partnership agreement were the real foundation of his income earning structure.
This was therefore a case where the major component of the taxpayer’s capital assets –
his income-producing structure – flowed from a contract, the partnership agreement.
Consequently, the compensation paid to the taxpayer for the termination of that
agreement was of a capital nature.
The taxpayer’s claim was therefore not for compensation for loss of earnings (which,
to use the metaphor adopted in Burmah Steamship, would have filled a hole in his
income), but for compensation in respect of the loss of his rights under the partnership
agreement (that is to say, to fill a hole in his capital assets).
The decision in this case may be contrasted with that in [194] WJ Fourie Beleggings
CC v CSARS, where the contract for the accommodation of the overseas students by the
taxpayer was held to be an ordinary commercial contract, and not part of the taxpayer’s
capital structure; hence, compensation for the premature termination of that contract
was income, and not capital.
Compensation paid for the loss of trading profits (as distinct from a loss of part of the taxpayer’s
income-earning structure) is income.

________________________

5 KBI v Transvaalse Suikerkorporasie Bpk 1985 (2) SA 668 (T) at 680C; 47 SATC 34 at 50 and CIR v Tuck
1987 (2) SA 219 (T); 49 SATC 28.
6 CIR v Hersov 1952 (1) SA 485 (A) at 494; 18 SATC 20 at 31.
7 ITC 492 12 SATC 80.
8 Taeuber and Corssen (Pty) Ltd supra.
9 Para [13] above.
10 A further example of such a contract (and where compensation for loss of the contract was held to be
capital) was that in Van den Berghs Ltd v Clark [1935] 19 TC 390.
356 Income Tax in South Africa: Cases and Materials

[194]
WJ Fourie Beleggings CC v CSARS
(2007) 70 SATC 8 (Orange Free State Provincial Division)
The taxpayer close corporation was the lessee of a hotel and had entered into a contract
to provide accommodation and meals for overseas students who were to undergo
training in the South Africa. The students abruptly left the hotel prematurely, leaving
their rooms in a seriously damaged condition, with burned carpets and damaged
furniture. The party with whom the taxpayer had contracted to provide accommodation
in the hotel agreed to pay compensation in an out-of-court settlement.
The issue before the court was whether the compensation paid to the taxpayer in
terms of the settlement agreement was a surrogate for the loss of trading profits (in
which event it would be of a revenue nature) or was of a capital nature. The agreement
itself did not specify precisely what the compensation was for.
Held: the taxpayer bore the onus of proving that the compensation in issue was not a
trading receipt but was of a capital nature;
Held: further: the agreement in terms of which the compensation was paid was not an
essential part of the taxpayer’s profit making machine or structure but was a normal
contract incidental to the normal course of the taxpayer’s business;
Held: further: that taxpayer had been compensated for the loss of profit that it would
have made had the students not moved out of the accommodation;
Held further: the compensation was in respect of costs incidental to the performance
of the taxpayer’s income-producing operations and was of a revenue and not a capital
nature.
Musi J: (HATTINGH J and VAN DER MERWE J concurring)
[2] The question that falls to be decided in this appeal is whether an amount of R1 292 760
which was paid to the appellant, during the year of assessment ending 28 February 2002,
pursuant to a settlement agreement was a capital receipt and therefore non-taxable or a revenue
receipt, which is taxable. ...
[5] On 6 December 2001 [the taxpayer and Naschem] agreed to the following terms: (editor’s
translation):
‘Naschem undertakes to pay Elgro Hotel an amount of R1 292 760 including VAT in full and final
settlement of all claims, of whatever nature, that Elgro Hotel may have against it, whether arising from
contract law or in terms of the common law.
As counter-performance for the payment of the above settlement amount, Elgro Hotel undertakes to
abandon all rights it may have to damages and to drop any pending or envisaged court action against
Naschem. ...’
[12] The court must not look at the form of the agreement but its real nature. A court in
determining the true character of the receipt must of necessity have regard to all the
surrounding circumstances. .... The court should not be bound by labels that the parties attach
to the compensation. ... It is not always easy to discern from an agreement what a receipt was
for. ... The intention of the taxpayer or the parties is also relevant to determine what the receipt
was for.
[13] It is clear ...Naschem was under pressure to settle the matter out of court. Naschem wanted
the appellant off their backs. The settlement amount was not computed with reference to any
damages suffered by the appellant. ....
[16] When considering the nature of a compensation receipt the court should seek to answer
two fundamental questions. Firstly, is the compensation a receipt of the trade? Secondly, if the
answer to the first question is yes, is it a capital or a revenue receipt? In casu the appellant alleges
that the amount is a receipt of trade and that it is capital. The appellant bears the onus to prove
same on a balance of probabilities.
[19] Mr Van Breda and Mr Stevens referred us to a plethora of authorities in favour of or
analogous to their respective cases.
 Capital receipts and accruals 357

[20] The following may be pointed out from those cases. A payment received for the permanent
or sometimes temporary loss, deprivation or ‘sterilization’ of a capital asset of the business is a
capital receipt. Likewise if the payment is made pursuant to a restraint of 11
trade clause that
accrual will12 be of a capital nature (see Glenboig Union Fire Clay Co Ltd v CIR ; CIR v Illovo Sugar
Estates Ltd. In contrast, it has been pointed out that if the compensation is for some temporary
interference with the trader’s13use of an asset then the accrual is of a revenue nature. See Burmah
Steam Ship Company Ltd v CIR where it was held that if the compensation is to ‘fill a hole’ in the
income or profit of the taxpayer it will be regarded as revenue and not capital. ...
[21] The above ‘tests’ are not always helpful when one is dealing with compensation for
cancellation of trading contracts. An amount paid by way of damages or compensation takes on
the character of the loss in compensation for which it has been paid. If the payment is made in
respect of a loss of income, the receipt will be of a revenue nature. A receipt arising on the
cancellation or variation of a trade agreement is normally of a revenue nature. Where, however,
a contract is so crucial that its loss would cripple or destroy the business it may transcend the
status of an ordinary commercial contract. Income received for the termination of such a
contract may – depending on the facts and circumstances of the particular case – be capital.
14 15
[22] In ITC 1279 Coetzee J followed the approach in IRC v Fleming & Co (Machinery) Ltd. In
the Fleming matter Lord Russel said the following:
‘The sum received by a commercial firm as compensation for the loss sustained by the cancellation of a
trading contract or premature termination of an agency agreement may in the recipient’s hands be
regarded either as a capital receipt or as a trading receipt forming part of the trading profit. ... When the
rights and advantages surrendered on cancellation are such as to destroy or materially to cripple the whole
structure of the recipient’s profit-making apparatus, involving the serious dislocation of the normal
commercial organisation and resulting perhaps in the cutting down of the staff previously required, the
recipient of the compensation may properly affirm that the compensation represents the price paid for
the loss or sterilisation of a capital asset and is therefore a capital and not a revenue receipt. Illustrations of
such cases are to be found in Van den Bergh Ltd 19 TC 390, [1935] AC 431, and Barr, Crombie & Co Ltd 26
TC 406, 1945 SC 271. On the other hand when the benefit surrendered on calculation does not represent
the loss of an enduring asset in circumstances such as those above mentioned – where for example the
structure of the recipient’s business is so fashioned as to absorb the shock as one of the normal incidents
to be looked for and where it appears that the compensation received is no more than a surrogatum for the
future profits surrendered – the compensation received is in use to be treated as a revenue receipt and not
a capital receipt.’
Coetzee J found this approach to be crisp, logical and in sync with our legal principles. I agree.
[23] If it is shown that the cancellation of a commercial contract affected the profit-making
structure of the business or that it affected the whole manner in which the business is conducted
and that compensation has been paid, therefore then that compensation would be of a capital
nature. If the amount to be paid is computed with reference to future loss of profits the receipt
will remain of a capital nature. The method used to compute the sum therefore does not
necessarily determine the nature of the sum.
[24] The capital asset of the appellant is the lease of the hotel itself. ...
[27] This hotel functioned quite well with or without the Naschem contract. There is no
indication that the appellant’s profit-making structure was crippled or destroyed by the
cancellation of the agreement. The hotel could and did continue as a profit-earning asset. The
agreement between Naschem and the appellant was not an essential part of the profit-making
machine or structure of the appellant. It was incidental to the working of the profit-making
machine. The agreement was a normal contract incidental to the normal course of the
appellant’s business. ...
[29] It is clear to me that the appellant was compensated for the loss of profit that it would have
made had the students not moved out. ...
[31] ... In my view, the compensation was revenue and not a capital receipt.
________________________

11 12 TC 427.
12 1951 (1) SA 306 (N).
13 (1930) 16 TC 67.
14 (1977) 40 SATC 254 (T) at 258.
15 (1951) 33 TC 57 at 63.
358 Income Tax in South Africa: Cases and Materials

Notes
In this case, the agreement in terms of which the compensation was paid did not specify
what the compensation was for, nor how the amount had been calculated.
The court acknowledged and applied the test laid down in Burmah Steam Ship Company
Ltd v CIR16 which held that the capital or revenue nature of a compensation receipt
depends on whether the compensation was to fill a hole in the taxpayer’s trading profits
(in which event it was revenue) or to fill a hole in the taxpayer’s capital assets (in which
event it was capital).
The nub of the court’s reasoning in the present case lies in its conclusion that–
‘There is no indication that the appellant’s profit-making structure was crippled or destroyed by
the cancellation of the agreement. The hotel could and did continue as a profit-earning asset.
The agreement between Naschem and the appellant was not an essential part of the profit-
making machine or structure of the appellant. It was incidental to the working of the profit-
making machine. The agreement was a normal contract incidental to the normal course of the
appellant’s business.’
In this passage, the court assumes (although the evidence in this regard was far from
clear) that the amount in question was paid to compensate the taxpayer for the
premature termination of the Naschem contract for the accommodation of this
particular group of students, and not as compensation for the damage they had done to
their rooms, or for the disruption caused to the hotel.
But, whatever view is taken of what the compensation was intended to be for, it was
clear on the facts that none of the damage suffered by the taxpayer affected (let alone
destroyed or substantially impaired) the capital structure of its business – that is to say its
profit-making structure. The taxpayer’s capital asset was the lease of the hotel, and that
lease was not affected by the events that gave rise to the payment of compensation.

The taxpayer company had sold building sand, located on its farm, to a dealer in building sand.
The sand was removed and paid for over an extended period. The multiplicity of amounts received,
plus the fact that the receipts generated by the exploitation of resources on the taxpayer’s capital asset
(namely, the farm) were plainly designedly sought and worked for, indicated that the amounts were
revenue and not capital, and constituted a gain made by an operation of business for carrying out
the scheme of profit-making.

[195]
Samril Investments (Pty) Ltd V CSARS
2003 (1) SA 658 (SCA)
For many years, the taxpayer company’s income had consisted of the proceeds derived
from selling farm products and rent received for grazing rights. But between January
1994 and February 1996, the taxpayer received more than R2 million in terms of a
written agreement entered into with one K for the removal of building sand from the
taxpayer’s farm. In the 1995 tax year, R774 704 was earned in this way.
Issue: was the amount paid to the taxpayer for the removal of the sand capital or
income?
Held: despite its clumsy wording, it was clear from its terms that the agreement was one
of purchase and sale of the sand.

________________________

16 (1930) 16 TC 67.
 Capital receipts and accruals 359

Held further: in determining whether the amounts received from the sale of the sand
fell to be classified as a gain made by the operation of a business for carrying out a
scheme of profit-making, that the enquiry had to extend to all the dealings between the
parties during the period of about two years over which the payments were received.
Viewed in this manner the multiplicity of the amounts received coupled with the fact that
the income was generated by exploiting the resources on what was admittedly a capital
asset and was plainly designedly sought and worked for, afforded at least prima facie
evidence that it was in the nature of revenue and not capital. The only evidence pointing
the other way was not convincing. The taxpayer had therefore failed to discharge the
onus of proving the assessment to be wrong.
Hefer AP: (SCHUTZ JA, STREICHER JA, FARLAM JA and LEWIS AJA concurring).
[2] The usual test for determining the true nature of a receipt or accrual for income tax
purposes is whether it constituted a gain made by an operation of business in carrying out a
scheme for profit-making.
17
According to the decision of this Court in CIR v Pick ’n Pay Employee
Share Purchase Trust this means that the receipt or accrual was not fortuitous but designedly
sought and worked for. However, it must be borne in mind 18
that profit-making is also an element
of capital accumulation. As Wessels JA said in CIR v Stott :
‘[E]very person who invests his surplus funds in land or stock or any other asset is entitled to realise such
asset to the best advantage and to accommodate the asset to the exigencies of the market in which he is
selling. The fact that he does so does not alter what is an investment of capital into a trade or business for
earning profits.’
Every receipt or accrual arising from the sale of a capital asset and designedly sought for with a
view to the making of a profit can therefore not be regarded as revenue. Each case must be
decided on its own facts with due regard to the distinction between capital and the income
derived
19
from the productive use thereof as described, inter alia, in CIR v George Forest Timber Co
Ltd and taking account of all the circumstances of the case.
[3] It must also be borne in mind that s 82 of the Income Tax Act 58 of 1962 casts the burden of
proving that any amount is exempt from or not liable to tax on the person claiming such
exemption or non-liability. Thus, where the Court is not persuaded on a preponderance of
probability that the income derived from the sale of an asset is to be regarded as capital gain, it
must be included in the taxpayer’s gross income.
[4] In the present matter the respondent submits that the appellant conducted the business of
selling sand and that it did so in carrying out a scheme of profit-making. The appellant’s
contention on the other hand is that it disposed of the right to acquire the sand on Droëvlei in a
single transaction which did not constitute the carrying on of a business. Both parties rely for
their contentions mainly on the terms of the written agreement in pursuance of which the sand
was excavated and removed. …
[5] The agreement was plainly one of purchase and sale and the first question which presents
itself is whether the subject-matter of the sale was sand (as submitted by the respondent) or the
right to acquire the sand on Droëvlei (as contended for by the appellant). [The court
considered the evidence, and proceeded:] It is difficult to understand how the appellant could
have sold the right to acquire the sand without selling the sand itself … It follows therefore that,
despite its clumsy wording, clause 2 conferred upon the purchaser the right to the sand itself. …
The evidence about what had happened before the conclusion of agreement points the same
way. [The purchaser] was a dealer in building sand whose only concern seems to have been to
secure supplies for his business. …. On the facts we know of no reason for the introduction of
the concept of the sale of a right.
[6] The next question is whether the income derived from the sale of the sand falls to be
classified as a gain made by the operation of a business for carrying out a scheme of profit-
making. In this regard the President of the Special Court said in the Court’s judgment:

________________________

17 1992 (4) SA 39 (A) at 57E-G.

18 1928 AD 252 at 263.
19 1924 AD 516 at 522-523.
360 Income Tax in South Africa: Cases and Materials

‘In my view the appellant did not dispose of the right to remove sand from Droëvlei in a single transaction
as submitted by Advocate Emslie , but the dealings between the parties, when viewed holistically and against
a commercial backdrop, had all the characteristics of the trading in sand as a commodity in tranches of 5
000 cubic metres each.’
[7] I agree that, in order to judge the true nature of the income from the sale of the sand, the
enquiry should extend to all the dealings between the parties during the period of about two
years over which the payments were received. Viewed in this 20
manner the 21multiplicity of the
amounts received (cf Modderfontein B Gold Mining Co Ltd v CIR ; CIRv Lunnon coupled with the
fact that the income was generated by exploiting the resources on what was admittedly a capital
asset and was plainly designedly sought and worked for, affords at least prima facie evidence that
it was in the nature of revenue and not capital. The only evidence which may point the other way
is that of Mr Currie to the effect that he merely sought to improve the company’s land by
removing an unwanted subsoil layer of sand. But the Special Court regarded his evidence in this
regard as suspect. … The appellant has accordingly not discharged the onus resting on it in
terms of s 82. The appeal is dismissed with costs including the costs of two counsel.

Notes
It is well established that the proceeds of the sale of a wasting capital asset (that is to say,
a capital asset that is depleted, as it is exploited, such as an oil well) can constitute
income, rather than capital – see for example, CIR v George Forest Timber Co Ltd 1924 AD
516 where the wasting asset was the standing timber on a purchased timbered estate, and
the entire proceeds of the sale of the timber were held to be income.
Thus, in the present case it was irrelevant that the sand in question was a wasting asset.
If the taxpayer were held to be engaged in selling the sand in the course of a scheme of
profit-making, the entire proceeds of the sale would be included in gross income.
Given all the obvious indicia of trading in the circumstances of the present case – in
particular, the multiplicity of receipts and the extended period over which they were
received, and the fact that the taxpayer’s gains were clearly ‘designedly sought and
worked for’ – the taxpayer’s only substantial arguments were that, in terms of the
contract, (a) what had been sold was not the sand itself, but ‘the right to the sand’
(presumably, the taxpayer believed that it would be easier to argue that the company was
not trading in ‘rights’ to sand, than if it were found to be selling the sand itself) and, (b)
that it had sold the sand in terms of a single transaction, namely, the written contract in
question.
As to the first point, the court held that the taxpayer had sold, not the right to the
sand, but the sand itself.
As to the second point, the court held that the relevant inquiry, as to whether the sale
of the sand constituted a scheme of profit-making, should extend to all the dealings
between the parties during the period of about two years over which the payments were
received.

Where a taxpayer holds a capital asset and gives up that asset in return for a monetary amount of
compensation, that amount will be revenue if it fills a hole in his trading profits and will be capital
if it fills a hole in his capital assets.

________________________

20 1923 AD 34 at 46.
21 1924 AD 94 at 98.
 Capital receipts and accruals 361

[196]
Stellenbosch Farmers’ Winery Ltd v CSARS
[2012] ZASCA 72
The taxpayer, a company in the Stellenbosch Farmers’ Winery Group of companies,
carried on business as an importer of liquor and as a wholesaler of a range of spirits, wine
and other liquor products to retailers. Since the 1970s the taxpayer had imported and
distributed Bells whiskey.
In February 1991 United Distillers, a UK-based company, concluded a joint venture
agreement with the Stellenbosch Farmers Winery Group and other parties. The
agreement provided that the taxpayer was to be the exclusive distributor of Bells whiskey
in South Africa and the surrounding territories for a period of ten years (after which the
agreement could be terminated on 12 months’ notice) and the taxpayer undertook not
to sell competing products in the area.
This sole distributorship agreement continued until it was terminated by agreement
on 28 August 1998, and while it lasted it was extremely profitable for the taxpayer as Bells
sales contributed between 18 and 25 per cent of the taxpayer’s profit.
As a result of various corporate re-organisations across the United Kingdom and
Europe, negotiations commenced for the premature termination (some three years
earlier than envisaged in the agreement) of the taxpayer’s ten year sole distributorship
agreement. An agreement was duly concluded on 27 August 1998 for the termination of
the joint venture and termination of the sole distributorship agreement in consideration
for a payment of R67 million being made to the taxpayer by another party to the
agreement.
In the two years after the loss of the distribution rights for Bells as a result of the
termination agreement, the taxpayer’s trading income dropped by many millions of rand
and the taxpayer was forced to merge with another entity to avoid bankruptcy.
The R67 million was duly paid to the taxpayer in the 1999 tax year and the Tax Court
held that it must be included in the taxpayer’s gross income, as it was an amount that was
not of a capital nature. The taxpayer took this judgment on appeal to the Supreme Court
of Appeal, arguing that the amount was of a capital nature.
Held: it was not disputed that the exclusive distribution rights held by the taxpayer in
terms of the exclusive distribution agreement were of a capital nature; the question was
whether the R67 million in compensation paid to the taxpayer under the termination
agreement was an amount of a capital nature.
Held further: the question whether a receipt is capital or revenue cannot be determined
by how it is subsequently treated by the taxpayer for accounting purposes; nor can this
issue be determined by the manner in which a taxpayer deals with the amount after
receiving it.
Held further: the Tax Court had erroneously focussed on the taxpayer’s physical assets
(which were insignificantly changed by the termination agreement) instead of on the
taxpayer’s much more valuable incorporeal assets in terms of the exclusive distribution
agreement.
Held further: the compensation for the impairment of the taxpayer’s business
constituted by the loss of those exclusive distribution rights was of a capital nature.
Kroon AJA: (BRAND, VAN HEERDEN, TSHIQI JJA and BORUCHOWITZ AJA concurring):
Onus
[18] In terms of s 82 of the Income Tax Act, the onus (in the Tax Court and on appeal to this
court) was on the taxpayer to establish that the receipt of the R67 million was of a capital nature
and that it should not have been assessed to tax as part of the taxpayer’s gross income . .
362 Income Tax in South Africa: Cases and Materials

[23] While the Act, in s 1, contains a definition of ‘gross income’, which excludes receipts or
accruals of a capital nature (save for certain exceptions which are not relevant for present
purposes), there is no definition of ‘receipt or accrual of a capital nature’. There is no single
criterion for determining whether a receipt or accrual is to be categorised as capital or income.
The question falls to be decided on the facts of each particular case: see Bourke’s Estate v CIR.22 In
CIR v Pick ’n Pay Employee Share Purchase Trust23 Smalberger JA expressed himself as follows:
‘There are a variety of tests for determining whether or not a particular receipt is one of a revenue or
capital nature. They are laid down as guidelines only – there being no single infallible test of invariable
application. In this regard I agreed with the following remarks of Friedman J in ITC 1450 (at 76):
“But when all is said and done, whatever guideline one chooses to follow, one should not be led to a result
in one’s classification of a receipt as income or capital which is, as I have had occasion previously to
remark, contrary to sound commercial and good sense” ’.
[25] The starting point in my view is the finding of the court a quo that the exclusive
distribution rights held by the taxpayer in terms of the distribution agreement, was a capital
asset. … It was clearly correct and nothing more requires to be said on that score. It follows that,
consequent upon the termination agreement, the taxpayer lost an asset.
[26] Non constat24 however . . . that the R67 million payment was of a capital nature. The
approach was in keeping with the approval by Franklin J in ITC 125925 of the following dictum in
the English case of Inland Revenue v Fleming & Co (Machinery) Ltd (3):26
‘The sum received by a commercial firm as compensation for the loss sustained by the cancellation of a
trading contract or the premature cancellation of an agency agreement may in the recipient’s hands be
regarded either as a capital receipt or a trading receipt forming part of the trading profit. It may be
difficult to formulate a general principle by reference to which in all cases the correct decision will be
arrived at since in each case the question comes to be one of circumstance and degree.’
[27] The Tax Court held that the question to be answered was whether the taxpayer was
compensated for the capital value of the exclusive distribution right, that is, whether the
compensation of R67 million paid for the early termination of the distribution right was paid as
compensation for the loss of the value of the capital asset, the distribution right, and therefore
destined to fill a hole in the taxpayer’s assets, or whether it was paid as compensation for a loss of
profits in the sales of Bells, which would be the result of the early termination of the distribution
right.
[28] The first comment that falls to be made on the ruling of the Tax Court against the
taxpayer on this score is that it implies that the receipt of the R67 million by the taxpayer was ‘a
gain made by an operation of business carrying out a scheme for profit-making’, a well-established
guideline test considered by Smalberger JA to be the appropriate one in Pick ’n Pay.27 That would
mean however that in the present matter the taxpayer, admittedly in possession of a capital asset
and treating it as such, changed its intention in respect thereof, and decided to convert its use of
the capital asset (part of its income-producing structure) to use thereof as trading stock (part of
its income-producing activities). For the reasons that follow I am unable to align myself with that
proposition.
[29] It was held in the court a quo that in order to determine the nature of the amount paid to
the taxpayer for the early termination of the exclusive distribution right, it was important to look
at the bargaining position of the taxpayer and what the amount was paid for. . . .
[30] The judgment of the court a quo sought to lay emphasis on what was referred to as the
taxpayer’s calculations in preparing for the negotiations. The reference was to the evidence of
Van der Watt, who stated during examination-in-chief that he was asked to negotiate on behalf
________________________

22 Bourke’s Estate v CIR 1991 (1) SA 661 (A) at 671I-J; 53 SATC 86 at 93.
23 CIR v Pick ’n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A) at 56G-I.
24 Literally, ‘it is not clear or evident’, in other words, it does not necessarily follow. In other words, the Tax
Court took the view that, just because the asset was a capital asset, it did not necessarily follow that the
proceeds received on its disposal were of a capital nature – Editor.
25 ITC 1259 39 SATC 65 at 68-69.
26 Inland Revenue v Fleming & Co (Machinery) Ltd (3) 33 TC 33 at 63.
27 Fn 2 above at 56I-G. See too SIR v The Trust Bank of Africa Limited 1975 (2) SA 652 (A); 37 SATC 87 at 101-
102.
 Capital receipts and accruals 363

of the taxpayer ‘an amount for the termination of the contract as it had a period to run and we
clearly needed to be compensated for that if it was terminated early’.
[33] In any event, the judgment of the Tax Court recognised that in the valuation of a capital
asset it is not inappropriate to have regard to the profits anticipated from the use of the capital
asset. Paragraph 32 of the judgment (which follows on the comments about the internal
document) reads as follows:
‘While the method of calculation of the amount of compensation is an important factor, it is not
determinative of the nature of the receipt. This is so because: “[I]t is a normal principle of valuation of a
capital asset, whether it be land or the goodwill of a business or otherwise, to use the profits expected to be
earned from the utilisation of the asset as a basis or starting point for the relevant calculations” per
McEwan J in ITC 1341 (1980) 43 SATC 215 at 224; and see Taeuber and Corssen (Pty) v CIR (1975) 37 SATC
129 at 140; and see CIR v Illovo Sugar Estates Ltd (1950) 17 SATC 387 at 394.’
[34] The judgment of the court a quo then referred to what were stated to be indicators of how
the taxpayer, at the time, saw and treated the amount of R67 million it received. The first were
entries in the taxpayer’s financial statements for the tax year in question. Two items were
relevant. First, in the statement headed ‘cash flow statement for the year ended 30 June 1999’, the R67
million was reflected as an ‘exceptional item’ under ‘cash flow from operating activities’ and not
under ‘cash flow from investing activities’.
[35] In my judgment, counsel for the taxpayer validly argued that the nature of a receipt (ie
whether it is capital or revenue) for income tax purposes, is not determined by how it is
subsequently treated for accounting purposes. Reference (by analogy) was made to the decision
in SIR v Eaton Hall (Pty) Ltd28 where it was held that accounting practice cannot override the
correct interpretation of the provisions of the Act and their application to the facts of the
matter. As appears from the present judgment, the facts favour a finding of a capital nature.
Second, not only did the financial statement reflect that the receipt of the R67 million was an
‘exceptional item’, but note 4 to the statement specifically recorded that the receipt was
‘compensation for the cancellation of the exclusive distribution rights’, which points rather to a
receipt of a capital nature.
[36] [An item in the taxpayer’s financial statements was] an entry reflecting that a dividend of
some R88 million was declared, notwithstanding that, although the taxpayer had the reserves to
declare the dividend it did not have the cash on hand to meet the dividend. The point . . . was
however adequately met by counsel’s submission that the manner in which a taxpayer deals with
a receipt, after it has received it, cannot determine the nature of the receipt, eg the capital
nature of the receipt of the proceeds of the sale of a building is not affected by the utilisation of
the proceeds to pay a dividend.
[37] The court a quo also placed reliance on the fact that the R67 million was initially paid into
a dividend account of SFW Group. On the evidence of Van der Watt this was done as a matter of
convenience as the taxpayer could then earn interest on the net amount in the account. The
aspect is not of assistance to the Commissioner.
[38] A further ground for the finding of the Tax Court was founded on a passage in the
taxpayer’s statement of its grounds of appeal to the Tax Court. It read as follows:
‘It was commercially more sensible for the [taxpayer] to have the [distribution] agreement terminated in
1998 upon compensation for the termination of its rights, than to have the agreement run its full term
and then not have it renewed. If it became apparent, in 1998, that the [taxpayer’s] right to distribute Bells
. . . would not have been renewed in January 2002, this would have had a serious detrimental effect on the
motivation of sales staff, leading to a reduction in income. Furthermore, the [taxpayer] had to give itself
time to attempt to limit the damage that would have been caused by the loss of its distribution rights by
attempting to garner other business in place of the lost products.’
Suffice it to say that this passage speaks to an intention to receive compensation for the loss of an
asset, which would be used in an endeavour to replace that asset with another income-producing
structure.
[39] The above paragraph leads to a consideration of earlier paragraphs in the judgment of the
court a quo reading as follows:
________________________

28 SIR v Eaton Hall (Pty) Ltd 1975 (4) SA 953 (A) at 958 B-D.
364 Income Tax in South Africa: Cases and Materials

‘The loss of the Bells distribution rights resulted in insignificant changes to [the taxpayer’s] physical
business infrastructure. But a few personnel (three to four out of 3200 employees) were laid off. Bells was
fully imported in bottled form and the litreage of the Bell’s products sold amounted to only 1,45 per cent
of the total litreage handled by [the taxpayer]. [The taxpayer’s] infrastructure regarding production and
distribution therefore remained virtually intact . . . . [The taxpayer’s] existing income-earning structure
was rendered less profitable, but it remained virtually unchanged and was not removed.’
[40] However, one of the guideline tests adverted to in the court a quo, borrowed from the
decision in ITC 1341 (1980) 43 SATC 215, was whether a substantial part of the income-
producing structure of the taxpayer had been sterilised29 by the transaction in question. It was
held in that case that the impairment of 20 per cent of the taxpayer’s business was material, and
compensation for such impairment by the withdrawal of a party from a joint venture agreement
was held to be of a capital nature. See too the further remarks following on the quotation from
Fleming set out in para 26 above, reading as follows:
‘When the rights and advantages surrendered on cancellation are such as to destroy or materially to cripple
the whole structure of the recipient’s profit-making apparatus, involving the serious dislocation of the
normal commercial organisation and resulting perhaps in the cutting down of the staff previously
required, the recipient of the compensation may properly affirm that the compensation represents the
price paid for the loss or sterilisation of the capital asset and is therefore a capital and not a revenue
receipt.’
[41] In Silke on South African Income Tax, 2010 the following passages appear:
‘An amount received by way of damages or compensation for the loss, surrender or sterilisation of a fixed
capital asset or of a taxpayer’s income-producing machine is a receipt of a capital nature.
...
In order for compensation for the cancellation of a trading contract to constitute a sum of a capital
nature, it is sufficient if the contract constitutes a substantial part of the business, and the cancellation
need not have the effect of destroying or materially crippling the whole of the taxpayer’s income
producing structure.’
See too CIR v Illovo Sugar Estates Limited 1951 (1) SA 306 (N) at 310-311.
[42] Counsel therefore correctly submitted that the court a quo’s reasoning reflected that it
erroneously focussed on only physical assets, instead of the much more valuable incorporeal
assets constituted by the exclusive distribution rights (the loss of which, consequent upon the
termination of the distribution agreement, brought in its train the disastrous consequences
referred to earlier in this judgment). The compensation for the impairment of the taxpayer’s
business constituted by that loss is properly to be viewed as a receipt of a capital nature.
[43] In amplification of the findings of the court a quo as to the calculations that founded the
settlement of the compensation to be paid, it was subsequently added that . . . a notional
purchaser of the distribution rights (to endure for a further 41 months) would not have paid
R67 million therefor, or even R42 million. But, as against this feature is a consideration of what
the negotiating parties wished to secure by settling the terms of the termination agreement. A
prospect faced by United Distillers was that, during the remaining 41 months that the
distribution agreement had to run, the value of the Bells brand would be seriously compromised
as a result of the manner in which the taxpayer, either of its own accord or forced by
circumstances, exercised the distribution right. The value of the distribution right, an asset,
would be safeguarded in UD’s hands. That was something worth paying for.
[44] On the other hand, Stroebel, the managing director of the taxpayer, and not Van der Watt,
was the person who had to finally determine and approve the settlement. As recorded earlier, he
conveyed to UD that he wanted a payment of R100 million (his main purpose being to ensure
that capital was available for the acquisition of a new whiskey brand). In the result, he approved
the counter offer of R60 million as supplemented by the sum of R7 million, the compromise
figure in respect of a contingent tax liability. The figures were cognisably less than the projected
sales profits and the contingent tax liability (if the Commissioner sought to assess any such
liability). The circumstance that resulted in Stroebel’s endeavours to acquire a substitute brand
to replace Bells met with minimal financial success is neither here nor there.
________________________

29 In this context, a capital asset is said to be ‘sterilised’ where it is not disposed of by the taxpayer, but is
rendered unproductive of income, by agreement or otherwise - Editor.
 Capital receipts and accruals 365

[45] Finally, it should be emphasised that clause 4.5 of the termination agreement30 referred to
payment of full compensation for the closure of the taxpayer’s business relating to the exercise
of the distribution rights (an asset). There was no reference in the termination agreement to a
payment for loss of profits. There is no suggestion that the termination agreement did not
reflect the intention of the parties or that it was in any way simulated. It need hardly be added
that any suggestion that the taxpayer, faced with the option of concluding a capital transaction
with no tax implications or an income transaction with such implications, would chose the latter,
is, to say the least, an unconvincing one.
[46] I find accordingly that the taxpayer, which did not carry on the business of the purchase
and sale of rights to purchase and sell liquor products, did not embark on a scheme of profit-
making, and that it did discharge the onus of establishing that the receipt of R67 million was of a
capital nature. The Commissioner erred in including the receipt in the taxpayer’s gross income
and assessing same to tax. The taxpayer is accordingly entitled in the main appeal to the relevant
orders set out at the end of this judgment.
Orders

[The court upheld the taxpayer’s appeal and ordered that the additional assessment of the
taxpayer for the 1999 tax year be set aside.]

Notes
A taxpayer’s assets can comprise not only corporeal assets (such as plant and buildings)
but also incorporeal assets, such as rights – for example contractual rights held by the
taxpayer and rights vested in the holder of a patent, trademark or copyright. Both
corporeal and incorporeal assets may be capital assets or revenue assets (trading stock)
depending on the nature of the taxpayer’s business and the role of those assets in that
business. Thus, if the taxpayer carries on the business of buying and selling assets of the
kind in question, then they are trading stock in his hands; but if the asset forms a fixed
part of his income-earning structure, then it is a capital asset.
If a contract to which the taxpayer is a party is terminated and the taxpayer becomes
entitled to compensation for the loss of an asset, whether corporeal or incorporeal, a
question arises as to whether such compensation is of a capital nature (and thus liable to
capital gains tax) or a revenue nature (thus liable to income tax) in the taxpayer’s hands.
Which hole does the compensation fill?
The Supreme Court of Appeal judgment cites as a criterion to determine whether
damages accruing to a taxpayer are of a revenue nature or of a capital nature the
metaphor adopted by Lord Clyde in Burmah Steamship Co Ltd v IRC [1931] SC 156, 16 TC
67 where he asked whether the damages in question filled a hole in the taxpayer’s
trading profits (in which event the damages would be revenue) or a hole in his capital
assets (in which event the damages would be capital).31
The method used to calculate the amount of compensation and its accounting treatment
A difficulty that arises, particularly where the taxpayer has, by agreement, disposed of or
relinquished a capital asset in return for compensation is that the amount of the
compensation will often be calculated with reference to the amount of income that the
asset would have produced for the taxpayer. In this decision, the court (at para [33])
finds no fault with the principle, articulated by the Tax Court, that the method of
calculating an amount does not determine whether it is revenue or capital.
________________________

30 Para 16 above.
31 This criterion was also cited in Bourke’s Estate v CIR 1991 (1) SA 661 (A) at 672A.
366 Income Tax in South Africa: Cases and Materials

The relevance of the way in which the taxpayer treated the amount in its accounting records
In this case (see para [34] of the judgment) the taxpayer’s financial statements recorded
the receipt of the R67 million as cash flow from operating activities. The court held that the
way in which the taxpayer treats an amount in his accounting records cannot be
regarded as determinative of whether it is capital or revenue.

Had there been a change of intention by the taxpayer vis-à-vis the asset?
The court noted (at para [28] of the judgment) the Tax Court’s conclusion that the
compensation of R67 million received by the taxpayer was a gain from a scheme of
profit-making. The Supreme Court of Appeal pointed out that, since it was not in dispute
that the exclusive distribution contract in question was originally a capital asset in the
taxpayer’s hands, the Tax Court’s conclusion that the compensation received for the loss
of that asset was of a revenue nature necessarily implied a finding by the Tax Court that
the taxpayer had undergone a change of intention in relation to that asset which caused
it to change its character from capital to trading stock. (Presumably, the Tax Court took
the view that, in negotiating for compensation, the taxpayer ceased to treat the
contractual rights in question as capital in nature, and instead treated them as assets that
could be used for monetary gain in a scheme of profit-making.) The Supreme Court of
Appeal rejected this aspect of the Tax Court judgment.

Physical assets and incorporeal assets

A major flaw in the judgment of the Tax Court, identified by the Supreme Court of
Appeal (see para [39] of the judgment), was that the Tax Court had given excessive
weight to the fact that the loss of the contract in question resulted in ‘insignificant
changes’ to the taxpayer’s physical business infrastructure and did not sufficiently
recognise the loss of its ‘much more valuable incorporeal assets’ through the loss of its
rights under the exclusive distribution agreement.
 8
STATUTORY INCLUSIONS IN GROSS INCOME

§ Page
1 Introduction ............................................................................................................. 368
1.1 The relationship between the general concept of income
and the statutory inclusions in gross income ................................................ 368
[197] CIR v Butcher Bros (Pty) Ltd ............................................................. 368
2 Amounts included in the definition of ‘gross income’ .......................................... 368
2.1 Annuities: para (a) of the definition of ‘gross income’ ................................ 368
[198] ITC 768 ................................................................................................ 368
[199] SIR v Watermeyer ................................................................................ 369
[200] SIR v Struben Minerals (Pty) Ltd ....................................................... 370
[201] ITC 115 ................................................................................................ 371
[202] ITC 713 ................................................................................................ 371
[203] KBI v Hogan ........................................................................................ 372
2.2 Services: para (c) of the definition of ‘gross income’ ................................... 375
[204] Mooi v SIR ........................................................................................... 376
[205] CIR v Cowley ........................................................................................ 376
[206] De Villiers v CIR .................................................................................. 377
[207] Stander v CIR....................................................................................... 378
[208] CIR v Kotze .......................................................................................... 380
[209] CIR v Professional Contract Administration CC ............................... 384
[210] Stevens v CSARS .................................................................................. 388
2.3 Payments for loss of office, etc: para (d ) of the definition of
‘gross income’ .................................................................................................. 390
[211] SIR v Somers Vine ............................................................................... 391
2.4 Lease premiums: para (g) of the definition of ‘gross income’ ..................... 393
[212] CIR v Butcher Bros (Pty) Ltd ............................................................. 393
[213] ITC 728 ................................................................................................ 395
[214] ITC 745 ................................................................................................ 396
[215] Broomberg, Tax Strategy .................................................................... 398
[216] CIR v Myerson and Kelly ..................................................................... 399
[217] Vacu-Lug (Pty) Ltd v COT .................................................................. 401
2.5 Leasehold improvements: para (h) of the definition of ‘gross income’ ...... 403
[218] Rex Tearoom Cinema (Pty) Ltd v CIR .............................................. 403
[219] ITC 767 ................................................................................................ 404
[220] COT v Ridgeway Hotel Ltd ................................................................. 406
2.6 Recovery and recoupment: section 8(4)(a) .................................................. 408
[221] CIR v Pinestone Properties CC ........................................................... 408
[222] Chipkin (Natal) (Pty) Ltd v CSARS ................................................... 412

367
368 Income Tax in South Africa: Cases and Materials

§1 Introduction
§1.1 The relationship between the general concept of income and the statutory
inclusions in gross income
The effect of the various sub-sections of the definition of ‘gross income’ is to include those specified
amounts in the taxpayer’s ‘gross income’ even if they are in reality of a capital nature.

[197]
CIR v Butcher Bros (Pty) Ltd
1945 AD 301, 13 SATC 21
For the facts of this case see extract [212]
Feetham JA: Section 7(1) of the Income Tax Act 1925 contains a definition of ‘gross income’ the
introductory portion of which reads as follows:
‘“Gross income” means the total amount whether in cash or otherwise received by or accrued to or in
favour of any person, other than receipts of a capital nature, in any year or period assessable under this
Chapter from any source within the Union or deemed to be within the Union, and includes the following:–’
Then follow a number of paragraphs, (a) to (f), specifying particular kinds of gross income . . .
It is convenient to note here that Mr Shaw stated in the course of his argument that he did not
dispute Mr Coaker’s contention that paragraphs (a) to (f) of the definition of ‘gross income’ in
s 7(1) extend its scope so as to bring within it certain receipts and accruals of a capital nature
which could otherwise be excluded therefrom. This view as to the interpretation of the defini-
tion is in accord with the decision of this Court in CIR v Wolf 1 . . . and with the decision of the
Natal Provincial Division in Levy v CIR 2 . . . and must be accepted as correct.

§2 Amounts included in the definition of ‘gross income’

§2.1 Annuities: para (a) of the definition of ‘gross income’
Gross income includes ‘any amount received or accrued by way of annuity’.

The question whether an amount is an ‘annuity’ does not depend on whether it is payable out of
income or capital.

[198]
ITC 768
(1953) 19 SATC 211
De Wet J: Mr Bizzell, who appeared for the appellant, contended that the word ‘annuity’ as used
in s 7(a) of the Act has a restrictive meaning and is confined to a typical annuity, such as one
granted by an insurance company to a person who wishes to make provision for the remainder
of his life’; that it does not include every annual payment although the amount is fixed. Also he
said that if it included any other type of annual payment, it must be a payment which is derived
from income and not from capital, because, so he said, in the definition of ‘gross income’ re-
ceipts or accruals of a capital nature are excluded. He resorted to English authorities in support
of his contention. but I do not think that the authorities relied upon by him assist the Court in
the interpretation of s 7(a). In the first place the basic method of taxation in England is totally
different. In England profits are taxed, whereas in South Africa income is taxed. Furthermore, in
the first instance the definition of ‘gross income’ is confined to receipts or accruals which are
not of a capital nature; immediately thereafter the net is widened so as, in some instances, to
include capital. Sub-paragraphs (a) to (f) of s 7 extend the scope of gross income so as to bring
within it certain receipts and accruals of a capital nature which would otherwise be excluded
________________________

1 1928 AD 177 at 182-183, see also Mooi v SIR 1972 (1) SA 675 (A), 34 SATC 1.
2 1930 NPD 370.
 Statutory inclusions in gross income 369

therefrom – see CIR v Butcher Brothers.3 So that the word ‘annuity is not confined to an annuity
which necessarily is paid only out of income.
Curiously enough it was argued in another case, when the meaning of the word ‘annuity was
being examined, that a true annuity is one which is paid out of capital and not income. I refer to
Case No 5136 of the Income Tax Cases, decided on 31 October 1952, not yet reported. In that
case Price J dealt with a case where it was contended on behalf of the appellant that because the
will made provision that the annuity was to be paid ‘out of income and profit resulting from the
investment of the remainder of my estate . . .’ it was not an annuity because it was payment out of
income, it being contended that an annuity is an amount payable out of a fund which is more of
a capital nature rather than income . . . Price J said that it did not matter if the amount was paid
out of income or out of capital assets of the estate’. So long as it was a fixed amount payable
annually it fell within the accepted meaning of the word ‘annuity’. He gave the following as the
main characteristics of an annuity:
‘(1) That it is an annual payment. (This would probably not be defeated if it were divided into instalments.)
(2) That it is repetitive – payable from year to year for, at any rate, some period.
(3) That it is chargeable against some person.’
I am not sure that it is essential that the payment should be repetitive. It is conceivable that an
annuity could be for one year; for instance, if a donor was to relate a gift of a fixed sum of money
to a particular year, it might be said that the sum was an annuity for that year . . .
It would appear from the definition given in the case referred to above, that in order that the
payment of an annual sum shall be regarded as an annuity, the amount should be a fixed sum.
. . . Again, I am not certain that the amount need necessarily be a fixed annual amount. I cannot
see why a person cannot grant an annuity to somebody else although the exact amount of the
annuity is uncertain, so long as it is definitely some amount which can, when it is due and paya-
ble, be ascertained . . .

In order to constitute an annuity, a taxpayer must have a right to more than one annual payment.

[199]
SIR v Watermeyer
1965 (4) SA 431 (A), 27 SATC 117
The taxpayer was the widow of the late Professor Watermeyer of the University of the
Witwatersrand. At the time of his death in 1951, Professor Watermeyer had been receiv-
ing both a pension and an ex gratia amount of R150 per annum from the University.
After his death the University voluntarily continued making the ex gratia payments to his
widow in recognition of her husband’s long service to the university. The university later
increased the ex gratia payment to R300 per annum. In a letter dated March 1956 the
registrar of the university informed her that the university Council had decided to con-
tinue to make ex gratia payment of R300 per annum to her and hoped to be able to
continue doing so for her lifetime.
Issue: were the ex gratia payments received during the 1961-62 tax year an ‘annuity’ in
the taxpayer’s hands and therefore to be included in her ‘gross income’?
Held: in the negative. The taxpayer had no legal right to the amounts; they were ex gra-
tia payments. Consequently, they did not constitute an ‘annuity’, but were merely a series
of gifts. Therefore, they were of a capital nature.
Holmes JA: The legislature has not defined ‘annuity’ and I do not consider that it is either nec-
essary or desirable to try to formulate a touchstone definition applicable to all cases. It will be
sufficient for the purposes of this case to refer to one or two basic or essential characteristics,
without which there cannot be an annuity. Used in regard to payments, the word, from its very
nature, postulates the element of recurrence, in the sense of annual payments (even if made,
say, quarterly during the year). And this element of necessary annual recurrence cannot be
________________________

3 1945 AD 301.
370 Income Tax in South Africa: Cases and Materials

present unless the beneficiary has a right to receive more than one annual payment. This seems
to me to be axiomatic, and there is no need to make it sound portentous by parading the au-
thorities. It is sufficient to say that it is consistent with what was said by Price J in ITC 7614 and by
Jenkins LJ in IRC v Whitworth Park Coal Co Ltd.5 Hence de facto recurrent payments, if voluntary
and payable at will, do not qualify as annuities.
...
In the present case it is common cause that the payments to the widowed taxpayer were volun-
tary and payable at the will of the Council. Although the payments were made year by year
there was no right of recurrence. In the result, the court a quo was right in holding that the pay-
ment in question was not received ‘by way of an annuity’, The next question is whether the pay-
ment was ‘of a capital nature’ in which event it is excluded by definition from the taxpayer’s
gross income.
As to that, where ex gratia yearly amounts are payable at will, de jure each payment is a separate
individual gift. The most that the recipient has, in regard to continuance or regularity, is the spes
of recurrence year by year . . .
There have of course been special cases in which it was held that a gift did amount to income, as
counsel for the Secretary pointed out. But in each such case some other cogent factor was pre-
sent. For example in Moolman v CIR 6 a voluntary payment, made by the Union Government to a
wool farmer, was held to be income and taxable. But there the distinctive feature was that the
receipt was in respect of wool sold by the taxpayer in the course of his occupation as a wool pro-
ducer and amounted to a profit made by him as the result of his operations.7
Similarly, in Blakiston v Cooper8 a freewill gift of the voluntary Easter offerings to a vicar was held
to be taxable as being profits accruing to him by reason of his office, in the language of the tax-
ing statute. The special feature was that the gift accrued to him in respect of his services as vicar.

Where the taxpayer has a right to annual payments, but it is uncertain whether more than one
payment would be made, this is not an annuity.

[200]
SIR v Struben Minerals (Pty) Ltd
1966 (4) SA 585 (A), 26 SATC 248
The taxpayer company had entered into a contract with a mining and prospecting com-
pany, in terms of which the latter was given the right for five years to prospect and search
for minerals on a certain farm and, at any time during that period, to purchase all
the rights to minerals. The agreement provided that during that five year prospecting
period, the prospecting company would pay the taxpayer, for each 12-month period, an
amount calculated at a specified rate per morgen.
Issue: was the annual prospecting money paid to the taxpayer of an income or a capital
nature; was it an annuity?
Held: the transaction was one of a capital nature, and was not an annuity.
Beyers JA: A final argument, which was not pressed very strenuously, was that the payments un-
der clause (3) of the agreement were in the nature of an annuity. As pointed out by the learned
Judge a quo, if the option is exercised very shortly after the agreement begins to run, only one
payment under clause (3) would be required to be made; and per contra, the grantee could
abandon prospecting during the first year of the operation of the agreement and by virtue of the
terms of clause (5) thereof be relieved of the liability for further periodic payments. I agree with
the Special Court that in these circumstances it would be inappropriate to describe payments
made under clause (3) of the agreement as an annuity.
________________________

4 (1952) 19 SATC 103 at 106.

5 [1958] Ch 792 at 815.
6 1954 (2) SA 560 (A).
7 At 568 C-D.
8 [1909] AC 104.
 Statutory inclusions in gross income 371

The appeal is accordingly dismissed with costs.

VAN BLERK JA, OGILVIE-THOMPSON JA, BOTHA JA and HOLMES JA concurred.

[201]
ITC 115
(1928) 4 SATC 66
On the death of her husband, the taxpayer became entitled to certain shares. An agree-
ment was then entered into, in terms of which the taxpayer transferred her shares to the
remaining shareholder and the latter undertook to pay her or her heirs the sum of £50
per month for a period of five years, and in the event that the taxpayer survived that
period, to pay her thereafter the sum of £25 per month for the remainder of her life.
During the year of assessment, the taxpayer received twelve monthly payments of £50
and the Commissioner included the aggregate sum of £600 in her taxable income for
that year. The taxpayer objected that this sum represented the payment of the purchase
price of the shares and, as such, was a receipt of a capital nature.
Issue: was the consideration payable to the taxpayer for her shares ‘income’, being an
annuity, or was it a capital amount, being the selling price of the shares?
Held: the payments of £50 per month for five years were of a capital nature, being the
selling price of the shares; any further monthly payments would be an annuity.
Mackenzie (accountant member) said that it appeared to him that the payment of £50 per month
for the period of five years in terms of the agreement really constituted a payment of the pur-
chase price of the shares, and as such was a return of capital to the appellant. The question,
therefore, of tax on that £50 a month did not arise. In the event however of the appellant surviv-
ing the five years, then the £25 a month would actually represent income.
Maritz (President) concurred but with some hesitation. He entertained a doubt in the matter, but
the doubt was not sufficiently strong to make him disagree with the views expressed by his col-
leagues.

[202]
ITC 713
(1950) 17 SATC 337
The taxpayer, who owned a manufacturing business, sold it in consideration for the
payment by the purchaser of the sum of £50 per month for the taxpayer’s lifetime.
The Commissioner included in the taxpayer’s income the aggregate of the monthly
payments received by him during the year of assessment.
Issue: was the sum of £50 per month of a capital nature, being the selling price of the
business, or was it an annuity?
Held: it was an annuity.
Lucas J: The contention advanced on behalf of the appellant is that the £50 per month for life
which he is to receive is a capital amount and not income in terms of the Act. There is no fixed
amount determined as purchase price. It might be £50, the first payment, or it might go on for
twenty years . . . The agreement is quite clear that on the death of the appellant the payments by
the purchaser will fall away completely. This, in my view, is entirely different from the position
where a fixed amount has been agreed upon and then provision made for such payment in
instalments.
Mr Kovalsky, for the appellant, has contended that what was the purchase price could be actuari-
ally ascertained and that that should be done and the £50 per month be regarded as instalments
372 Income Tax in South Africa: Cases and Materials

towards the payment of the amount so arrived at. I do not think that there is anything in that
contention. The position in the view of the Court is that this is clearly an annuity and falls within
the provisions of s 7 of the Act. Baron Watson in Foley v Fletcher9 defined an annuity in these
terms:
‘An annuity means where an income is purchased with a sum of money and the capital has gone and
ceased to exist, the principal having been converted into an annuity.’
10
. . . The position is analogous to that in ITC 70 where it was held that a sum of £50 per month
payable to a legatee during her lifetime in terms of a bequest contained in the will of her
deceased husband was held to be income chargeable with tax. Had a fixed amount been
bequeathed to her that would not have been taxable, but an annuity which she would buy with
that money would be taxable.

Where a person gives up a right to be paid a capital sum in return for the payment of periodical
amounts, those amounts will be annuities and subject to income tax if they constitute an annuity.
[203]
KBI v Hogan
1993 (4) SA 150 (A)
H had been seriously injured in a motor accident. He instituted a delictual action against
the Motor Vehicle Assurance Fund (‘the Fund’) for the payment of R350 000 as general
damages, including loss of future income. The action was settled by agreement and the
Fund proceeded to issue a certificate under s 21(1C)(b) of the Compulsory Motor Vehi-
cle Insurance Act 56 of 1972 in terms of which the claim for loss of future earnings was to
be paid into H’s bank account in monthly instalments. The Fund did not pay the full
amount of the instalments, as provided for in the certificate, into Hogan’s bank account,
but deducted employee’s tax from each instalment. This was done because the Fund
considered the payments in question to be annuities and accordingly part of H’s gross
income, and that it was obliged under the Act to deduct employees’ tax from each in-
stalment before paying it into Hogan’s bank account.
H contended that the payments were of a capital nature, not annuities, and that the
Fund had in any event undertaken, in the settlement agreement, to pay the full amounts
set out in the certificate directly into his bank account. The Provincial Division found in
favour of H and ordered the instalments to be paid to him without any deduction of
employees’ tax.
On appeal, the Court said that there were two separate issues: (1) whether the
payments could be regarded as ‘annuities’ for the purposes of the definition of ‘remu-
neration’ in para 1 of the Fourth Schedule to the Income Tax Act; and (2) whether the
fact that the certificate provided that the instalments had to be paid directly into H’s
bank account meant that no prior deductions could be made for employees’ tax.
It was held that the terms of the certificate furnished to Hogan by the MVA Fund had
replaced his right to receive damages in a lump-sum (which would have been of a capital
nature) with a contractual obligation to pay monthly instalments for as long as he lived.
There was no longer any capital sum which was reduced by those instalments, and the
instalments were ‘annuities’ for the purposes of the Income Tax Act.
It was held that the MVA Fund was obliged, in terms of the Fourth Schedule to the
Income Tax Act, to deduct employees’ tax from each instalments before paying it to
Hogan, and that this statutory obligation could not be changed by the contractual provi-
sions in the certificate.
________________________

9 28 LJ 100.
10 3 SATC 58.
 Statutory inclusions in gross income 373

Joubert ACJ: The action [by the taxpayer against the MVA Fund for delictual damages] was set-
tled and the manager of the MVA Fund issued a certificate under s 21(1C)(b) of the Compulsory
Motor Vehicle Insurance Act 56 of 1972 in terms of which the claim for loss of future earnings
was to be paid into H’s bank account in monthly instalments. This certificate contains the follow-
ing clauses:
‘1. [The MVA Fund shall, from 1 April 1981, pay Hogan in respect of his claim for loss of future income,
by way of instalments on the following terms:]
1.1 for the first six months, R540 per month;
1.2 for the following six months, R590 per month;
1.3 for the following six months, R615 per month;
1.4 for the following two and a half years, R640 per month
1.5 for the following year, R640 per month’
1.6 thereafter at the gross salary per month earned by a sub-officer at the Fire Department of the
Johannesburg City Council to the normal retirement date of such a person;
1.7 thereafter at the gross pension that such a person would earn on the supposition that his service
period had lasted from 1 April 1981.
. . . [I]t is a precondition for such payments that the claimant prior to each payment shall provide a
declaration by a Commissioner of Oaths that he has satisfied himself that the claimant is still alive . . .
2 The payments by the MVA Fund to the claimant shall be paid directly into claimant’s current bank
account . . .’
The MMF is the legal successor to the MVA Fund . . . What led to Hogan’s application for relief
is that the MMF did not pay the full amount as calculated in clause 1.6 of the certificate, but a
lesser amount, namely the amount after deduction of employees’ tax. This amount was paid over
by the MMF to the Commissioner for SARS. The legal justification put forward for this action
was that the amounts, payable in terms of the certificate, are amounts payable to Hogan by way
of annuity which consequently formed part of his gross income from which employees’ tax had
to be deducted. Hogan’s contention was that the payments were of a capital nature, and were
not annuities, and in any event that the MMF had undertaken to pay him the full amounts set
out in the certificate.
The first point of contention
The first point of contention between the parties . . . is whether the periodical monthly payments
in clause 1 of the certificate are an ‘annuity’ for the purposes of the definition of ‘remuneration’
in para 1 of the Fourth Schedule to the Income Tax Act . . . According to this definition, ‘remu-
neration’ means –
‘an amount of income payable to anyone by way of salary, leave pay, allowance . . . and including–
(a) any amount in para (a), (c), (d), (e) or (f) of the definition of ‘gross income’ in section 1 of this Act’.
[In section 1 of the Act, para (a) of the definition of ‘gross income’ refers to ‘an amount re-
ceived or accrued by way of annuity’.]
Consequently, an annuity is included in gross income irrespective of whether it is of a capital
nature. In terms of s 10A of the Act, the capital element of a purchased annuity is exempt from
income tax.
The concept ‘annuity’ is not defined in the Act. In judicial decisions, the approach of our courts
11
has been to determine the most important characteristics of an annuity. Cf SIR v Watermeyer:
‘The Legislature has not defined “annuity” and I do not consider that it is either necessary or desirable to
try to formulate a touchstone definition applicable to all cases. It will be sufficient for the purposes of this
case to refer to one or two basic or essential characteristics, without which there cannot be an annuity.
Used in regard to payments, the word, from its very nature, postulates the element of recurrence, in the
sense of annual payments (even if made, say, quarterly during the year). And this element of necessary
annual recurrence cannot be present unless the beneficiary has a right to receive more than one annual
payment. This seems to me to be axiomatic, and there is no need to make it sound portentous by parading
the authorities.’
From the italicised words it seems that emphasis is laid on two main characteristics of annuities,
namely–
(1) recurrent (that is to say, periodical) payments;
(2) the right of the beneficiary to receive more than one payment.
________________________

11 1965 (4) SA 431 (A) per Holmes JA at 437A-C.

374 Income Tax in South Africa: Cases and Materials

The latter characteristic is of course the converse of someone’s obligation to pay the annuity . . .
The question in the matter at hand is whether the payments made to Hogan in terms . . . of the
certificate are annuities. If they are, then they are part of his gross income (irrespective of
whether they are of a capital nature or not). Moreover, they then form part of his ‘remun-
eration’ as defined in para 1 of the Fourth Schedule to the Income Tax Act. On the other hand,
if the payments are not annuities, then the further question arises whether they are of a capital
nature, in which even they do not form part of gross income and ‘remuneration’. Cf SIR v
Watermeyer (supra) per Holmes JA:
‘It will be seen that if an amount in question is received by way of an annuity, it is part of gross
income whether or not it is of a capital nature. If it is not an annuity, the further question arises
whether the amount is a receipt or accrual of a capital nature, in which event it is excluded from gross
income.
Section 21(1C) of Act 56 of 1972 . . . is the empowering statutory provision by which a certificate
is issued as an ‘undertaking’ . . .
In Marine & Trade Insurance Co Ltd v Katz NO 12 this court went into the interpretation of
s 21(1C)(b). The objective is to make provision for a deviation from the common law approach
according to which a claimant for damages must claim his damages or loss, whether present or
future, once and for all, in one action. An authorised insurer . . . is given the capability by
s 21(1C) to give the third party an undertaking to pay his future loss of income by way of instal-
ments. The purpose of such an undertaking is to take away from the trial court the task of deter-
mining the quantum of damages for these items by stipulating a global amount which takes
account of uncertainties and indeterminable factors.13
In this case, the MVA Fund’s undertaking is embodied in the certificate. What is immediately
apparent is that nowhere is there mention made of a total amount or global sum as damages for
Hogan’s claim for loss of future income . . . It is a prerequisite for each monthly payment that
Hogan provide written proof that he is still alive. The inference is that the obligation to make
monthly payments lapses on his death . . .
Are the monthly payments in the present case annuities? Apart from the chief characteristics of
annuities referred to above, there is other assistance which is very useful in this case. In Deary v
Deputy CIR 14 Benjamin J quoted as follows from a dictum of Rowlatt J the English case of Jones v
CIR 15 namely:
‘A man may sell his property for a sum which is to be paid in instalments and when you see that is the case,
that is not income nor any part of it . . . . A man may sell his property for what is an annuity – that is to say
he causes the principal to disappear and an annuity to take its place. If you can see that that is what it is
then the Income Tax taxes it. Or a man may sell his property for what looks like the annuity, but you can
see quite well from the transaction that it is not really the transmutation of a principal sum into an annui-
ty, but it is a principal sum the payment of which is being spread over a time and is being paid with interest
. . . . I therefore think that what one has to do is to look and see what the sum payable really is. I think . . .
that the ascertaining of an antecedent debt is not the only thing that governs it; it does not govern it by
magic, but it is a very valuable guide in a great many cases undoubtedly.’
Linked to this is the following approach by Millin J in CIR v Milstein16 . . . He held as follows:
‘Paragraph (a) [of the definition of ‘gross income’] includes under gross income any amount so received
by way of an annuity. Annuities differ from other investments in that the capital sum invested is not re-
turnable when the annuity ceases to be payable . . . The test, in determining whether a series of annual
payments amounts to an annuity, is whether the principal continues to exist as a debt or is liquidated when
the transaction takes place. If it is liquidated the payments constitute an annuity.’
The motor accident in which Hogan was injured gave rise to a delictual debt on account
of which the MVA Fund incurred liability toward him to compensate him for his future loss
of income. A once-off payment of the debt would be of a capital nature which extinguished
the debt. In the same way, the spreading of payment by means of a number of instalments
would also be of a capital nature which reduced the debt until it was extinguished. Cf Jones v CIR,
supra.
________________________

12 1979 (4) SA 961 (A).

13 Ibid at 974B, 974 in fine-975A, 975B-C, 976A-B.
14 1920 CPD 541.
15 [1920] 1 KB 711, 121 LT 611.
16 1942 TPD 57 at 64.
 Statutory inclusions in gross income 375

The undertaking in the present case brought about a completely different situation. It replaced
the delictual debt with a contractual liability by the MVA Fund to compensate Hogan for his
future loss of income by way of monthly payments. The delictual debt was extinguished by the
undertaking, so that it underwent a transformation by replacing it with a contractual obligation
to make monthly payments to Hogan for as long as he lived (unless his condition improved)
without setting a liquid or determinable debt which would be reduced by the payment of month-
ly instalments. On Hogan’s death no capital sum is given back to him . . . I am of the opinion
that these monthly payments are annuities and that the court a quo erred in construing them as
capital payments of general damages.
As regards the first point of contention, I am therefore of the view that the periodical payments
are annuities for the purposes of the definition of ‘remuneration’ in para 1 of the Fourth
Schedule to the Income Tax Act, and that they are part of Hogan’s gross income, (irrespective of
whether they are of a capital nature) as defined in s 1 of the Act.
The second point of contention
[The court held in this regard that the MVA Fund had a statutory obligation, in terms of the
Income Tax Act, to deduct employees’ tax from the annuities before making payment to Hogan,
and that this obligation could not be changed by the contractual provision in the undertaking
given by the Fund to pay the whole amount directly into his bank account.
GROSSKOPF JA, MILNE JA, NIENABER JA and HARMS AJ concurred.

Notes
This decision affirms the principles laid down in SIR v Watermeyer regarding the character-
istics of an ‘annuity’. It also affirms and applies the principle that a person who has a
capital asset (such as, in this case, a claim for delictual damages) can sell or exchange
that right in return for an annuity, in which event the annuity payments will be income
and taxed as such. It is only in the case of a purchased annuity (for example, where a
person pays an insurance company a lump sum and in return receives an annuity) that
s 10A of the Income Tax Act partially overrides this common law principle by explicitly
providing for the annuity payments to be apportioned into a capital and a revenue
component, with only the latter being subject to income tax.
The court recognised that periodical payments can be of a capital nature where there
is a fixed amount which is then reduced as the instalments are paid. In the present case,
it was of fundamental importance that the contract in question – whose terms were
embodied in the certificate issued by the MVA Fund – did not stipulate a capital sum as
damages, nor did it provide for the residue of any capital sum to be paid to Hogan’s
estate on his death. The payments were to cease on Hogan’s death.
It followed that the payments made to Hogan were indeed annuities. He had, in effect,
exchanged a capital asset (his right to a capital amount for delictual damages) for an
annuity, as contemplated in the dictum from Deary’s case, quoted in the judgment. The
Fund’s delictual obligation to compensate Hogan for his loss of future earning by way of
a once-off capital sum had been extinguished and replaced by a contractual obligation to
pay him an annuity for life.
Consequently, the annuities formed part of his gross income, and in terms of Fourth
Schedule the MVA Fund was obliged to deduct employees’ tax from each instalment
before paying it to Hogan. This statutory obligation could not be changed by the terms
of the settlement agreement embodied in the certificate issued by the MVA Fund.

§2.2 Services: para (c) of the definition of ‘gross income’

‘Gross income’ is defined as including:
‘any amount, including any voluntary award, received or accrued in respect of services rendered
or to be rendered or . . . received or accrued in respect of or by virtue of any employment or the
holding of any office . . .’
376 Income Tax in South Africa: Cases and Materials

These words are subject to the various exclusions and provisos which follow. Of particu-
lar note is that non-monetary fringe benefits are taxed in terms of the Seventh Schedule,
and not in terms of para (c).
At common law, an amount received for services rendered or to be rendered has the
quality of ‘income’. (See chapter 5.) As a result of the decision in [119] Lunnon, para (c)
was expanded to include voluntary payments for services rendered.

Any amount which falls within para (c) is included in the taxpayer’s gross income even if it is of a
capital nature.

[204]
Mooi v SIR
1972 (1) SA 675 (A), 34 SATC 1
For the facts of this case, see extract [81].
Ogilvie-Thompson CJ: The object of para (c) of the definition is to bring into the category of
‘gross income’ all ‘amounts’ whether of a capital nature or not, accrued in respect of services.
Linguistically inappropriate thought the word ‘amount’ may be in this context, when a taxpayer
becomes entitled to a right ‘in respect of services’ a money value must be assigned to that right
in order to determine the relevant ‘amount’ to be incorporated as ‘gross income’.

A payment in advance as consideration for entering an employer’s service is a payment for the
rendering of future services and therefore falls within the definition of ‘gross income’.

[205]
CIR v Cowley
1960 (2) SA 700 (A), 23 SATC 276
The taxpayer accepted an offer of employment with the Engelhard Industries Group.
The terms of the offer were contained in a letter to him which stated that on joining the
Group, he would be given a ‘relocation payment’ of £2 500. In his income tax return for
the year of assessment ended 30 June 1957 he described this amount as ‘an ex gratia
compensation for loss of pension fund benefits on resignation from [his previous em-
ployer]’, and claimed that it was of a capital nature.
Issue: did the amount in question fall within the definition of ‘gross income’?
Held: in the affirmative. Consideration paid for entering an employer’s service is a
payment for the rendering of future services, irrespective of whether any fixed period of
employment is agreed upon, and falls within the definition of ‘gross income’,
Schreiner JA: Any payment in advance made as consideration for future services must, in the
hands of the recipient, be an ‘amount . . . received . . . in respect of services . . . to be rendered’
within the meaning of s 7(b) of the Income Tax Act.17 If the £2 500 was such a payment in ad-
vance, the taxpayer was rightly assessed upon it. But it was argued that this was not the position,
since on payment the money became the taxpayer’s property absolutely, and he did not oblige
himself under the contract to serve for any particular time. If he should die or resign immediate-
ly upon entering the new employment the money would not, it was contended, be recoverable
by the payer and the payment could thus not be said to be in consideration of services; it was
made in consideration only of entering into or agreeing to enter the new employment, which
was a materially different transaction.
________________________

17 Act 31 of 1941, in terms of which a taxpayer’s gross income included ‘(b) any amount, including any
voluntary award, so received or accrued in respect of services rendered or to be rendered . . .’ See now pa-
ra (c) of the definition of ‘gross income’ in s 1 of the Income Tax Act 58 of 1962.
 Statutory inclusions in gross income 377

A somewhat similar contention was advanced and rejected in Cameron v Prendergast 18 where an
amount of £45 000 was paid to the taxpayer by a company, of which he was a director, as consid-
eration for his undertaking not to resign . . . The transaction was interpreted as embodying a
promise by him to continue to perform services as a director, and accordingly it was held that
the amount was part of the ‘salaries, fees, wages, perquisites or profits’ of his office as director
and therefore taxable. The fact that the taxpayer did not contract to continue to serve for any
particular time was considered irrelevant. Impliedly, he had agreed to serve for a reasonable
time and his fellow directors must have assumed from their knowledge of him that he would not
resign at once or without reason but that the company would get good value for the payment.
This sufficed to make the latter part of his emoluments of office. Lord Romer said:19
‘It matters not that the sum is a lump sum payable at once instead of being spread over a number of years,
and depending in no way upon the number of years already spent or to be spent in the future by the
appellant in the office . . . Remuneration which, if paid by instalments over a number of years, would be
income, is income thought paid once and for all in a lump sum; just as much as the capital consideration
for a sale (say) of land is capital even though payable by instalments spread over a number of years.’
The case is of course not a binding authority in this Court. It dealt with the continuance of an
existing employment and not with the commencement of a new employment. And the statutory
provision was different from ours. But the view there taken lends, in my opinion, support to the
conclusion, which the language of s 7(b) itself indicates, that an amount paid as consideration
for entering an employer’s service is paid as consideration for the rendering of future services,
and that, whether or not any fixed period of employment is agreed upon, the nature of the
payment remains that of remuneration for such services. Whether there is a right to recover any
of the money paid on failure of the recipient, by his voluntary act or otherwise, to serve for a
reasonable period does not, in my view, affect the nature of the payment. Here the £2 500 was
paid to assist in persuading the taxpayer to enter the employment of the new employer so as to
render services in that employment. It was therefor an ‘amount . . . received . . . in respect of
services . . . to be rendered’ and was gross income within the definition. For these reasons in
addition to those in the judgment of Beyers JA I agree that the appeal should be allowed.
VAN BLERK JA, OGILVIE-THOMPSON JA and HOLMES JA concurred.

Notes
It is submitted that the same conclusion could have been reached in this case by applying
the common law principle that a payment for services rendered or to be rendered is
income. The judgment in Cowley is an illustration of the propensity of our courts to
ignore the common law principles of income tax and to focus exclusively on the (often
ill-drafted) provisions of the Act.
The words ‘including any voluntary award’ were inserted into para (c) to counter the
decision in [119] CIR v Lunnon which held that an ex gratia reward for services was a gift
and was not income. It is submitted that this case was wrongly decided, and that the
common law principle was (and is) wide enough to include any quid pro quo for ser-
vices, including an ex gratia payment, within the general concept of income.

A payment to an employee in lieu of leave is given for services rendered.

[206]
De Villiers v CIR
1929 AD 227, 4 SATC 86
The taxpayer, previously the Attorney-General of the Transvaal Province, retired from
that office on the statutory ground of the abolition of his office by a previous Act. At the
date of his retirement there was due to him 136 days accumulated vacation leave. For this
he was entitled to a sum of £670 3s 3d which was duly paid to him.
________________________

18 [1940] AC 549.
19 At 563.
378 Income Tax in South Africa: Cases and Materials

Issue: was the taxpayer liable for income tax on this sum on the grounds that it accrued
to him ‘in respect of services rendered’ in terms of s 7(1)(b) of Act 40 of 1925?
Held: the taxpayer was paid this amount because he had credit for 136 days leave; this
entitlement originated in the fact that he served the state as attorney-general, and it was
therefore given in respect of services rendered.
Stratford JA: The appellant contended that the amount was paid to him not in respect of his
services but as a solatium for the abolition of his office, the termination of which prevented him
from enjoying the leave that otherwise he would have enjoyed. The argument was advanced with
considerable force and evident conviction and merits an examination of the exact nature of the
payment and the reasons which prompted it. The words ‘in respect of’ received judicial interpre-
tation in the case of CIR v Crown Mines20 in which Innes CJ said that a tax could not be said to be
imposed ‘in respect of a particular subject-matter, unless it had direct relationship to that mat-
ter,’ by which is meant, I think, ‘causal relationship’ . . . The question may be stated thus: Was
the sum paid to the appellant as remuneration for services rendered or as a solatium for the
detriment he suffered by reason of the abolition of his office? . . . But if any principle is to be
extracted from these decisions it is simply that when dual considerations are in play we must
look to the dominant one as affording the true reason for the payment. So that in each case it is
a question of drawing the correct inference from all the circumstances of the payment and
inferences drawn in other cases on different facts do not greatly assist us . . . It was for the work
done that the £670 3s 3d was paid . . . In my judgment, therefore, this amount accrued to the
taxpayer ‘in respect of services rendered’ within the meaning of s 7 of Act 40 of 1925 . . . The
appeal must be dismissed with costs.
Wessels JA: The leave, therefore, which the appellant had accumulated when his office was abol-
ished was due to him as much in respect of his services as was the money paid to him as salary.
When his office was abolished the Government calculated the amount of leave due to him on
the basis of his salary. Assuming that the Government was not bound to pay him a penny, but
that it gave the appellant the money as a solatium upon the abolition of his office, then it is still
abundantly clear that the Government did not intend to give him that money because his office
had ceased to exist, but because there stood to his credit 136 days leave which he did not enjoy,
and this leave was due to him as part and parcel of the benefits he was entitled to by virtue of his
appointment as Attorney-General.
It makes no difference whether we consider the money paid to him as a gratuity or as a moral
obligation or as a contractual right; its origin must be sought for in the fact that he served the
State as Attorney-General; that fact is the fountain from which the gratuity flows.

Notes
If the taxpayer in this case had succeeded in showing that the amount in question had
been paid to him for loss of office, such an amount would, under the present Income Tax
Act, be included in his gross income under para (d) of the definition of ‘gross income’.
A payment which has the quality of remuneration for services rendered is income, but a payment or
award that constitutes a testimonial or accolade is not income.

[207]
Stander v CIR
1997 (3) SA 617 (C), 59 SATC 212
Delta Motor Corporation (Pty) Ltd was a manufacturer and distributor of motor vehicles,
which it marketed through franchise dealers. One such dealer was Frank Vos Motors
(Pty) Ltd which held a franchise for the Worcester district. The taxpayer was employed
by Frank Vos Motors as a secretary/bookkeeper. Delta adjudged the taxpayer to be one
of the top five bookkeeper/accountants of the franchise dealers in South Africa and
________________________

20 1923 AD 21.
 Statutory inclusions in gross income 379

awarded him a prize of a seven-day overseas holiday for himself and his wife. The cost to
Delta of the air fares and accommodation was R14 000.
For the 1990 year of assessment, the taxpayer was assessed to income tax on the value
of the prize, namely R14 000.
It was held that if the prize was taxable, it could only be because it fell within the ambit
of para (c) of the definition of ‘gross income’, namely that it was ‘an amount’ which was
‘in respect of services rendered’ or ‘by virtue of any employment or the holding of any
office.’
It was held that the prize was not an ‘amount’ because the taxpayer could not convert
it into money (but this principle was later rejected by the Supreme Court of Appeal in
[84] CSARS v Brummeria Rennaissance (Pty) Ltd which held that the decision in Stander
was wrong in this regard) and it was also not ‘in respect of services rendered’ because he
had rendered services only to his employer, Frank Vos Motors, and not to Delta. The fact
that he performed his duties in a manner which Delta considered to be excellent (which
was what qualified him to receive the prize) did not mean that the award he received was
‘in respect of’ services rendered. It was more in the nature of a testimonial gift.
It was further held that the taxpayer did not receive the prize by virtue of ‘the holding
of any office’.
Consequently, the value of the overseas trip in question did not fall to be included in
the taxpayer’s gross income; it was therefore not taxable, and the assessment was set
aside.
Friedman JP: The correctness or otherwise of the Commissioner’s decision to include the
amount of R14 000 or indeed any other amount in respect of the overseas trip awarded to
Stander, in the revised assessment, depends upon whether such award falls within the definition
of ‘gross income’ . . .As the award to Stander was of a fortuitous nature like an ordinary donation
it was an award of a capital nature . . . and therefore does not fall within the general opening
paragraph of the definition of gross income. This is in fact common cause . . .
In regard to the question whether the trip could be said to have been given ‘in respect of ser-
vices rendered’ the court a quo found that the award clearly ‘stands in a direct causal relation-
ship to the services rendered by him’.
The awards are, as far as Delta is concerned, a marketing management strategy. They are de-
signed, according to the Honours Brochure issued by Delta, to motivate the people involved in
Delta’s field distribution of retail vehicles . . .
In Stander’s case the award was made in recognition of his meticulous manner in which he rec-
orded data and prepared the reports for his employer which were submitted to Delta on a regu-
lar basis.
The manner in which the franchise holders’ employees performed their work, was obviously of
benefit to Delta. The fact that Stander was an employee of Frank Vos Motors, was a sine qua non
to his receiving the award. Had he not been an employee of a Delta franchise holder he would
not have been eligible to receive the award. That fact does not, however, provide the necessary
causal link between the services which he rendered to his employer and his obtaining of the
award. Those services did not constitute the causa causans 21 of the award. He did not seek the
prize by entering a competition. (Cf ITC 976 24 SATC 812.) Nor did he expect to receive any-
thing from Delta for the work he performed for Frank Vos Motors. He merely performed his
normal duties for which he was remunerated by his employer. The fact that these duties were
performed in a manner which Delta considered to be excellent was what qualified him to receive
the prize.
Stander’s position was in my view similar to that of the captain of the English soccer team which
won the World Cup and who received, as a bonus from the Football Association, a sum of money
________________________

22 In other words, it was not a fringe benefit, provided by an employer to an employee, that was taxable
under the Seventh Schedule.
380 Income Tax in South Africa: Cases and Materials

which was held not to be taxable. See Moore v Griffiths (Inspector of Taxes). In that case Brightman J
stated–
‘The true purpose of the payment was to mark his participation in an exceptional event, namely, the win-
ning of the World Cup Championship – it is exceptional because the Cup is open for competition only
every four years and has never before been won by this country. In other words the payment had the qua-
lity of a testimonial or accolade rather than the quality of remuneration for services rendered.’
Mr de Haan [counsel for SARS] submitted that the trip was granted to Stander in respect of
services rendered to Delta. I do not agree. Stander rendered no services to Delta. The services
which he rendered were to his employer, Frank Vos Motors. The fact that these services were
beneficial to Delta does not mean that the award he received was ‘in respect of’ services ren-
dered. The sine qua non referred to above does not provide the necessary causal link between
what Stander did and the award he received.
An alternative basis upon which a taxpayer may become liable in terms of para (c) of the defini-
tion of gross income, is that the amount received is ‘in respect of or by virtue of any employment
or the holding of any office’. Stander did not receive this award by virtue of ‘the holding of any
office.’ . . .

Notes
Although it was held in [84] CSARS v Brummeria Rennaissance (Pty) Ltd that the deci-
sion in Stander was wrong in holding that, as a matter of principle, a non-monetary bene-
fit derived by a taxpayer is not an ‘amount’ as envisaged in the definition of ‘gross
income’ unless the taxpayer could have converted it into money, the dicta in Stander in
regard to the distinction between a reward for services and an ‘accolade’ or ‘testimonial’
are still good law.

[208]
CIR v Kotze
(1998) 64 SATC 447 (C)
The taxpayer was a businessman who ran a restaurant and bed-and-breakfast establish-
ment in Springbok. He had been approached by overseas visitors who showed an interest
in obtaining concessions (rights) to engage in diamond mining. His suspicions were
aroused and he was concerned that he might be regarded as associated with persons who
were planning to engage in illegal diamond transactions. A friend advised him to make
full disclosure to the police, which he then did.
He was at all material times aware that ‘informers’ are sometimes paid a reward by the
police for information leading to the arrest and conviction of persons involved in illicit
diamond buying. However, his reason for going to the police was to protect himself
against any appearance of involvement in criminal activity and to safeguard his name, his
business, and his standing in the community of Springbok.
After providing the police with this information, the suspects did indeed commit an
offence by purchasing uncut diamonds, were caught in a police trap, tried and convicted.
The taxpayer thereafter received a reward of R200 000 from the South African Police,
on which he was assessed to tax.
He had never before or since given any information of a similar nature to the police,
nor had he ever received any other reward from the police.
It was held that the taxpayer had been rewarded for providing information which led
to the arrest and conviction of offenders, and that the payment constituted remun-
eration for services rendered and thus fell within the ambit of para (c) of the definition
of ‘gross income’.
 Statutory inclusions in gross income 381

Foxcroft J: The sole issue between the parties is whether . . . the amount of R200 000 received by
the appellant constituted gross income in his hands in terms of paragraph (c) of the definition
of ‘gross income’ in section (1) of the Income Tax Act (‘the Act’).’
It was common cause in the Special Court that the said sum could not be taxed under the
general definition of ‘gross income’ because it was an amount of a capital nature. It was
further common cause that. since there was no relationship of employer and employee
between the police and the [taxpayer], it followed that the said sum also did not fall into gross
income in terms of para (i) of the definition of ‘gross income’ and the Seventh Schedule to the
Act.22
The relevant portion of para (c) of the definition of ‘gross income’ is as follows:
‘Any amount, including any voluntary award, received or accrued in respect of services rendered or any
amount . . . received or accrued in respect of or by virtue of any employment or the holding of any office.’
There was clearly no employment or holding of any office . . . so the issue is simply whether the
amount received was ‘in respect of services rendered’ . . .
In a letter dated 31 January 1996 . . . which served as the respondent’s formal objection to the
assessment, the following is recorded: [translation]
‘The accrual was of a fortuitous nature and it was not the primary objective of the person to make a profit
out of the transaction. His starting point was to convey information to combat crime. The payment that
was eventually made was of secondary importance.’
In the Special Court, it was unanimously decided that the furnishing of the information referred
to did constitute ‘services rendered’, but . . . it was further held that the reward received by
respondent was not ‘in respect of’ the rendering of services . . . This question is the subject of
the appeal by the Commissioner . . .
Mr Emslie, who appeared on behalf of respondent, submitted that the provision of information
in a situation such as this could not amount to the rendering of a service. He raised a number of
examples of voluntary acts by concerned citizens, never expecting to obtain any reward, who had
fortuitously received money for ‘services rendered’. In these situations, he submitted, it would be
unreasonable to tax such persons for performing what they had obviously regarded as a civic
duty.
I do not consider it necessary to examine those situations in detail. Many of them would proba-
bly be explained by reference to the remarks of Brightman J in Moore v Griffiths (Inspector of Tax-
es) 23 where the following was stated:
‘The true purpose of the payment was to mark his participation in an exceptional event, namely the win-
ning of the World Cup Championship ‘exceptional because the cup is open for competition only every
four years and has never before been won by this country. In other words the payment had the quality of a
testimonial or accolade rather than the quality of remuneration for services rendered.’ . . .
Mr Emslie’s example of someone rescuing a drowning child and subsequently being rewarded by
grateful parents would clearly, in my view, fall within this category of a payment having the quali-
ty of an accolade.24
Whatever the position may be in regard to such examples, the facts of the present case are quite
different. While I accept that the motive for the telephone call by respondent to his friend in the
police and his request for advice was prompted by a fear that he might be drawn into suspicious
conduct and that his reputation might be damaged, he was certainly not rewarded for having
been prompted by such a motive. He was rewarded for having provided information which led to
the arrest and conviction of the persons who had approached him. If he had not provided the
information, he would obviously not have received the reward.
. . . Lord Simon in Brumby (Inspector of Taxes) v Milner25 . . . drew attention to the confusion which
may sometimes result from the use of the expressions ‘causa causans’ and ‘causa sine qua non’.
________________________

22 In other words, it was not a fringe benefit, provided by an employer to an employee, that was taxable
under the Seventh Schedule.
23 [1972] 3 All ER 399 (Ch) at 411b.
24 The court seems to have had in mind that any reward given by the grateful parents would have been in
recognition of the bravery or other personal qualities of the rescuer (ie a testimonial gift), as distinct from
a payment for the ‘rendering of services’.
382 Income Tax in South Africa: Cases and Materials

The latter expression is of assistance in the present case for the reason which I have just stated.
But for the information there would have been no reward.26 The more important question is the
proximate or direct cause of the payment, or as expressed in Latin, ‘causa causans’. Despite the
judicial disquiet in the House of Lords in 1976 concerning ‘outmoded and ambiguous concepts
of causation couched in Latin’, the expression has often found favour with our courts. In Incorpo-
rated General Insurances Limited v Shooter27 Galgut AJA said the following:
‘No difficulty arises when one cause only has to be considered. The difficulty arises when there are two
or more possible causes. In such a case the proximate or actual or effective cause (it matters not
which term is used) must be ascertained, and that is a factual issue . . . an earlier event may be a dominant
cause in producing the damage or loss; it may be the causa sine qua non but the issue is, is it the causa cau-
sans . . .’
Counsel for plaintiff does not dispute what is said by the learned authors. He contends that the
loss was the result of the continuous process set out above and that one cannot single out any
one event as being the proximate cause ‘causa causans.’ . . .
[T]he expression ‘causa causans’ was used by Friedman JP in Stander’s case (supra). It is quite
clear from the reference to De Villiers v CIR 28 in Stander’s case that the court was contrasting a
direct relationship or ‘causal relationship’ on the one hand with a causa sine qua non on the oth-
er hand . . .
When Friedman JP went on to say that Stander was an employee of Frank Vos Motors and that
this was a sine qua non to his receiving the award, this was not the end of the matter. True, if he
had not been an employee of a Delta franchise holder, he would not have been eligible, but
(and I quote Friedman JP):
‘That fact does not, however, provide the necessary causal link between the services which he rendered to
his employer and his obtaining of the award. Those services did not constitute the causa causans of the
award. He did not seek the prize by entering the competition.’
. . . It is clear that Friedman JP was using the expression to crisply define the direct causal rela-
tionship to which he was referring.
I do, however, agree . . . that the case is distinguishable from the present one. In Stander’s case,
one was concerned with an employee who received an award not from his employer, but from a
third party. It is also clear from the judgment in that case that the mere fact of employment had
not provided the necessary causal link between what Stander had done and the award he re-
ceived. Not only was the reward given to him by someone who was not his employer, but it also
had the quality of a testimonial or accolade rather than the quality of remuneration for services
rendered.
Those features do not come into play on the present facts. The respondent was not doing his
civic duty like the person rescuing a drowning child. He was afraid of being implicated in suspi-
cious activities. His motive, therefore, was to protect himself. That is not worthy of any kind of
prize. The fact that he thereafter received payment which he did not give back shows, conclusive-
ly in my view, that it was received for the information which he had provided . . .
The payment on the present facts is clearly not one of the nature of a testimonial or accolade,
but is, as was said in Moore v Griffiths, one which has ‘the quality of remuneration for services
rendered’. It is trite that ‘services need not be rendered by virtue of any contract, nor need the
amount received or accrued be by reason of any contract or obligation: it can be a purely volun-
tary payment.’29
. . . I am therefore of the view that the Special Court erred in holding that there was no sufficient
link between the service rendered and the payment of the reward . . . In the present case the
Police Commissioner exercised his discretion to a award R200 000 to the appellant because of
the disclosure of information by the appellant.’
________________________

25 [1976] 3 All ER 636 (HL).

26 In other words, the giving of the information was a cause of the payment in the sense that it was a sine qua
non of the payment. No payment would have been made ‘but for’ the giving of the information. But, as the
court then goes on to say, this is not sufficient to establish the necessary causal link. The law has regard on-
ly to the causa causans – the direct or proximate cause.
27 1987 (1) SA 842 (AD).
28 1929 AD 227 at 622.
29 Meyerowitz on Income Tax, para 9.13.
 Statutory inclusions in gross income 383

In the result, I would allow the appeal and confirm the assessment for the 1993 year of assess-
ment, and order further that costs in the appeal, including the costs of two Counsel, be paid by
respondent to the appellant.
GRIESEL J and DAVIS J concurred.

Notes
In this case, the Tax Court30 held that the furnishing of the information by the taxpayer
to the police did constitute ‘services rendered’ but that the reward received by him had
not been ‘in respect of’ the rendering of those services. In other words, the Tax Court
held that the necessary direct causal link was lacking between the rendering of the
services and the payment of the reward. This crucial finding was reversed on appeal.
The central issue in this case related to the nature of the causal link between the ren-
dering of services and payment that is implicitly required by para (c) of the definition of
‘gross income’. It was clear in this case that there was a connection between the render-
ing of the services in issue – the giving of information to the police – and the reward that
was thereafter paid. But the question was whether, for the purposes of para (c) of the
definition of ‘gross income’, the rendering of those services was the causa causans (the
direct or proximate cause) of the reward or merely a causa sine qua non.
The taxpayer’s grounds of objection to the assessment were that the reward was fortui-
tous, and that he had not been motivated by the prospect of a reward when he gave the
information to the police.
The High Court held that the payment to the taxpayer did not have the quality of a
‘testimonial or accolade’ (these words normally refer to an award given to a person in
recognition of personal qualities, such as good sportsmanship, bravery, loyalty, etc) such
as the award given to a footballer in the United Kingdom to mark his participation in the
World Cup, which was held by the UK courts not to be subject to income tax; see Moore v
Griffiths (Inspector of Taxes).31
In the present case, the court held that, whatever the taxpayer’s motive had been, he
was in fact rewarded for providing information that led to the arrest and conviction of
offenders.
The court held, following an established line of authority, that where there are two or
more causes, the only legally relevant cause is the direct or proximate cause (the causa
causans); a non-proximate cause that is merely a causa sine qua non32 does not suffice.
The court distinguished the decision in [207] Stander v CIR in which an employee of a
motor distribution company was given a prize for excellent performance by a separate
company, namely the motor manufacturing company. In that case, Stander would not
have been given the reward ‘but for’ his rendering of services to his employer company
(in other words, the prize was a sine qua non of the services rendered by him), but those
services were not the causa causans of the prize he received from a different company.
Stander was not taxable on the prize because the necessary direct relationship was lack-
ing between the rendering of services or his employment and the receipt of the prize. In
that case, said the court, the prize had the quality of a testimonial or accolade, rather
than the quality of remuneration for services rendered.
In the present case, by contrast, the reward had the quality of remuneration for ser-
vices rendered, not a testimonial or accolade.
This case also held (correctly, it is submitted) that a payment for services can fall with-
in para (c) of the definition of gross income even where the services are not rendered by
________________________

30 See ITC 1683 (1999) 62 SATC 406.

31 [1972] 3 All ER 399 (Ch) at 411b.
32 A causa sine qua non is an event ‘but for which’ the result would not have occurred.
384 Income Tax in South Africa: Cases and Materials

virtue of any contract or by reason of any obligation; it can be a purely voluntary payment
– but there must be the necessary causal link.
The Tax Court had held that the reward could not have been taxed under the general
definition of ‘gross income’ because it was an amount of a capital nature. (In other
words that it was taxable, if at all, under para (c) of the definition of ‘gross income’.) In
so saying, the court presumably had in mind the decision of the Appellate Division in
CIR v Lunnon33 that a payment for services, made without any obligation, is a mere gift
and hence of a capital nature and thus not subject to income tax. Following the decision
in Lunnon, para (c) of the definition of ‘gross income’ was amended to include a pay-
ment for services ‘including any voluntary award’.

Paragraph (c)(ii) of the definition of ‘gross income does not apply where the contract for the render-
ing of services was between a juristic entity and a third party and where the services were rendered on
behalf of the juristic entity to that third party; para (c)(ii) applies only where the real contract (disre-
garding any simulation) was between the individual who rendered the services and the third party.

[209]
CIR v Professional Contract Administration CC
2002 (1) SA 179 (T), 64 SATC 119
The taxpayer, a close corporation, had entered into a written contract with Gencor
Engineering and Technologies Ltd (‘Gencor’) in terms of which services would be
rendered to Gencor. Those services would be physically rendered by the close corpora-
tion’s sole member, Mr Spaan. The close corporation’s only income in the 1995 tax year
was in respect of services rendered to Gencor on its behalf by Spaan.
SARS issued an assessment in terms of which Gencor’s payment for those services was
treated as income, not of the close corporation, but as income of its sole member, Spaan.
The Tax Court held that the contract between the close corporation and Gencor was
not simulated, and that the income in question was income of the close corporation, and
was not the income of its member, Spaan.
SARS appealed to the Transvaal Provincial Division and argued that, in terms of para
(c)(ii) of the definition of gross income in the Income Tax Act, the income from the
rendering of the services was deemed to be Spaan’s income, and not income of the close
corporation.
At the time, para (c)(ii) of the definition of gross income in s 1 of the Act provided that–
‘Any amount received by or accrued to or for the benefit of any person in respect of services
rendered . . . by any other person shall for the purposes of this definition (of gross income) be
deemed to have been received by or to have accrued to the said other person.’
The Transvaal Provincial Division dismissed SARS’s appeal and held as follows–
Held: As with a company, a close corporation is a legal person and as such is a taxpayer
in its own right; a member of a close corporation may be paid a salary by the corporation
for services rendered by him to a third party on behalf of the close corporation. Taken to
its logical conclusion, the argument advanced by SARS in this case would have the star-
tling consequence that all income derived from services rendered by a member on
behalf of a company or close corporation would be taxable in the hands of the member,
and not in the hands of the juristic entity. This contention was unacceptable and illogical
and ignored the practicalities of modern life in which many people contract, not in
their own names, but on behalf of companies or close corporations of which they are
members.
________________________

33 1924 AD 94.
 Statutory inclusions in gross income 385

Held further: The close corporation’s contract with Gencor was not simulated and re-
flected the true intention of the parties; this contract reflected Spaan as an independent
contractor. SARS’s contention that the contract was, in substance, a contract between
Spaan and Gencor (and not between the close corporation and Gencor) was inconsistent
with SARS’s concession that the contract between the close corporation and Gencor was
not simulated.
Held further: Para (c)(ii) of the definition of gross income does not become applicable
merely because a service is rendered to a third party by a member of a close corporation,
and this provision applies only where the contract is not with the company or close
corporation, but is a contract between the member in question and the third party.
Held further: In the context of the contract in question, it was the taxpayer, as a close
corporation, which rendered the services to Gencor and which made performance in
terms of the contract and para (c)(ii) of the definition of gross income was not applicable.
Held further: SARS’s appeal against the decision of the Tax Court was dismissed.
Kirk-Cohen J: At the commencement of his argument before us counsel [for SARS] abandoned
every other point raised [in the notice of appeal] except the applicability of para (c)(ii) of the
definition of ‘gross income’. In particular, he abandoned any reliance on s 103(1) and also that
the second contract was simulated or contained any element of simulation. These concessions
were correctly made as there was no merit in them . . .
I will now deal with the provisions of para (c)(ii) of the definition of gross income.
The issue is whether the money paid to the respondent by Gencor forms part of the respond-
ent’s gross income or whether it forms part of the gross income of Mr Spaan.
The appellant’s counsel submits that this appeal can be decided purely by reference to the pro-
visions of para (c)(ii) of the definition of ‘gross income’ in s 1 of the Act. His submission is that
the provisions of the Fourth Schedule of the Act are irrelevant for the purposes of this decision.
I agree.
The definition of ‘gross income’ in s 1 provides, insofar as it is relevant to this appeal, as follows:
‘“gross income”, in relation to any year or period of assessment, means . . . in the case of any person . . .,
the total amount, in cash or otherwise, received by or accrued to or in favour of such person during such
year or period of assessment . . . but including . . .
(c) any amount, . . ., received or accrued in respect of services rendered . . . or any amount . . .; received
or accrued in respect of or by virtue of any employment . . .:
Provided that’
(i) . . .
(ii) any amount received by or accrued to or for the benefit of any person in respect of services
rendered . . . by any other person shall for the purpose of this definition be deemed to have
been received by or to have accrued to the said other person’.
The submission is that the money paid by Gencor to the respondent was paid in respect of ser-
vices rendered to Gencor by Mr Spaan personally or was paid by virtue of Mr Spaan’s employ-
ment by Gencor.
The argument . . . advanced on behalf of the appellant is that the money received for the ser-
vices rendered to Gencor were rendered by Mr Spaan (and not by the cc) which money is
deemed [in terms of para (c)(ii), above] to be part of the gross income of Mr Spaan.
Taken to its logical conclusion the argument postulates that, wherever services are rendered by a
member of a body corporate, those services are not rendered by the body corporate, but by the
member in person. To adopt the words of the deeming clause, the body corporate is the first
mentioned person and the member is the other person . . .
It is trite that a body corporate, be it a company or a close corporation, having one member, has
legal personality and as such is an individual taxpayer. It is also trite that such member may be
paid a salary or emolument by the body corporate, part or the whole of which is derived from
services rendered by him on behalf of the body corporate. Taken to its logical conclusion, this
argument would result in all income from services rendered on behalf of a body corporate by a
member, which body corporate pays a portion or the whole thereof to the member, being in
386 Income Tax in South Africa: Cases and Materials

come taxable in the hands of the member and not the body corporate, irrespective of the latter’s
costs in rendering such services. Having regard to the practicalities of commercial and profes-
sional activities this general submission is startling. . .
In the matter before us the appellant does not rely upon any simulated contract. Counsel in fact
conceded that Mr Spaan formed the respondent and contracted on its behalf with Gencor for
‘good commercial reasons’ . . .
If that be the case, the provisions of para (c)(ii) will be applied only where the facts justify a find-
ing that the substance of the contract differed from its form as analysed in the Erf 3183/1 Lady-
34
smith case. . . . See also in this regard Income Tax Case 1518 54 SATC 113. In this latter case
Melamet J applied the provisions of para (c)(ii) to a portion of a company’s income which was
diverted to two trusts, being shareholders of the company, of which minors were beneficiaries.
In coming to the conclusion that the paragraph was applicable the learned judge pointed
out –
‘that it is a well-known principle of income tax law that the emphasis must be placed on the substance of a
transaction and not on the legal form wherein it is clothed.’
The court held that what was paid to the trusts (and the minors) was taxable in the hands of the
directors who were also the managers of the farm owned by the company, farming being the
only activity of the company.
I consider now the facts of the present case . . .
. . . Mr Spaan’s evidence was the Gencor contract with the respondent reflected the true inten-
tion of the parties. He gave his reasons for wishing to contract through a close corporation . . .
He discussed the matter with Gencor and Gencor was willing to conclude a contract with the
close corporation . . .
The court a quo . . . came to the conclusion, at least by necessary implication, that the respond-
ent had proved on a balance of probabilities that, applying the principles set out in the Erf
3183/1 Ladysmith case, the contract with the respondent in substance and in form expressed the
true agreement between the parties.
Yet counsel for the appellant, both in his heads and in argument, submitted that
‘on a proper interpretation of the contract concluded between the respondent and Gencor, the respond-
ent did not render the service of a civil construction supervisor, Mr Spaan did’.
In other words the submission necessarily entails that the written contract between the respond-
ent and Gencor was in substance a contract between Mr Spaan and Gencor and it was thus nec-
essary to pierce the veil of corporate personality. That argument is not compatible with the
concessions made by counsel to which I have referred.
Counsel, however, at one stage in his argument submitted that whenever the member of a close
corporation or of a company rendered a service he rendered that service in his personal capacity
and not as a member of a body corporate . . .
In my opinion, [counsel’s answers to the court’s questions in regard to this proposition] demon-
strate that this test is simply unacceptable and illogical; it ignores the practicalities of modern life
and the fact that a large number of people do not contract in their own name but on behalf of
bodies corporate of which they are members. That is why in reply counsel added the rider that
the corporate veil should be pierced in each case. . . .
I conclude that para (c)(ii) cannot be applied simply because a service is rendered by a member
of a body corporate. That would create anomalies such as those referred to above. For the pur-
poses of this case I conclude that the answer [is that] paragraph (c)(ii) applies only where the
substance of a contract (as opposed to its form) demonstrates that the contract concluded be-
tween a body corporate and a third party is one where the member of the body corporate, and
not the body corporate itself, in fact rendered the services.
In casu my conclusion is that, on a proper approach to the contract in question, and having
regard to the principles and facts discussed, it was the cc and not Mr Spaan who rendered the
services and performed the duties set out in the contract which came into force on 1 March
1994. Paragraph (c)(ii) does not apply in this case. In the circumstances the appeal cannot
succeed.
ROUX J and MOSENEKE AJ concurred.
________________________

34 Erf 3183/1 Ladysmith (Pty) Ltd v CIR 58 SATC 229.

 Statutory inclusions in gross income 387

Notes
At the time, paragraph (c)(ii) of the definition of gross income provided that–
‘any amount received by or accrued to or for the benefit of any person in respect of services
rendered . . . by any other person shall for the purpose of this definition be deemed to have
been received by or to have accrued to the said other person’.
This provision, it seems clear, chiefly targeted the situation where A enters into a con-
tract to provide services to B on terms whereby payment for those services will be made
to C. Such an arrangement would achieve a tax saving for A if C were a spouse or child
who is in a lower tax bracket than himself, for less tax will then be paid than if the in-
come had been derived by A.
In contract law, such an arrangement is entirely valid, and the income in question
would then accrue to C. Unsurprisingly, however, the fiscus regards this as an unac-
ceptable form of tax avoidance which needed to be nullified by anti-avoidance legisla-
tion.
Thus, para (c)(ii) is an anti-avoidance provision that nullifies any tax advantage where
income is diverted away from the person who provided the services that gave rise to the
income.
However, the question arises as to whether this provision is so wide as to encompass
the situation where a juristic entity, such as a company or close corporation, enters into
an agreement to provide services, and those services are then provided by an individual,
who may be a member of the company or close corporation, or its employee, or an
independent contractor who has been mandated by the company or close corporation to
render the services on its behalf.
The language of para (c)(ii) of the definition of ‘gross income’ requires a determina-
tion to be made as to the person ‘by whom’ the services in question were rendered.
Obviously, a company or cc, being a juristic person, cannot physically render services
itself, and services which it undertakes to perform must be carried out by a natural
person. And if that juristic person arranges for that individual to render those services on
its behalf then, in law, the services have been rendered by that juristic person, and not by
the individual.
In other words, if an individual renders services as the agent or employee of a compa-
ny or close corporation, then, in law, it is the company or the cc which renders the
service. There is nothing in the language of para (c)(ii) to disturb this elementary propo-
sition.
It is of course always necessary to determine whether a contract is genuine or a sham.
If it is a sham, the court will give effect to the real agreement. It is conceivable that,
where a contract states that services are to be rendered by a company or cc, the real
agreement may be that the services will be provided by an individual in his personal capaci-
ty. In this event, in terms of common law principles, payment for those services will
accrue to that individual and not to the company or close corporation, since this is the
real agreement behind the simulation.
This, indeed, was the approach taken by the court in the judgment summarised above,
to the interpretation of para (c)(ii), namely, that it applies only where there was a simu-
lated agreement and the true agreement was between the individual who physically
rendered the services and the third party.
In effect, the court invoked the common law rule that substance prevails over form
and that the court will ignore a simulated agreement and give effect to the true agree-
ment. The legal principles in this regard were laid down in Commissioner of Customs and
Excise v Randles, Brothers & Hudson Ltd.35

________________________

35 1941 AD 369.
388 Income Tax in South Africa: Cases and Materials

In deciding whether or not the contract in question was ‘simulated’, account must now
be taken of the judgment of the Supreme Court of Appeal in [357] CSARS v NWK Ltd
2011 (2) SA 67 (SCA) where Lewis JA, giving the judgment of the court, said that “In my
view the test to determine simulation cannot simply be whether there is an intention to
give effect to a contract in accordance with its terms. . . . The test should thus go further,
and require an examination of the commercial sense of the transaction: of its real sub-
stance and purpose. If the purpose of the transaction is only to achieve an object that
allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated.”

Where an ex gratia payment (that is to say, a payment made without any legal obligation) is made to
an employee in recognition of his service to an employer, then as long as the motivation is to give the
recipient a benefit in recognition of such service, there is an unbroken causal relationship between the
employment on the one hand and the receipt on the other and the receipt is taxable in terms of para
(c) of the definition of ‘gross income’; it is irrelevant that the payment for the services was gratuitous
in that there was no obligation on the employer to make the payment.

[210]
Stevens v CSARS
2007 (2) SA 554 (SCA)
In terms of a company’s share incentive scheme, the group company secretary acquired
an option to purchase 51 000 shares in the holding company at R3.70 per share. Subse-
quent events rendered the option worthless, and the company was about to be voluntari-
ly liquidated.
The company’s directors resolved to pay all R3.70 option holders whose options had
become worthless an amount of 75 cents per share ex gratia. In consequence, the tax-
payer received R38 250 in the 2001 tax year.
The taxpayer was assessed to tax on that receipt on the basis that the receipt fell to be
included in his gross income in terms of paragraph (c) of the definition of ‘gross in-
come’.
Issue: was the amount of R38 250 properly included in the taxpayer’s income in terms
of paragraph (c) of the definition of ‘gross income’?
Held: in the affirmative; the recipients of the payments in question were employees
who had lost a benefit linked to their employment and who, in the Board's discretion,
were deserving of a substitute ex gratia payment. The selfsame quality of service which
motivated the grant of the option to them in the first place was operative in motivating
the award of the ex gratia payment to them. A causal relationship existed between the
employment on the one hand, and the receipt on the other; and the receipt was there-
fore taxable in terms of para (c) of the definition of 'gross income'.
Howie P: (MTHIYANE JA, BRAND JA, MAYA JA AND COMBRINCK AJA CONCURRING)
[4] The [company’s share option] Scheme included the following provisions which are rele-
vant.
2. Purpose of the Scheme
The Scheme is intended to promote the retention of employees of ability and expertise who are primarily
responsible for the profitability and continued growth of Safren and . . . by giving them an opportunity to
acquire shares in Safren.

3. Eligibility
The persons who may participate in the Scheme and to whom the Board shall be entitled to cause to be
offered . . . options over Scheme shares . . . shall be such employees of Safren . . . as the Board, in its abso-
lute discretion, considers play a role in the management of Safren . . . and contribute to its growth and
profitability.…
 Statutory inclusions in gross income 389

[5] In all, there were 125 R3,70 option holders, and the present matter is in the nature of a test
case. … They were all made an offer of the ex gratia payment and all accepted it.
[6] The testimony of the taxpayer highlighted several features of the case which are important.
He said the option rights were awarded to people because they were employees and in recogni-
tion of their services rendered or to be rendered.…
[8] The taxpayer testified that the ex gratia payment was to make up for the drop in the capital
value of the shares that could have been acquired had the option been exercisable … In other
words it was to compensate for the option holders’ loss. …
[9] It remains to mention his comment that with liquidation imminent the Board, in awarding
the ex gratia payment, would not have been particularly concerned about rewarding services
either being rendered or to be rendered.
[10] The question for decision is whether on the facts of this case the amount received by the
taxpayer fell within the relevant part of para (c) of the definition of ‘gross income’. That part
includes in ‘gross income’–
‘any amount, including any voluntary award, received or accrued in respect of services rendered or to be
rendered or any amount . . . received or accrued in respect of or by virtue of any employment or the hold-
ing of any office . . ..’
[11] In passing I should remark that, because the taxpayer’s option was never exercised, s 8A of
the Act does not apply, and that it was accepted by the parties that no other provisions of the
definition of ‘gross income’ applied either.
[[13] Counsel for the appellant disavowed acceptance of the taxpayer’s reference to compensa-
tion for loss. Counsel argued that the amount paid was not to compensate for any loss, but for
the unfairness which the R3,70 option holders would have suffered as a result of the special divi-
dend [for which they did not qualify] …
[14] Counsel also placed reliance on the decision of this Court in CIR v Shell Southern Africa
Pension Fund36 in contending that, in the language employed in that case, the taxpayer’s services
and employment constituted no more than an ‘historical antecedent or background feature’,
and that the legally causative factor in this case was the declaration of the special dividend and
its unforeseen effects on the R3,70 option holders.
[15] In the Shell case the issue was whether a lump-sum payment from a pension fund to the
widow of a deceased member – payment being in the discretion of the fund's administering
committee – was a benefit recoverable ‘in consequence’ of the death of the member. It was held
that upon the grant of the pension to the widow, the member’s death ceased to have any opera-
tive effect on the payment. It was held that the committee’s decision was an independent, un-
connected and extraneous cause which isolated the death from the payment.
[16] It was the declaration of the special dividend, said the taxpayer’s counsel, which led to the
Board’s discretionary decision and the payments in issue, which were made to no other option
holders. Again, in the language used in Shell, the special dividend declaration was, he said, an
'independent, unconnected and extraneous causative factor or event.
[18] Accordingly, submitted counsel, the ex gratia payment was not aimed at compensating the
R3,70 option holders as employees or ex-employees. In other words it was not intended to give
them that benefit by reason of their services or their employment. … The R3,70 option holders
were singled out not because of their seniority, prominence or quality of service but because
their option price was below the market value when the special dividend was declared [for which
they did not qualify] and it was they who were deprived of a contemplated profit.
[20] Turning to an evaluation of the appellant’s argument, there is no material difference be-
tween the expressions ‘in respect of’ and ‘by virtue of' in para (c)’.
[21] There can be no doubt that the R3,70 option was a benefit directly linked to the taxpayer’s
employment. Options were given as a benefit to those whose past services prompted the employ-
er’s wish to secure their future services. … However, the declaration of the special dividend ren-
dered the R3,70 options … worthless. As a result the intended capital benefit which the Board
had wished the taxpayer to have was unquestionably lost.
________________________

36 1984 (1) SA 672 (A), 46 SATC 1.

390 Income Tax in South Africa: Cases and Materials

[22] … The question which requires answering is not: what was the factor or event which
prompted the Board to decide to make the ex gratia payment? Undoubtedly, the right answer to
that question is ‘the effect of the special dividend declaration’. The question to answer is rather:
why was the payment made to those who received it? The answer to this question is that the re-
cipients were employees … who had enjoyed a benefit directly linked to their employment, who
had lost that benefit and who, in the Board’s discretion, were deserving in the particular circum-
stances of a substitute ex gratia payment. The point is that the selfsame quality of service which
motivated the grant of the option to them in the first place was still operative in motivating the
award of the ex gratia payment to them. … As long as the motivation was to give the recipients a
benefit in recognition of their service in Safren’s employment – as I think the evidence shows it
was – then there was an unbroken causal relationship between the employment on the one hand
and the receipt on the other.
[23] In the present matter the Board’s decision to make the ex gratia payment was made as em-
ployer vis-à-vis employee, … Payment was made because the recipients were employees whose
standard of service – past or current – warranted, in the light of their loss, the ex gratia payment.
Even if it be supposed that the employment and the special dividend declaration were dual caus-
es, the former was in my view clearly the dominant one. And as pointed out in De Villiers, it does
not matter that payment was made gratuitously rather than under an obligation. The amount in
issue was therefore received in respect of or by virtue of employment.

Notes
The taxpayer argued that the reason he had been given the ex gratia payment was not to
reward him for services, but to compensate him for the loss he had suffered when his
option under the company’s share option scheme became worthless.
The court rejected this argument, and held that–
the selfsame quality of service which motivated the grant of the option to them in the first place
was still operative in motivating the award of the ex gratia payment to them. … As long as the
motivation was to give the recipients a benefit in recognition of their service in Safren’s em-
ployment …then there was an unbroken causal relationship between the employment on the
one hand and the receipt on the other
The decision holds that the essential requirement of paragraph (c) of the definition of
‘gross income’ is an unbroken causal link between the benefit granted (whether ex gratia
or not) and the rendering of services by the recipient of the benefit.

§2.3 Payments for loss of office, etc: para (d) of the definition of ‘gross income’
‘Gross income’ is defined as including:
‘any amount, including any voluntary award, received or accrued in respect of the relinquishment, termi-
nation, loss, repudiation, cancellation or variation of any office or employment or of any appointment (or
right or claim to be appointed) to any office or employment.
As a general principle, if a taxpayer has a legal right, contractual or otherwise, to hold a
particular office which yields income in the way of salary or otherwise, and he is awarded
compensation for giving up or varying that right, the compensation will be of a capital
nature.37 By virtue of para (d), however, such an amount will now be included in the
taxpayer’s gross income.

For the purposes of s 10(1)(x), the word ‘office’ connotes a position which generally is remunerated,
which exists independently of the person who fills it, and which will, in the ordinary course, be filled
by successive holders. A person appointed as attorney to another does not hold an ‘office’, nor is he
‘in employment’.

________________________

37 Scott v C of T (NSW) (1935) 35 SR (NSW) 215.

 Statutory inclusions in gross income 391

[211]
SIR v Somers Vine
1968 (2) SA 138 (A), 28 SATC 179
The taxpayer was an attorney in a partnership. In 1961 the firm was appointed by Parity
Insurance Co Ltd as its attorneys for a period of not less than six years. The terms were
recorded in a letter written by Parity to the firm. The contract was terminated in 1963.
The firm was remunerated by way of fees, with no additional salary or other payment.
Toward the end of 1962, when Parity instructed another firm of attorneys, the taxpayer’s
firm terminated the contract on account of Parity’s breach of contract and sued for
damages in respect of its loss of profits. The action was settled in 1964, on terms which
recited that Parity had appointed the taxpayer’s firm ‘to the office of attorneys to Parity’,
and recorded that Parity would pay the taxpayer and his partners R20 640 ‘in settlement
of their claim . . . in respect of the loss which they have suffered as a result of their
employment, appointment or office as attorneys to Parity having been terminated’.
The taxpayer claimed that R4 000 of this amount was exempt from tax under
s 10(1)(x) 38 being portion of a lump sum received as compensation for loss of office or
loss of their appointment as Parity’s attorneys.
Issue: was the compensation paid to the taxpayer for the premature cancellation of his
firm’s appointment as attorneys for Parity, an amount ‘in respect of the relinquishment,
termination, loss repudiation, or cancellation of any office or employment’ for the
purposes of s 10(1)(x)?
Held: the answer was in the negative; the taxpayer’s contractual appointment as Parity’s
attorneys was not an ‘office’ or ‘employment’.
Ogilvie-Thompson JA: At the hearing before this Court, counsel on both sides directed their
submissions exclusively to the issue of a terminated ‘employment’ . . . [I]n order to be entitled to
the exemption he claims, the taxpayer must show that he falls within para (d) of that definition:
that is to say, the taxpayer must establish that the R20 640 in question was received by him in
respect of the termination, etc of an
‘office or employment or of any appointment . . . to any office or employment’.
The first question for decision, therefore, is whether the taxpayer, or his firm, held any ‘office’
with Parity within the meaning of para (d). At the outset it should, I think, be mentioned that
the above cited phraseology of the deed of settlement of 15 April 1964 is, of course, not in any
way decisive of the enquiry. The Court must determine the true relationship between the tax-
payer’s firm and parity irrespective of the designation accorded to that relationship in the deed
of settlement (cf Henley v Murray).39
. . . Plainly an ‘office’ may have different meanings in different contexts; and an ‘officer’ is not
necessarily the holder of an ‘office’, or conversely . . .
There does not however appear to be any decision of this Court or of any of the Provincial Divi-
sions – certainly we were referred to none – wherein the meaning of an ‘office’ has examined in
the context of fiscal legislation. This last-mentioned question has, however, been considered by
the English Courts. Thus in McMillan v Guest 40 Lord Wright, after remarking that the word
‘office’ is of indefinite content whose various meanings occupy four columns of The New English
Dictionary, selected41 the meaning of
________________________

38 During the tax year in issue, para (d) of the definition of ‘gross income’ referred to ‘any amount, includ-
ing any voluntary award, received or accrued in respect of the relinquishment, termination, loss, repudiation or cancel-
lation of any office or employment . . .’. Section 10(1)(x) provided that up to R4 000 of such amount was
exempt from tax.
39 (1950) 1 All ER 908 at 910.
40 (1942) 1 All ER 606 (HL).
41 At 608.
392 Income Tax in South Africa: Cases and Materials

‘a position or place to which certain duties are attached, especially one of a more or less public
character’.
In the same case Lord Atkin said:42
‘There is no statutory definition of office. Without adopting the sentence as a complete definition one
43
may treat the following expression of Rowlatt J in Great Western Ry Co v Bater as a generally sufficient
statement of the meaning of the word:
“. . . an office or employment which was a subsisting, permanent, substantive position, which had an
existence independent of the person who filled it and which went on and was filled in succession by
successive holders . . .”
44
This statement was adopted by Lord Atkinson in his judgment in the same case in the House of Lords.
There can be no doubt that the director of a company holds such an office as is described’.
...
In the context of that section, it appears to me that the word ‘office’ connotes a position which
generally carries with it some remuneration and which is ‘a substantive position which has an
existence independent of the person who fills it’, and which will, in the ordinary course, be filled
by successive holders.
These characteristics are, in my opinion, entirely absent in the present case. Nothing has been
put before us to show that Parity, either in its articles or by resolution, ever purported to estab-
lish the ‘office’ of attorneys to the company. The duties to be performed by the taxpayer’s firm
depended, not upon the duties of an ‘office’ constituted by the relevant agreement, but upon
the mandate given to the firm as and when work was assigned to it by Parity. Nor, in my opinion,
does the taxpayer derive any assistance from the English decisions, cited by his counsel, dealing
with the position of auditors. Like the English Act, our own statute requires an auditor to be
appointed . . . and, both here and in England, when an auditor is so appointed, he, in contrast
with a casually employed auditor, becomes the holder of an ‘office’, which the statute requires
always to be filled. The position of an attorney retained to render periodic professional services
appears to me to be radically different. In the present case, there is nothing to indicate that Pari-
ty contemplated any successor to the taxpayer’s firm after the expiry of the period of the latter’s
appointment. The firm’s duties derived, not from the appointment, but only from instructions as
and when received. The appointment of the taxpayer’s firm carried with it neither salary nor
right to any remuneration whatever unless and until the firm should be instructed to undertake
a particular piece of legal work – in which event fees would, in respect of such work, accrue to
the firm upon the ordinary basis as between attorney and client.
. . . I am of the opinion that . . . the mere circumstance that the firm held . . . a general retainer
did not convert that relationship into an ‘office’ within the meaning of para (d) of the definition
of ‘gross income’.
It remains to consider whether the taxpayer received the aforementioned R20 640 in respect of
the termination, etc of ‘employment’ within the meaning of para (d) of the definition of ‘gross
income’ in the Act. As was rightly pointed out by the learned President of the Special Court, the
word ‘employment’ may, according to its context, bear either a wide or a narrow meaning . . . In
rejecting the narrower construction . . . the learned president, in delivering the judgment in the
Special Court, took the view that in para (f) ‘contract of employment’ had to be interpreted ‘in
the wide sense as including employment in a professional capacity’ . . .
I am, with respect, unable to agree with these views of the Special Court . . . In the present case,
the construction first accorded by the Special Court to the words ‘contract of employment’ in
para (f) and then applied to para (d) has the effect of excluding entirely from the latter para-
graph any ‘contract of service’ in the ordinary generally accepted sense of those words. Such a
result should not, in my opinion, lightly be attributed to the Legislature.
...
From the aforegoing it is, I think, clear that para (c) of the definition of ‘gross income’ in the Act is
concerned only with ‘office holders’ and ‘employees’ in the ordinary signification of the latter
word. While it does not necessarily follow from this that the word ‘employment’ where it occurs in
________________________

42 At 607.
43 8 TC at 235.
44 8 TC at 246.
 Statutory inclusions in gross income 393

para (d) of the definition . . . is to be construed as the correlative of ‘employee’, it, in my opinion,
rather points in that direction.
The cumulative effect of all the foregoing is such as, in my opinion, to point strongly towards
the Legislature having used the word ‘employment’ in para (d) in a narrow sense . . . In several
decisions,45 it was held by the Special Court that ‘employment’ must be construed
‘in the narrower sense of the term to signify the case where an employee is employed by an employer,
analogous to but not necessarily coinciding with the position of master and servant’.
Without unreservedly approving this definition in toto, it suffices to say that in all such decisions
of the Special Court the element of control was, either expressly or by implication, regarded as
being the criterion distinguishing ‘employment’.
If follows that, in my judgment, the Special Court erred in holding the taxpayer to be entitled to
the exemption conferred by s 10(1)(x) of the Act.
For the foregoing reasons . . . the appeal is allowed with costs . . .
BOTHA, JA, and POTGIETER JA, concurred in the above judgment.
Williamson JA: (dissenting) I think that the respondent’s position in relation to Parity was an
‘office’ within the meaning of that word in the para 1(d) of the definition.
...
‘Office’ in ordinary parlance means nothing more than a post or situation; it is a word, for in-
stance, which can aptly be applied to the position held by somebody who does not fall exactly
within the term ‘employed’ but who, like an employee, has been granted by contract the right to
derive benefit himself for an agreed period for services he may render.
...
The respondent’s firm in this case had been appointed by contract for a period of at least six
years as Parity’s sole attorneys. That appointment , in my view, put them in the position of hold-
ing the ‘office’ or ‘post’ of sole attorneys for that period.
I think the appeal should be dismissed
WESSELS JA concurred in the judgment of WILLIAMSON JA.

§2.4 Lease premiums: para (g) of the definition of ‘gross income’

In terms of para (d) of the definition, ‘gross income’ includes any amount received or
accrued from another person ‘as premium or like consideration’ for the use or occu-
pation or the right of use or occupation of land or buildings; or for the use or right of
use of plant or machinery; or for use or the right of use of any motion picture film, video
tape or disk, or for the use or right of use of any patent.

A lease premium is a consideration passing from a lessee to a lessor, whether in cash or otherwise,
distinct from and in addition to, or in lieu of, rent’ and it must have an ascertainable money value.

[212]
CIR v Butcher Bros (Pty) Ltd
1945 AD 301, 13 SATC 21
The taxpayer company acquired land, which was subject to a 50 year lease. The terms of
the lease obliged the lessee to erect and maintain buildings on the leased premises to the
value of at least £55 000. At the end of the lease, the buildings would become the proper-
ty of the taxpayer, who was not obliged to pay compensation to the lessee. The lessee
demolished the existing building on the leased premises and erected new buildings,
which were completed in 1955.
________________________

45 See 15 SATC 247 and Joffe v CIR 1950 (3) SA 309 (C) and cases there cited.
394 Income Tax in South Africa: Cases and Materials

Issue: whether the Commissioner was correct in including the amount of £55 000 in
the taxpayer’s gross income for the 1935 tax year on the basis that, when completed, the
buildings were a ‘premium or like consideration’ in terms of the Income Tax Act 1925.
Held: The advantages accruing to the taxpayer were not capable of being valued in
1935, and were therefore not an ‘amount’. No amount had therefore been received by or
had accrued to the taxpayer in the 1935 tax year.
Feetham JA: It is clear, I think, from the judgment of Warrington LJ and from the other judg-
ments given in King v Earl Cadogan (1915) 3 KB 485, that ‘premium’ is a cash consideration,
passing from a lessee to a lessor in addition to rent, . . . [W]e must now take account of the presence
in that paragraph of the words ‘or like consideration’ following ‘premium’, and of the words
‘whether in cash or otherwise’ appearing in the earlier part of the definition of ‘gross income’.
When due account is taken of these words it becomes clear that the consideration described in
paragraph (d) need not necessarily take the form of a cash payment . . . In regard to the words
‘or like consideration’ the question arises – what points of resemblance are required in order to
make consideration which is not a ‘premium’ sufficiently similar to a premium to justify its being
regarded as a ‘like consideration’? This is not an easy question to answer. It may be, however,
that the words ‘or like consideration’ were inserted with the limited purpose of making it clear
that a premium in some form other than a cash payment was to be regarded as covered by para-
graph (d). Proceeding on the assumption that that was the sole object of inserting these words,
we should arrive, in the light of what I have already said, at the following interpretation of
the expression ‘premium or like consideration’ as used in paragraph (d) in so far as it refer to
relations between lessor and lessee:
‘Consideration passing from a lessee to a lessor, whether in cash or otherwise, distinct from and in addi-
tion to, or in lieu of, rent’.
I think, however, we must infer that ‘like consideration’ referred to in paragraph (d) must have
an ascertainable money value, and not a merely conjectural value; otherwise it could not, I think,
be said to possess the necessary resemblance to a ‘premium’ . . . In order to give effect to this
view I would insert ‘having an ascertainable money value’ after the word ‘consideration’, where it
occurs in the above suggested definition. But if, as I think, the word ‘amount’ as used in para-
graph (d), must also mean an amount having an ascertainable money value (vide Lategan v CIR)46
the addition of this further qualification to the suggested definition of ‘premium or like consid-
eration’ does not have any material effect on the meaning of paragraph (d) taken as a whole. It
may, perhaps, fairly be objected to the above definition as so amended that it is too wide, in that
it might have the effect of including certain obligations frequently accepted by a lessee in respect
of matters normally incidental to relations between landlord and tenant, such as undertakings to
pay all rates and taxes imposed on or in respect of property leased, to maintain buildings in
good repair, and to insure buildings . . . It has not been suggested that such undertakings on the
art of a lessee should be regarded as constituting ‘a premium or like consideration’ and I think it
is clear that the consideration constituted by such undertakings should not be so regarded, and
that such consideration should therefore be excluded from the suggested definition.
...
. . . I think the word ‘grant’ in the expression ‘grant of a right of the use and occupation of
premises’ is to be understood as referring, in the case of a grant made by a lease, to the initiation
of the relation between grantor and grantee: a lease is a form of contract which confers on the
lessee such a right as is referred to, and in the case of a lease the original lessor is the grantor
and the lessee is the grantee of such a right. The expression ‘in respect of’ is one which indicates
a relationship which may be a causal relationship (vide De Villiers v CIR);47 but I do not think it
necessarily or invariably indicates such a relationship. It seems to me that ‘in respect of’ is here
used as equivalent to ‘in relation to’ or ‘in reference to’. I then come to argument (3), that, as
the building clauses form part of the lease itself, it cannot be inferred that the rights conferred
by such clauses constitute ‘a premium or like consideration’ for the granting of the lease. It
seems to me that, in the case of a lease such as this, it is quite possible to justify the drawing of
the inference referred to in regard to undertakings given by the lessee which are contained in
________________________

46 1926 CPD 203 at 209.

47 1929 AD 227 per Stratford JA at.229.
 Statutory inclusions in gross income 395

the lease itself, though no doubt it would be easier to draw such an inference in the case of simi-
lar undertakings contained in a separate document, entered into by the parties as a preliminary
to the lease.

Notes
When Butcher Bros was decided, the Act did not contain a provision like the current para
(h) of the definition of ‘gross income’. The case was therefore argued on the basis of
whether the lessor’s right to have improvements on the leased premises effected was a
‘lease premium’. In the result, the court refused to uphold the assessment because no
‘amount’ had been shown to have accrued to the taxpayer during the tax year in issue. In
other words, because of the length of the lease, and the uncertainty as to what the value
of the improvements would be at the end of the lease, it was held to be impossible to
value the ‘amount’ that had accrued to the lessor at the commencement of the lease.
Paragraph (h) of the definition of ‘gross income’ was enacted as a direct response to
the decision in Butcher Bros. The problem of valuation is now overcome by the formula
laid down in that paragraph.
The current relevance of Butcher Bros lies in its general dicta: first, that a lease premi-
um is ‘consideration passing from a lessee to a lessor, whether in cash or otherwise,
distinct from and in addition to, or in lieu of, rent’; secondly, that the word ‘amount’
means an amount having ‘an ascertainable money value’; thirdly, that undertakings
which are a normal incident of leases, such as those which require a lessee to pay rates
and taxes or to maintain buildings in good repair, do not constitute a lease premium.
It has been argued that Butcher Bros decided that, although the onus of proof is nor-
mally on the taxpayer (see s 82), this onus only comes into effect once the Commissioner
has proved that that an ‘amount’ has accrued to the taxpayer. The argument is thus that
the onus is on the Commissioner to prove that what accrued to the taxpayer was an
‘amount’. In Butcher Bros, the Commissioner failed in his bid to have the assessment
upheld because he could not prove that what had accrued to the taxpayer was an
‘amount’, in the sense of something with ‘an ascertainable money value’.48

Goodwill which attaches to a person can never be a lease premium. Goodwill paid in respect of
premises (local goodwill) may constitute a lease premium, and this is a question of fact.

[213]
ITC 728
(1951) 18 SATC 94
The taxpayer and his wife were the joint owners of certain premises in which a hotel
business was carried on. During the tax year in issue, they granted a lease of the premises
to a third person and his wife sold the hotel business as a going concern to that same
person. The lease was for a period of 10 years at £250 per month for six months and
thereafter at £275 per month. The agreement for the sale of the hotel business fixed the
price, including the assets and goodwill, at £15 250. The Commissioner included the sum
of £13 342 out of the £15 250 in the taxpayer’s taxable income, on the grounds that it
was a premium or like consideration paid for the right of use or occupation of the hotel
premises. The taxpayer objected to the assessment. Evidence was led as to the value of
the tangible assets which had been sold and as to the flourishing state of the business.
Issue: was any part of the selling price of the hotel business a premium or like consid-
eration for the right of use or occupation of the premises?
________________________

48 Further, see Broomberg, Tax Strategy, 2 ed at 40-41.

396 Income Tax in South Africa: Cases and Materials

Held: in the negative; the value of the assets sold was about £6 000 and the balance of
the purchase price was not a premium for the right of use or occupation of the premises,
but represented the value of the goodwill of the hotel business as a going concern.
De Wet J: The Court is satisfied that the tangible assets when sold were worth in the neighbour-
hood of £6 000. The question still remains whether the balance, which would represent, accord-
ing to the Deed, the purchase price of the goodwill, was a premium for the lease. The question
of whether or not an amount paid for a business is in fact a premium paid in respect of the right
of use or occupation of the premises, is a question of fact to be ascertained from all the sur-
rounding circumstances. The fact that an agreement refers to it as being goodwill, or anything
else for that matter, does not necessarily go to show that it was not in fact a premium for the
lease. On the other hand, goodwill may be something altogether different from a premium. The
difference is more readily seen when a goodwill which attaches to a person is compared with a
goodwill which attaches to premises. Goodwill which attaches to a person can never be a premi-
um for the right of use or occupation of premises, whereas goodwill paid in respect of premises
may amount to a premium. But there are other factors that have to be taken into consideration
in order to determine exactly what the money is paid for. I should imagine that an hotel which is
a going concern and which, as in this case, has all its rooms let, and has a ready trade with its
own clientele, has a value attaching to its business which is altogether separate from the rental val-
ue of the premises. That that is so is readily demonstrated when one examines the history of this
hotel. When the appellant’s wife took it over at the end of 1945 two of the floors were unoccupied
and that was the position despite the fact that in the particular area where the hotel is situated
accommodation is readily let. When she took over she advertised the hotel far and wide, and in a
matter of six months she had it running to full capacity. Those efforts on her part represent a busi-
ness goodwill. It represents the difference between an hotel which is badly run and one which is
well run. That in itself, to my mind, is something which a would-be purchaser would take into ac-
count when he purchases a business and for which he would be prepared to pay money. Money so
expended is altogether different from money paid for the right of use or occupation.
Another factor that comes into the question is the adequacy or otherwise of the rent paid in
terms of the lease. Premium is obviously money paid in addition to rent, therefore to ascertain
whether or not a particular amount is a premium for the right of use or occupation, one must
take into account the adequacy or otherwise of the rent paid for the premises . . . On a balance
of probability the Court has come to the conclusion that the amount paid in excess of the tangi-
ble assets was not a premium within the meaning of s 7(d) of the Act, but that it reflected the
value of the goodwill of the hotel business as a going concern.
Under these circumstances the Court has come to the conclusion that the Commissioner was
wrong in including the sum of £11 354 in the appellant’s assessment for the year ended 30th
June 1947. The assessment is amended by deleting therefrom the said sum of £11 354.

[214]
ITC 745
(1952) 18 SATC 307
The taxpayer had, for a number of years, carried on the business of a beer-hall keeper in
partnership with others. During the tax year in issue, he entered into a contract to sell
the business as a going concern, including the furniture and fittings, the stock of liquor
and goodwill for a total consideration of £15 000. The sale was conditional on a transfer
of the liquor licence to the purchaser and on the purchaser’s obtaining a lease of the
premises in which the business was carried on, and such a lease was duly concluded on
the same day as the sale. The Commissioner was of the view that £11 000 of the £15 000
constituted a premium for the right of use and occupation of the premises, and he
included £6 600, being the taxpayer’s share of the £11 000, in his taxable income.
The taxpayer objected to the assessment on the ground that the sum in question did
not represent a premium or like consideration paid for the right of use or occupation of
premises within the meaning of s 7(d) of Act 31 of 1941, but was a receipt of a capital
 Statutory inclusions in gross income 397

nature. At the hearing of the appeal evidence was led and accepted by the court that a
fair allocation of the £15 000 was as follows:
(a) lease of the liquor license £7 500
(b) personal goodwill £4 300
(c) local goodwill £2 200
(d) furniture and fittings £1 000
£15 000
Issue: was part of the consideration received by the taxpayer for the sale of the beer-
hall business a premium for the right of use or occupation of the premises in which the
business was carried on?
Held: in the negative; a consideration for personal goodwill is not a premium for the
use or occupation of premises; but a consideration ostensibly for local goodwill may, in
reality, be a premium for the use and occupation of the premises.
Price J: It is quite evident that the appellant was a very popular figure in the neighbourhood . . .
and that his personality was mainly responsible for the prosperity of his business. That some
goodwill attaches to the locality of the premises is no doubt a fact. The licence too must be given
a value.
At the date of the sale the lease of the licence in favour of the appellant still had fourteen
months to go. This the purchaser received . . . The estate agent who was called as a witness values
the lease of the premises . . . at £7 500. There is no evidence to contradict this . . . The same
applies to the valuations of the goodwill. The rough allocations of the witness . . . meant that the
personal goodwill would be worth approximately £4 300 and the local goodwill approximately
£2 200. These figures must all be accepted by the court.
Now it is conceded by Mr Barnard that in so far as the value of the licence is concerned and in so
far as the personal goodwill is concerned, any money paid for these two intangible benefits
would not be subject to payment of income tax. This means that £11 800 of the £14 000 appro-
priated to the purchase price of the goodwill is not subject to tax. This leaves £2 200 still to be
dealt with. As regards this item, the question is whether in the circumstances of this case the
local goodwill is the same thing as a right of use or occupation of the premises. If the local
goodwill amounts in fact and in law to the right of use or occupation of the premises then it is
taxable under s 7(d) of the Act; if it is not, then it is not so taxable.
...
. . . It is not contended that there was a deliberate disguising of a right of use or occupation by
the use of the word goodwill. It is admitted by a director of the purchasing company that the
deed of sale accurately and correctly sets out what was the agreement between the parties. The
only question is whether in view of all the circumstances that portion of the goodwill which can
be described as local goodwill is in truth and in fact merely the right of use or occupation of the
premises.
Looking at the circumstances, therefore, the first question is whether the rent payable for the
use or occupation of the premises is adequate or whether it is a low rent because a portion of the
rent has already in fact been paid by an inflated value being placed on the goodwill. The facts,
however, are exactly the opposite. Although the director of the purchasing company says the
rent is a reasonable rent, people much better informed than he is and with a more extensive
background of experience of this area say that the rent is very high indeed. Therefore it cannot
be said that an inadequate rental is being paid and that a portion of the rental is disguised . . . in
the word goodwill and is included in the £14 000 paid for the goodwill. It is obvious that when a
person pays a premium for a lease he pays a premium because he is buying a valuable asset. A
lease is valuable if the rent is low in relation to the rent of the surrounding premises. A lease is
not valuable if it is much above what it ought to be. This circumstance therefore points strongly
against the contention that the amount allocated to local goodwill was paid really for the use or
occupation of the premises. It seems to us that this one circumstance is decisive and that it is not
necessary to review various other less significant and unimportant circumstances, none of which
398 Income Tax in South Africa: Cases and Materials

it may be remarked points in the opposite direction. It is quite clear the s 7(d) cannot be exten-
ded to include within its ambit local goodwill.
49
In the case of CIR v Kelly and Myerson it was held that the cession of a lease did not fall within
the ambit of the section and Greenberg JA pointed out that a cession of a lease is a common
transaction, well known, and if such a transaction should be included in the section it would
have been the simplest thing to mention it specifically. This reasoning applies to the present case
...
It may be mentioned that in the case of Kelly and Myerson (supra) it is pointed out that a premium
connotes something more than a payment. It must be over and above some other payment. In
the present case the circumstances would have to show that the amount paid for local goodwill
was a payment over and above the amount payable by way of rent. If the rent is already shown to
be excessive it is in the highest degree unlikely that it was intended to supplement the amount of
rent by disguising it as payment for goodwill . . .
The really decisive factor in this case is that a very high rental was payable for the premises by the
purchaser and that leaves no margin for an allocation of any portion of the purchase price to the
right of use or occupation of the premises. The purchaser was doubtless able to afford a high
rental for the premises because it occupies a commanding position in the liquor trade in view of
its association with another liquor business and it saw, no doubt . . . every opportunity of build-
ing up the business into a much larger concern.
In view of all these circumstances it seems to us that the appeal must succeed and that it must be
declared that no portion of the said sum of £14 000 is payable by way of income tax.

Notes
In this case the taxpayer was apparently not sub-letting to the purchaser of the business; a
new lease was, it seems, entered into between the purchaser and the lessor. In these
circumstances, there is no possibility that part of the consideration paid to the taxpayer
by the purchaser could be a lease premium, and the case ought to have been decided on
this simple point. See [215] Broomberg, Tax Strategy. Hence, much of the discussion in
this case is irrelevant.

[215]
Broomberg, Tax Strategy50
If the seller of a business who occupies the business premises as a tenant ceases to be a
party to the existing lease, either because he cedes and assigns his rights and obligations
in the lease to the purchaser, or because the landlord and the purchaser enter into a
fresh lease, resulting in the cancellation of the old lease, then no portion of the goodwill
paid by the purchaser to the seller will be regarded as a premium in the hands of the
seller, even if the amount is paid exclusively for ‘local goodwill’. If, however, the seller
of the business retains an interest in the premises occupied by the purchaser; either
because the seller owns the premises and now leases the premises to the lessee, or
because, as lessee, the seller sublets the premises to the purchaser, then the seller will be
liable for tax to the extent to which the court finds that the so-called ‘goodwill’ payment
did not really relate to the business itself, but represents an amount received for allowing
the purchaser to occupy the premises.

Consideration received by a lessee for the outright disposal of his rights under the lease is not a lease
premium or ‘like consideration’.

________________________

49 1947 (2) SA 1243.

50 2 ed, p 54.
 Statutory inclusions in gross income 399

[216]
CIR v Myerson and Kelly
1947 (2) SA 1243 (A), 14 SATC 300
This case concerned two separate assessments on unrelated taxpayers, Myerson and
Kelly, involving the same legal issue. In 1929 Myerson took cession of a lease over a
certain piece of vacant ground, for which he paid £3 000. The lessor was the Durban
Corporation. The lease provided that buildings to the value of at least £7 000 had to be
erected on the land within two years, and that on expiry of the lease all buildings would
become the property of the Town Council, without compensation being payable. In
determining his liability for income tax, the Commissioner treated the £3 000 and the
£7 000 as a lease premium and consideration in the nature of a premium respectively,
and allowed him to deduct annually, a proportion of these two amounts. In 1933 My-
erson erected a block of flats on the land at a cost to him of £42 918, and thereafter he
derived income from renting the flats. In 1941 Myerson ceded to P and H Blumberg all
his rights in the lease, in consideration for the payment to him of £51 000. The Commis-
sioner treated the £51 000 as a premium or like consideration paid to Myerson for the
right of use or occupation of land or buildings and included that amount in his income.
Issue: was the amount payable to Myerson for the cession of the lease, a ‘premium or
like consideration paid . . . for the right of use or occupation of land or buildings’?
Held: in the negative. Consideration received by a lessee for ceding all his rights under
a lease does not fall within the scope of those words.
Greenberg JA: The first question to be determined in both cases is whether the payments fall
within s 7(d). The Provincial Division came to the conclusion, for the same reasons in both cases,
that the payments did not fall under the sub-section and if the view they held is right, it disposes
of both cases. In the view I take of the matter it will be necessary to refer to the facts only in
Myerson’s case.
...
Section 7(d) of the Act provides that ‘gross income’ includes
‘any amount received or accrued from another person as premium or like consideration paid by such oth-
er person for the right of use or occupation of land or buildings or the use of plant or machinery’.
. . . It was argued on behalf of the Commissioner that the point in issue was decided in Ochberg v
CIR 51 in favour of his contention . . . But it seems to me clear beyond doubt that the question
whether the consideration which passed [in that case] was a premium or like consideration, in
terms of the sub-section, was never considered by the Court . . . [I]t is clear from a perusal of the
judgments that the case did not deal with the question now in issue.
This question is whether the payment received by the taxpayer in consideration of the cession of
the lease is received as premium or like consideration for the right of use or occupation of land
or buildings. There can be no doubt that the payment was received as the consideration for the
cession by him of all the rights he possessed under the lease in regard to the land and buildings.
If the Legislature had meant to include in ‘gross income’ the purchase price of such rights, one
would not have expected it to use the language which appears in the sub-section. Transactions of
this kind are well known and are ordinarily described as a sale or a cession of a lease or of the
rights under a lease, . . .
Moreover, I think it is clear that, apart from any special provision, a payment of this kind would
be regarded as a capital, and not as a revenue accrual. If a person, who is not a dealer in real
estate, purchases fixed property as a rent-producing investment and thereafter resells it at a prof-
it, not only is the return of the amount invested regarded as capital, but even the profit he makes
is not income but is an accretion to his capital, and, in the absence of legislative provision on the
point, it makes no difference whether what he has bought is the property or a lease such as the
one in question. Nor does this payment fall within the definition of income found in cases such
________________________

51 1931 AD 215.
400 Income Tax in South Africa: Cases and Materials

as CIR v George Forest Timber Co Ltd;52 Crowe v CIR;53 and New State Areas v CIR.54 If therefore we
have a well-known form of transaction the proceeds of which would ordinarily be regarded as
capital and it was intended to include those proceeds under the category of income, one would
have expected this to be clearly stated.
The next question is whether it can be said that the words used in the sub-section clearly point to
or are capable of a construction which includes such a transaction. The words are ‘premium or
like consideration’. The meaning of these words was considered in this Court in CIR v Butcher
Brothers (Pty) Ltd.55 but the point now in issue was expressly left open. In the present case we are
not dealing with payments made by a lessee to his lessor and the meaning assigned to the word
‘premium’ in the authorities cited do not necessarily apply . . . But it is clear that a common
meaning of ‘premium’ is a payment over and above something else, . . . [B]ut from the diction-
aries I have consulted it would seem that the use of the word as a general synonym for ‘payment’
or ‘amount paid’ is rare, if not unknown, . . .
In view of all these considerations I conclude that the payment accrued by the taxpayer Myerson
is not a premium in terms of s 7(d).
It is unnecessary to decide whether the portion of the sub-section under consideration applies
solely to a premium in regard to the relationship between a lessor and lessee, but it certainly
includes such a premium, and in the meaning given to ‘premium’ in the cases quoted, the rea-
son for its inclusion in s 7 is obvious: if such a payment was not so included, taxpayers whose
income consists of rent would be able, in order to avoid the payment of income tax, to exclude
portion of what is in reality income by way of rent from their income by stipulating with their
tenants for premiums and smaller rents, and this is a sufficient explanation of the subsection.
...
It was also contended on behalf of the Commissioner that if the taxpayer, instead of ceding the
lease, has sub-let it for the whole term at a rental, sufficiently in excess of the rental provided for
in the lease, to give him the equivalent of £51 000 then such excess would have been part of his
income from year to year. I agree, but if he had done so, then an entirely different relationship
would have subsisted both between him and the lessor and between him and his sub-lessee; the
difference between the rent payable by him and the rent payable to him would have been por-
tion of his taxable income, even if the provisions of s 7(d) did not appear in the Act.
I think therefore that it cannot be said that the payment in this case was a ‘premium’, nor does it
appear to me that it falls under the description of a ‘like consideration’.
...
I conclude therefore for the reasons given, that the £51 000 was not a premium or like consider-
ation in terms of s 7(d); this view also decides Kelly’s case . . .
WATERMEYER CJ, TINDALL JA and DAVIES AJA concurred.

Notes
Prior to this case, the Commissioner’s practice had been to construe the concept of a
‘lease premium’ very widely, as including any payment made by a new lessee either to the
owner of the premises or to a prior tenant. The decisions in Myerson and Kelly, above, and
Turnbull v CIR 56 adopted a far more restrictive interpretation. In effect, the Appellate
Division held that a lease premium had to be a payment from a lessee to a lessor, or from
a sub-lessee to a sub-lessor in a continuing relationship. Hence, a payment received by a
lessor or sub-lessor for agreeing to a cancellation of the lease (eg on a sale of the leased
premises, or on entering into an entirely new lease agreement) or for the outright assign-
ment of the lease to a new lessee was not a lease premium or a ‘like consideration’.
Further, see Broomberg, Tax Strategy, pp 52 – 55.
________________________

52 1924 AD 516.
53 1930 AD 122.
54 1946 AD 610.
55 1945 AD 301.
56 1953 (2) SA 573 (A).
 Statutory inclusions in gross income 401

The consideration received for a sub-letting of the taxpayer’s rights, as opposed to the cession of his
rights, is income.
[217]
Vacu-Lug (Pty) Ltd v COT
1963 (2) SA 694 (SR), 25 SATC 201
The taxpayer company, registered in Southern Rhodesia, entered into a contract in 1952
with an English company (which the judgment calls the ‘Vacu-Lug company’) under
which the taxpayer was granted the sole right for a period of 14 years to use, in the
Rhodesia’s, a certain patented process for relugging and repairing tractor tyres and
treads. Vacu-Lug undertook to communicate to the taxpayer the knowledge and tech-
nical information necessary to operate the process, to sell or lease to the taxpayer the
equipment needed to operate it, and to supply the materials required. In 1956 the tax-
payer company and the English company entered into an agreement with another
Rhodesian company, Copperbelt Tyre Service Ltd (‘the C T S company’), giving the
latter company certain rights to operate the process in Rhodesia, in return for which
C T S agreed to pay the taxpayer £5 000. The Commissioner included this amount in the
taxpayer’s income. The taxpayer objected on the grounds that this amount was of a
capital nature.
Issue: was the sum of £5 000 paid to the taxpayer for the right to use the patented pro-
cess and for supplying the necessary knowledge and information of a capital nature?
Held: the agreement was not an outright cession of rights, but a sub-letting of rights,
and as such was an operation of business in carrying out a scheme of profit-making, the
proceeds of which were income and not of a capital nature.
Beadle CJ: The American Rawls Vacu-Lug Process of relugging and repairing tyres is a patented
process, and Vacu-Lug is a trade mark registered in England. ‘The agreement’ [between the
taxpayer and C T S] is the only transaction of this kind ever entered into by the appellant, which
retained for its own benefit all the rights acquired under its agreement with the Vacu-Lug com-
pany, except those transferred to the C T S company under its agreement with that company.
Mr Christie, who appeared for the appellant, submitted two broad arguments in support of the
appellant’s case.
First he argued that on a proper construction of clause 1 of ‘the agreement’, all that was given by
the appellant in return for the £5 000 was what the cases call the ‘know-how’ of operating the
process in Northern Rhodesia and that the appellant had disposed finally and completely of this
‘know-how’. Relying, therefore, on the authority of Mariarty v Evans Medical Supplies Ltd 57 and
distinguishing Rolls Royce Ltd v Jeffrey,58 he argued that as the £5 000 was the consideration re-
ceived for the final disposal of this ‘know-how’ it was received for the sale of a capital asset and as
such was not subject to tax. Alternatively, he argued that, if the consideration for the £5 000
included the right to operate a patented process and the right to use a trade mark, the appellant
had in ‘the agreement’ finally and completely disposed of all the rights it ever had in Northern
Rhodesia to operate such process or use such trade mark. Such an outright disposal, argued Mr
Christie, was similar in principle to the disposal of all his rights under a lease by a lessee who ced-
ed, as opposed to sub-let, all his rights to a third party. He argued that the case of CIR v Myerson59
was clear authority for the proposition that any sum received for the outright cession of a lease
was a capital accrual and that this being so, the £5 000 paid to the C T S company was equally a
capital accrual. I shall deal with each of these arguments in the order submitted, both of which
turn, I think almost entirely on a proper construction of ‘the agreement’.

________________________

57 [1957] 3 All ER 718.

58 [1962] 1 All ER 801.
59 1947 (2) SA 1243 (A), 14 SATC 300.
402 Income Tax in South Africa: Cases and Materials

I reject Mr Christie’s first argument because I think a proper construction of clause 1 shows that
the £5 000 was received for something more than the mere ‘know-how’; it was received also for
the right to use a patented process and a trade mark.
While, therefore, Mr Christie may be right (but I express no firm opinion on this) when he says
there was a final disposition of ‘know-how’ (because ‘know-how’ once parted with can never be
recovered), his argument, based on the assumption that it was only ‘know-how’ which was dis-
posed of, fails. Consequently, before the appellant can succeed, it must at least show that it also
parted finally with its right to use the patented process and the right to use the trade mark, and
this takes me to Mr Christie’s second argument.
I shall assume without deciding (because this involves an examination of the effect of clause
8(1)(d) of the Income Tax Act 1954, which exercise I do not find necessary in the view I take of
this case) that Mr Christie is right in his submission that if ‘the agreement’ was in effect a final
disposition of all the appellant’s rights in Northern Rhodesia under its agreement with the Vacu-
Lug company, then this £5 000 would be a capital accrual.
In Moriarty’s case60 and in the Rolls Royce case,61 Viscount Simonds, in considering whether the
particular payments in those cases were capital or income, adopted the test laid down by Bankes
LJ in British Dyestuffs Corp (Blackley) Ltd v IRC.62 This test is:
‘. . . looking at this matter, is the transaction in substance a parting by the company with part of its proper-
ty for a purchase price, or is it a method of trading by which it acquires this particular sum of money as
part of the profits and gains of that trade?’
If I may incorporate in this test the Californian Copper Syndicate case63 test, which has been so uni-
versally applied in South Africa and in Southern Rhodesia (see, for example, the case of CIR v
Strathmore Exploration Ltd 64 and the cases there cited, as being particularly appropriate to our
Income Tax Act) I would suggest the following broad test:
‘Is the transaction in substance a parting by the company with part of its property for a purchase price or is
it in substance a gain made by an operation of business in carrying out a scheme for profit-making?’
Meyerson’s case, as Mr Christie rightly pointed out, is authority for the proposition that the pro-
ceeds of the cession of a business lease are normally regarded as capital. On the other hand, the
proceeds of the sub-letting of a business lease must be regarded as the fruits of capital produc-
tively employed, and, as such, income. It seems to me, therefore, that this case ultimately turns
on the question of whether or not ‘the agreement’ is to be regarded as similar in legal character
to a ‘cession of rights’ or to a ‘sub-letting of rights’. If it is more similar to a cession than to a sub-
lease then, for the purpose of this argument, the £5 000 would be capital; if on the other hand, it
is more similar to a sub-lease it would be income.
The following features of this agreement, taken together, seem to decide this question.
If the appellant had intended to dispose finally of all its rights in Northern Rhodesia, it would
have been a simple mater to have said so . . . The agreement does not say this; on the contrary it
calls the agreement a ‘Sub-Licensing Agreement’ . . . [The judge analysed the agreement fur-
ther, and continued:]
...
. . . I am satisfied that the appellant is not disposing outright of its assets in Northern Rhodesia
but putting these assets to productive use, in an agreement which resembles in character far
more closely a sub-lease than a cession.
. . . While, therefore, there are some features in ‘the agreement’ which might resemble an
outright cession of rights, if the agreement is taken as a whole, it bears far more resemblance
to a sub-letting of rights and the £5 000 in issue is in my view in substance a gain by an operation
of business in carrying out a scheme of profit-making and not in substance a parting by the
appellant with part of its property for a purchase prices. This being so, it is income and liable to
tax.

________________________

60 At 726.
61 At 803
62 12 TC at 596.
63 41 Sc LR 694.
64 1956 (1) SA 591 (A) at 599.
 Statutory inclusions in gross income 403

Notes
65
Broomberg, Tax Strategy suggests that, since the taxpayer was granting all the rights
which it enjoyed in Northern Rhodesia for the whole life of the patent, the taxpayer
might just as well have couched the contract as an out-and-out sale of his rights, rather
than an agreement in the nature of a lease. By doing so, ‘without being one wit worse off
economically, the taxpayer could have escaped tax on the receipt of the £5 000 literally
by a mere stroke of the pen’.

§2.5 Leasehold improvements: para (h) of the definition of ‘gross income’

In terms of para (h) of the definition, ‘gross income’ includes ‘in the case of any
person to whom, in terms of any agreement relating to the grant to any other person
of the right of use or occupation of land or buildings, or by virtue of the cession of
any rights under any such agreement, there has accrued in any such year or period
the right to have improvements effected on the land or to the buildings by any other
person–
(i) the amount stipulated in the agreement as the value of the improvements or as the
amount to be expended on the improvements; or
(ii) if no amount is so stipulated, an amount representing in the opinion of the
Commissioner the fair and reasonable value of the improvements.’
This provision was inserted as a result of the decision in [212] Butcher Bros where the
assessment was set aside because the Commissioner was unable to quantify the ‘amount’
that had accrued to a lessor as a result of a clause in the lease which obliged the lessee to
effect specified improvements.

The question whether the value of leasehold improvements effected by the lessee must be included in
the lessor’s gross income depends on whether, on a proper interpretation of the contract, the lessor had
the legal right to have the improvements effected, and the lessee was under a legal obligation to effect
them.

[218]
Rex Tearoom Cinema (Pty) Ltd v CIR
1946 TPD 338, 14 SATC 76
The taxpayer company, which carried on business as a tea room in Cape Town, leased its
premises from Woolworths (Pty) Ltd. The lease was for a period of five years. The lease
entitled the lessee to alter the premises and went on to provide that ‘all alterations and
new constructions as shown on the attached plan shall be undertaken by the lessee who
shall pay the cost thereof’ and that ‘at the termination of the lease . . . all alterations, new
constructions additions and/or improvements shall be the property of the lessor, and the
lessee does hereby waive any claim thereto or arising therefrom’. The alterations on the
plan were duly completed at a cost to the taxpayer of £6 605. The taxpayer claimed a
deduction for the proportionate part of that sum as a lease premium or like consider-
ation for the right of use or occupation of the premises.
Issue: was the taxpayer entitled to a deduction of the expenditure as a ‘premium for
the right or use of occupation’ of the leased premises?
Held: in the affirmative; on a proper interpretation of the agreement, the taxpayer was
obliged to make the alterations in question; the cost thereof was in addition to the
________________________

65 At 22-23.
404 Income Tax in South Africa: Cases and Materials

monthly rent and was a consideration in the nature of a premium in terms of the Act;
hence the requirements of the section were satisfied.
De Villiers J: The learned President of the Special Court came to the conclusion that the
contemplated alterations were not obligatory on the lessee . . .
In my opinion on a proper construction of the clauses quoted above the lessee is obliged to
effect the alterations. He is not entitled to use the premises for any other purposes than
for a bioscope-cafe and he is obliged to render the premises fit for such use. it is unnecessary to
decide whether he is obliged to carry on the business of a bioscope-cafe for the period of the
lease.
. . . If I am right in holding that the lease imposes an obligation on the lessee to effect the altera-
tions shown on the plan at his own cost, then in my opinion on the authority of CIR v Butcher
Bros (Pty) Ltd 66 the cost of such improvement is a premium or a consideration in the nature of a
premium in terms of s 11(2)(e) of the Income Tax Act No 31 of 1941.
...
The Appellate Division held that the words ‘premium or like consideration’ in s 7(1)(d) of Act
40 of 1925 in so far as they refer to relations between lessor and lessee, mean consideration hav-
ing an ascertainable money value passing from a lessee to a lessor, whether in cash or otherwise
distinct from and in addition to or in lieu of rent, excluding any obligation accepted by a lessee
in respect of matters normally incidental to leases such as undertakings to pay rates and main-
tain buildings.
In my opinion the cost of the alterations in the present case is, vis-à-vis the lessee, a consideration
of an ascertainable money value passing from the lessee to the lessor in addition to the rent of
£200 per month and constitutes a consideration in the nature of a premium in terms of
s 11(2)(e) of the Income Tax Act.
RAMSBOTTOM J concurred.

Notes
Like [212] Butcher Bros, Rex Tearoom Cinema came before the courts at a time when the
Income Tax Act did not contain a provision dealing specifically with the inclusion of
leasehold improvements in the lessor’s gross income. For this reason the case turned on
whether the value of the improvements had to be included in the lessor’s gross income
under the section of the Act which dealt with lease premiums.
The current significance of Rex Tearoom Cinema lies in the fact that the case turned on
whether the lessor had a ‘right’ in terms of the relevant agreement to have the improve-
ments effected; this is the same criterion as is laid down in the current section of the Act
governing the taxability of leasehold improvements, namely para (h) of the definition of
‘gross income’. The question whether the lessor had such a ‘right’ can also be ap-
proached conversely, by asking whether the lessee had an ‘obligation’ to effect the
improvements. This turns on the proper interpretation of the agreement between the
lessor and the lessee, and the crisp question is whether the lessor had the right to compel
the lessee to effect the improvements.

[219]
ITC 767
(1953) 19 SATC 206
The taxpayer company was the lessor of certain business premises under a lease which
provided that, ‘The lessee . . . undertakes to effect such repairs, renovations, and altera-
tions as may be required for the beneficial occupation of the lessee’ provided that these
________________________

66 1945 AD 301.
 Statutory inclusions in gross income 405

were in accordance with a plan approved by the lessor. The lease also provided that, on
the completion of these works, the lessor would ‘pay the lessee towards the cost thereof
the sum of £1 150’. The lease further provided that all the improvements, alterations
and additions to the leased premises would accrue for the benefit of the lessor without
compensation to the lessee. During the 1950 tax year, the lessee expended £5 328 on the
repair, renovation and alteration of the leased premises, and the taxpayer company paid
the lessee the agreed contribution of £1 150.
The Commissioner included in the taxpayer company’s taxable income the sum of
£2 699 as an estimate of the amount by which the value of the leased premises had been
enhanced, or the fair and reasonable value of the improvements effected to the leased
property. The taxpayer objected to the inclusion of this sum in its income, apparently on
the grounds that the lessee was not under an obligation to effect these improvements.
Issue: did the value of the improvements to be made by the lessee form part of the tax-
payer’s gross income under [what is now] para (h) of the definition of ‘gross income’?
Held: in the affirmative; the taxpayer company, as the lessor, had the legal right to have
the improvements effected on the leased premises; their value therefore had to be inclu-
ded in its gross income.
Price J: The crucial question in this case is whether the lessee was legally obliged to effect the
repairs, renovations and alterations which are referred to in the lease. Mr Kirkup, who represent-
ed the Commissioner, contended that the relevant clause in the lease in itself creates a binding
obligation upon the lessee to effect the repairs, renovations and alterations mentioned. He drew
attention to the use of the word ‘undertakes’ which he says connotes a legal obligation, and em-
phasizes certain other words occurring in the clause, more particularly ‘shall’ which is repeated
several times; . . .
Mr Kirkup contends that the test provided by the clause is an objective one and that the lessee
company would not be entitled to say that it had decided not to effect any of the repairs, renova-
tions, or alterations, more particularly because the evidence indicates that the lessee was pre-
pared to undertake this work in consideration of a reduced rental and of a longer period of
occupation.
. . . It is not disputed that the premises were extremely dilapidated and had been seriously dam-
aged by the previous tenant . . .
The only substantial relevant difference between the two leases is that in the Rex Tearoom case the
purpose for which the property was let was mentioned in the lease whereas in the present case it is
not mentioned, but it does not seem that this constitutes a real difficulty because in the present
case I have no doubt it is to be implied from the lease that the premises were let to the lessee for
the purpose of carrying on its factory and for its business of trading in the commodities which it
manufactured . . .
Dealing with clause 8 in more detail it seems to me that an objective test could certainly be applied
to the repairs and that the lessee could be compelled to repair whatever was in disrepair . . . The
more difficult stipulation is that providing for ‘renovations and alterations as may be required for
the beneficial, occupation by the lessee’. It might be contended that the lessee would be at liberty
to set a subjective limit to what was to be done under this provision. Such a contention is certainly
not easily disposed of, but even in regard to this portion of the work an objective test can be imag-
ined if one has regard to the normal and ordinary requirements of a business such as that carried
on by the lessee . . . The rule of law is that if a contract can be read in two ways and that being read
in one way renders it unenforceable whereas being read in another way renders it valid and en-
forceable, the Court should endeavour to read it so as to render it a valid and enforceable contract.
Applying this rule to the present case the Court ought, if it can, to read validity rather than invalidi-
ty into the contract . . .
. . . From the moment that the plant had been approved of and accepted the work to be done
was clearly and unequivocally defined and I think at the very least that at this stage the lessor
would have been clearly entitled to enforce the provisions of clause 8.
406 Income Tax in South Africa: Cases and Materials

This being my conclusion as regards the interpretation of the lease it follows that the obligations
undertaken by the lessee were legally enforceable. It follows that the lessor, that is the appellant,
possessed the legal right to have the improvements which were effected in the premises carried
out and that the value of the improvements or the amount expended on the improvements is
gross income within the meaning of section 7(d)bis of the Act and the Commissioner was correct
in assessing the appellant on this basis.
The case is therefore sent back to the Commissioner to make a new assessment on the basis of
this judgment . . .

Improvements that the lessee becomes obliged to effect under a variation of the lease, concluded before
the improvements are made, must be included in the lessor’s gross income at the value laid down in
the agreement, as varied.

[220]
COT v Ridgeway Hotel Ltd
(1961) 24 SATC 616 (FS)
In February 1951 the taxpayer had acquired by cession all the rights of a lessee under a
lease of certain land granted by the Crown. The lease was for a period of 99 years, subject
to the condition that within 36 months from its commencement, the lessee should erect
on it a building to the value of not less than £80 000, to be used as a hotel. In November
1951, after representations by the taxpayer that the figure of £80 000 in the lease bore no
relation to the present-day cost of erecting a hotel, a supplemental agreement was en-
tered into to change the figure in the lease to £200 000. In June 1953 the hotel was
completed at a cost in excess of £200 000. In his assessment of the taxpayer, the Commis-
sioner based the allowance granted to the taxpayer on the figure of £80 000, on the
grounds that the variation agreement was not the agreement under which the taxpayer
was granted the right of use or occupation.
Issue: was the allowance to be based on the figure of £80 000 or the figure of £200 000?
Held: the allowance should be based on £200 000; the variation agreement did not
rescind the original lease, but merely added an additional obligation; consequently the
amount fixed in the variation agreement constituted the obligation undertaken in the
lease whereby the right of occupation was granted.
Clayden CJ: These subsections are in a sense complementary to each other. As is explained in
CIR v Butcher Bros (Pty) Ltd 67 the purpose of s 8(e) is to include in the gross income of a taxpayer
accruals normally of a capital nature which would otherwise not be included . . .
. . . Section 8(e) charges to tax an amount which would not otherwise be taxable. Section
13(2)(f) by allowing a deduction releases from tax other income which would have been taxable
...
I consider that ‘any other person’ in section 13(2)(f) does include the Crown.
. . . The question is whether the deduction claimable in each year under s 13(2)(f) can be based
on the figure of £200 000 or must be based on the figure of £80 000.
The subsection allows deduction of ‘an allowance in respect of expenditure actually incurred by
the taxpayer in pursuance of an obligation to effect improvement on land . . . incurred under
any agreement whereby the right of use or occupation of the land . . . is granted by any other
person . . .’ The provisos limit the amount of the allowance. Proviso (i) limits the aggregate
allowances to the ‘amount stipulated in the agreement as the value of the improvements as the
amount to be expended on the improvements, or, if no amount is so stipulated’ the limitation is
to the fair value. Proviso (ii) limits the allowances in any one year by dividing the aggregate by
the number of years of use or by twenty-five, whichever is the less.
________________________

67 1945 AD 301 at 310, 13 SATC 21.

 Statutory inclusions in gross income 407

I have no doubt that the main part of the subsection does deal with amount, despite the argu-
ment to the contrary. It speaks of ‘expenditure actually incurred’. Were it not for the provisos
the whole expenditure would be deductible. I have also no doubt that when the proviso speaks
of ‘the amount stipulated’ it can include an amount which is expressed in the form ‘not less
than’. That is the normal way in which an obligation to make improvements of some value is
expressed. What is ‘stipulated’ is not what a person may choose to do but what he is obliged to
do . . .
The main question on this issue is whether the obligation to build to the value of not less than
£200 000 can be said to be ‘incurred under the agreement whereby the right of use is granted’.
The agreement by which £200 000 was substituted for £80 000 is expressed in its preamble to be
‘supplemental to’ the original lease. And in its one operative provision it says: ‘the lease shall be
read and construed for all purposes as if the figure of £200 000 had been inserted . . . instead of
the figure of £80 000.’ . . .
Under both common laws [ie English common law and Roman-Dutch common law] this varia-
tion is not to be regarded as rescinding the old agreement and making a new one in its place,
but as adding an obligation to, or engrafting an obligation on to, the old agreement. And in this
case the parties to the varying agreement have made it very clear that that was their intention.
They did not merely change the figure: they agreed that the lease should be read as if the higher
sum ‘had been’ in the lease . . .
And so it seems to me that the obligation to effect improvements in the higher sum was ‘in-
curred’ under the lease, though it may result from a variation of the lease. The parties made the
higher sum a part of the lease, dating back to when it came into being. The law regards this vari-
ation, when made, as part of the agreement of lease. And though it is the lease ‘whereby the
right of use or occupation of the land . . . is granted’, so that an obligation to improve incurred
under another agreement would not fall within the subsection, this obligation to improve to the
value of not less than £200 000 was incurred under the lease. . . .
The appeal should I consider be dismissed with costs.
Briggs FJ: I think it is perfectly clear that where an objection is taken under s 55 of the Act, the
Commissioner has no power under that section to alter the assessment adversely to the taxpayer,
and in view of the terms of s 58(1) and (4) I think the jurisdiction of the High Court on appeal
under s 58(11) is not as wide as in terms it appears to be. I do not think it would ordinarily be
justified in ordering an immediate amendment of an assessment in favour of the Commissioner.
If the appeal appeared to be governed by some principle which, if applied, would lead to such
an amendment, I think the proper course might be to ‘refer the assessment or decision back to
the Commissioner for further investigation and assessment or decision. The Commissioner
could then amend in his own favour under s 43 and his action, being open to objection and
further appeal, would be subject to proper scrutiny. If this were not done, the taxpayer might be
gravely prejudiced. The point relied on would probably not be dealt with in his case and indeed
might take him to some extent by surprise. It might raise issues of fact on which the burden of
proof would be on him. On the view I take of this appeal it is not necessary to decide the point,
and I prefer to leave it open.
The Commissioner’s first contention, and the one which, if correct, would lead to the conclu-
sion that no allowance at all should have been made, is that the words ‘any other person’ in the
paragraph quoted must be construed so as to exclude the Crown. Having regard to past practice,
this submission seems somewhat revolutionary, but that is no argument against it. . . .
The second and third grounds of appeal may be summarized as a contention that the agreement
whereby the taxpayer obtained the right to use and occupation of the land in question was the
lease of 14th April 1950, as vested in him by the assignment of 3rd February 1951, and before
variation by the deed of 21st February 1952, and that the only obligation incurred under that
agreement was to build to a figure of £80 000, not £200 000. This, so far as it goes, is unanswera-
ble. The variation made by deed of 21st February 1952 was the result of a request by the taxpayer
to which the Crown acceded. When the deed of 21st February 1952, was executed the taxpayer
increased its obligations on a purely voluntary basis. It was already in possession of the land, and
had already spent some £68 000 in performance of the building covenant. . . ..
The last point made by the appellant’s counsel was that the word ‘obligation’ in s 13(2)(f )(i)
was inapplicable to the case where the taxpayer had voluntarily increased his burden to effect
408 Income Tax in South Africa: Cases and Materials

improvements. In my opinion, there is no warrant for restricting the meaning of the word so as
to exclude obligations voluntarily assumed.
I would dismiss the appeal.

Notes
In this case, the agreement was varied before the improvements were carried out. Where
a lease agreement is varied after the improvements have been effected, any increase in
the value of the improvements to be effected in terms of the variation agreement is not
deductible by the lessee under s 11(h); see Professional Suites Ltd v COT.68 By inference,
therefore, the increased value would not be included in the lessor’s gross income under
para (h) of the definition of ‘gross income’.

§2.6 Recovery and recoupment: section 8(4)(a)

If the taxpayer incurs expenditure on repairs for which he is granted a deduction in terms of s 11(d),
and he thereafter sells the property for more than its original cost to him, it cannot be said from these
facts alone that he has recouped the expenditure on repairs as contemplated in s 8(4)(a).

[221]
CIR v Pinestone Properties CC
(2000) 63 SATC 421
The taxpayer had purchased a certain commercial property for the purpose of letting
the property and earning rental income. The building on the property consisted of a
ground floor and two upper floors. It had been consistently leased to rent-paying tenants.
In September 1994, when the leases still had some time to run, a fire caused extensive
damage to the roof and cladding of the building.
The taxpayer was insured against fire and its insurers paid R1 483 552 in terms of the
policy. The actual cost of repairing the fire damage was approximately R100 000 more
than the amount received by the taxpayer from its insurers.
The taxpayer’s consulting engineers, while examining the fire damage, discovered cer-
tain defects in the building which were completely unrelated to the fire or the conse-
quential damage. These engineers ascertained that the reinforcement of the concrete
floor slabs of the ground and first floors had been substantially inadequate for the pur-
pose for which they had been hired by the tenants and, as a result, the slabs had become
distorted and misshapen.
The taxpayer then undertook the necessary work, referred to as ‘the repairs’, to rein-
force and level the slabs, intending to continue letting the property after the leases
expired. These repairs were carried out concurrently with the necessary work to rehabili-
tate the fire damage during respondent’s 1995 and 1996 years of assessment.
The taxpayer claimed as a deduction in terms of s 11(d) of the Income Tax Act an
amount of R626 519 in respect of expenditure on the repairs, and this deduction was
allowed by SARS in the taxpayer’s 1995 and 1996 years of assessment.
All the repair work on the taxpayer’s property was completed by May 1995 and the
taxpayer then sought tenants for the property. Having been unsuccessful in letting the
property, the taxpayer ultimately sold it for the sum of R2.5 million in November 1996.
In the 1997 year of assessment and acting in terms of s 8(4)(a), SARS added back to
respondent’s income the amount of R626 519 which it had expended on repairs and
which had been allowed as a deduction for tax purposes, on the basis that this amount
had been recovered or recouped by the taxpayer.
________________________

68 (1960) 24 SATC 573.

 Statutory inclusions in gross income 409

Issue: whether the fact that the property had been sold for more than its original cost
to the taxpayer of itself showed that there had been a partial or total recoupment of the
expenditure on repairs within the meaning of s 8(4)(a) of the Income Tax Act.
Held: there is an onus on SARS to show that an amount previously allowed as a deduc-
tion has been recovered or recouped by the taxpayer. No recoupment will have been
demonstrated unless it is shown, by facts other than the mere sale of a property at a price
greater than the cost of the repairs and maintenance, that there has been a recoupment.
In the present case, the facts relied on by SARS did not establish, even prima facie, that
the taxpayer had recouped the cost of the repairs by virtue of the sale of the property at a
profit.
Magid J:
Introduction
This appeal involves a completely novel concept in the law of taxation of income: if the owner of
property who has claimed and been allowed the cost of repairs as a deduction against his rental
income sells his property for a price greater than his cost, does that profit (albeit a capital profit)
represent a partial or total recoupment of such cost within the meaning of s 8(4)(a) of the In-
come Tax Act (‘the Act’)’ In the Income Tax Special Court, the learned President, (Galgut DJP)
and two assessors held on the facts that there had been no recoupment and accordingly upheld
the taxpayer’s appeal against his assessment to tax in respect thereof. The Commissioner for the
South African Revenue Service (‘the Commissioner’) appeals against that judgment.
After outlining the facts, the judgment proceeded:]
The law
The relevant portions of s 8(4)(a) of the Act read as follows:
‘There shall be included in the taxpayer’s income all amounts allowed to be deducted or set off under the
provisions of sections 11 to 20 inclusive . . . whether in the current or any previous year of assessment
which have been recovered or recouped during the current year of assessment.’
The relevant portion of s 11(d) of the Act reads as follows:
‘For the purpose of determining the taxable income derived by any person from carrying on any trade
within the Republic, there shall be allowed as deductions from the income of such person so derived . . .
(d) expenditure actually incurred during the year of assessment on repairs of property occupied for the
purpose of trade or in respect of which income is receivable . . .’ . . .
The Commissioner’s contentions
Mr Naidu, who appeared with Mr Silke and Mr Vanker for the Commissioner, submitted that the
court a quo had erred in considering questions of value because (and I quote from Mr Naidu’s
Heads of Argument)–
‘the proper method of calculating the recoupment allowance in respect of s 11(d) was to subtract from the
selling price of approximately R2 500 000, the historical cost of the property, the amount of any recoup-
ment being limited to the lesser of the amount of the deductions allowed under s 11(d), or the extent to
which the selling price exceeded its historical cost.’
Before us, Mr Naidu argued that a fundamental proposition of the Commissioner’s submission
was (and again I quote from his Heads of Argument) that–
‘the cost of the property, its selling price and the total amount allowed as deductions in respect of repairs
. . . are the only relevant criteria to a decision regarding whether or not there has been a recovery or re-
coupment in terms of the Act.’
He argued further that though the profit on the sale might be a capital profit, the sale of the
property was the event which gave rise to the profit itself and that as, in this case, the capital
profit was greater than the cost of the repairs that fact alone demonstrated that there had been a
recovery or recoupment of such cost.
He also submitted that had the respondent not done the repair it could not have realised the
price it did, which demonstrated, according to Mr Naidu, that there had been a recoupment . . .
Analysis of the issues
It is, in my opinion, significant that all the reported judgments dealing with the taxation of
recoupments relate to the sale of assets (both movable and immovable) in respect of which de
410 Income Tax in South Africa: Cases and Materials

preciation or wear-and-tear and other like allowances have previously been allowed as deductions
for tax purposes in terms of various subsections of s 11 of the Act. It was on some of these cases
(eg Moorreesburg Produce Co Ltd v CIR;69 ITC 559;70 ITC 146771) that Mr Naidu relied for the propo-
sition that the respondent, by selling the property at a price greater than it had paid for it by
more than the cost of the repairs, had thereby recouped the cost of the repair.
Thus, in Moorreesburg Produce supra, Fagan J said–
‘If, after having used a machine, the taxpayer gets for it as much as he paid for it, I should say that he has
recovered or recouped anything he may have written off as depreciation during its period of use. And to
the extent to which he gets more than the value shown by deducting from the original cost the amounts
he has written off, to that extent he recovers or recoups those amounts.’
And in ITC 1467, supra, at 31, Conradie J said–
‘If the Commissioner is entitled to tax the recoupment of past allowances on the cost of a building, he can
only levy tax on the price of the (one and only) thing sold. If the taxpayer’s books show that an immovable
property which it formerly owned and on which allowances had earlier been granted has been sold at a
price exceeding the purchase price thereof, the Commissioner may tax any recoupments without regard
to whether or not the buildings on which allowances had been granted had a value, or if they have, what
the value is, or indeed, whether they were still in existence at the date of the sale.’
In my view where a taxpayer has been allowed to deduct from his income an expense which did
not involve the expenditure of actual cash it is logical to hold that that expense had been
recouped when the asset is sold for more than its written-down value. But that situation differs
totally, in my view, from the present case in which the tax deduction consisted in an amount
involving the actual expenditure of money.
72
It is noteworthy that in ITC 699 it was held that s 8(4)(a) of the Act was intended as ‘a method
of adjusting over-allowances for depreciation in the past.’ See, too, CIR v Wolf.73
Mr Naidu was initially inclined to concede that the onus was on the Commissioner to prove that
the cost of repairs had indeed been recovered or recouped within the meaning of those words as
used in s 8(4)(a) of the Act. In reply, however, he retracted the concession in the light of the
provisions of s 82 of the Act which reads as follows:
‘The burden of proof that any amount is exempt from or not liable to any tax chargeable under this Act or
is subject to any deduction, abatement or set-off in terms of this Act, shall be upon the person claiming
such exemption, non-liability, deduction, abatement or set-off . . .’
In my view s 82 of the Act is of no relevance to this enquiry because unless the respondent can
be shown to have ‘recovered or recouped’ the cost of the repairs, the amount which the appel-
lant sought to add back to the respondent’s income for tax purposes cannot be taxable.
In CIR v Butcher Bros (Pty) Ltd 74 the facts were that vacant land had been leased to a tenant which
was obliged to erect buildings to the value of not less than £55 000 on the property. When the
buildings were completed the Commissioner included the sum of £55 000 in the taxpayer’s in-
come on the basis that the taxpayer had received ‘a premium or like consideration’ for the grant
of the lease on the basis that the buildings acceded to the land. In delivering the judgment of
the court Feetham JA said:
‘The assessment in dispute, made by the Commissioner . . . can only be allowed to stand if some “amount”
accrued to or was received by the company in the tax year ended 30 June 1935 . . .’
By a parity of reasoning in the instant case the Commissioner must show that an amount previ-
ously allowed to be deducted has been recovered or recouped by the taxpayer . . .
The words, ‘recovered or recouped’ are not terms of art. They must therefore be interpreted
according to their ordinary everyday meanings. I have had recourse to the Oxford English Diction-
ary (‘OED’) in my investigation of the ordinary meanings of the words.

________________________

69 1945 CPD 289.

70 13 SATC 306.
71 52 SATC 28.
72 17 SATC 98 at 104.
73 1928 AD 177 at 182–183.
74 1945 AD 301.
 Statutory inclusions in gross income 411

The must appropriate definition of the word ‘recover’ in the OED is ‘to get . . . again into one’s
hands or possession; to regain possession of (something lost or taken away).’
The OED definition of the word ‘recoup’ is ‘to make up for, compensate for, make good’; and
that of ‘recoupment’ is ‘the act of recovering or recompensing; the fact of being recouped for
loss or expense.’
It is not axiomatic that repairs to a property necessarily improve its value – certainly not repairs
which may have been done some time before its sale. And that is the fundamental fallacy in the
Commissioner’s stance. Thus, if a property is purchased in 1980 for R1m, repairs at a cost of
R200 000 are carried out in 1985 and the property is sold in 2001 for R5m, could anyone say
without any further evidence that the 1985 repairs contributed at all to the substantial purchase
price in the year 2000? And if there were evidence to that effect, could anybody say to what ex-
tent the repairs had contributed to the purchase price?
The owner of an income-producing property will, no doubt, simply for the sake of its appearance
and, perhaps more important, its proper maintenance, cause it to be painted from time to time.
The cost of painting will, no doubt, be allowed as a deduction from income. If the taxpayer sells
his property, is the Commissioner entitled, merely because he sells it at a profit entitled to claim
that the taxpayer has recouped the cost of that painting or, for that matter, other minor
amounts expended on other kinds of maintenance? I think not, unless it can be shown by facts
other than the mere sale at a profit greater than the costs of the repairs and maintenance that
there has in fact been a recoupment thereof.
I do not wish to be understood to hold that the cost of repairs can never be recouped within the
meaning of s 8(4)(a) of the Act. For example, if the taxpayer recovers damages for defective or
negligent workmanship from the builder of the building on his property, such damages may well
represent a partial or total recoupment of the cost of the repairs to his building which may have
been deducted from his income for tax purposes in a prior tax year. Another possible source of
recoupment might be a payment by an insurance company of the cost of repairs (or some part
thereof) if the occasion giving rise to the repairs is covered by insurance. Similarly (an example
given by Mr Olsen in argument) a seller agrees to sell his income-producing property on two
alternative bases – R5m for the building as it stands or R5m [presumably this should read ‘R6 m’
– ed] if certain specified repairs are undertaken. The seller, knowing he can do the repairs for,
say, R500 000 accepts the higher offer. He does the repairs and is allowed the cost thereof as a
deduction against income. In a later tax year when the property, duly repaired, is sold and trans-
ferred and the seller receives the purchase price he would, in my view, not be able to argue that
he had not recouped the cost of the repairs.
In my view the facts relied on by the Commissioner do not establish, even prima facie, that the
respondent recouped the cost of the repairs merely by virtue of the sale of the property at a profit.
It follows, therefore, that the appeal must be dismissed with costs.
HUGO J and THERON J concurred.

Notes
This case does not hold that the cost of repairs can never be recouped on a subsequent
sale of property. It merely holds that, where repairs have been done and a s 11(d) deduc-
tion granted for such repairs, and the property is later sold for more than its original cost
to the taxpayer, it cannot be said from these facts alone that there has been a recoup-
ment of the cost of repairs.
In Butcher Bros75 it was held that onus is on the Commissioner to show that some
‘amount’ has accrued to the taxpayer. On the analogy of this case, it was held in the
present case that the onus is on the Commissioner to adduce evidence to show that there
has, in fact, been a recoupment of the prior deduction.
When a partner disposes of all or part of his interest in a partnership, there will be a recoupment by
him of his pro rata share of any deductions or allowances granted in respect of partnership assets.

________________________

75 CIR v Butcher Bros (Pty) Ltd 1945 AD 301.

412 Income Tax in South Africa: Cases and Materials

[222]
Chipkin (Natal) (Pty) Ltd v CSARS
([2005] 3 All SA 26, 67 SATC 243 (SCA)
The taxpayer company and eleven other persons had entered into a partnership. The
only disclosed partner was Air Southern76Cross Management (Pty) Ltd (‘ASCM’) and all
the others were partners en commandite. In return for a cash contribution the taxpayer
acquired a 30% share in the partnership. ASCM acted as the manager of the partnership.
The business of the partnership was to purchase a particular aircraft and to conduct
the business of transporting by air, persons, livestock, goods or mail. The aircraft was
purchased out of partnership funds and was a partnership asset.
Section 14bis of the Income Tax Act provides for an allowance to be deducted from
‘the income of any person’ in respect of an aircraft acquired by such person on or after 1
April 1965.
Section 24H(5)(a) provides that income that has accrued to partners in common is
deemed to have accrued to each of the partners individually in their proportionate
shares. Where income has accrued in this way to a partner, the partner is entitled in
terms of s 24H(5)(b) to deduct a proportionate share of deductions and allowances that
are granted by the Act.
The taxpayer company, as a partner, claimed, in terms of s 24H(5)(b), its pro rata
share of the s 14bis allowance for the 1989–1991 tax years.
The taxpayer company thereafter disposed of its interest in the partnership to a new
company, which acquired a 99.9% interest in the partnership. In consideration for that
disposal, the bank released the taxpayer from the outstanding balance of the loan which
the taxpayer had originally taken out to finance its capital contribution to the partnership.
SARS assessed the taxpayer on the basis that by virtue of the disposal, the pro rata
s 14bis allowances previously claimed by the taxpayer had been recouped by the taxpayer
in terms of s 8(4)(a).
The taxpayer contended, inter alia, that there was a distinction between the cost to a
partner of acquiring a share in the partnership and the cost to the partnership of acquir-
ing an asset and that there was a distinction between the disposal by a partner of an
interest in a partnership and the disposal by the partners of a partnership asset.
The taxpayer contended that tax allowances would be recouped by a partner only
when the partnership sold the aircraft, which occurred in 1995.
Issue: did the disposal by the taxpayer company of its interest in the partnership give
rise to a recovery or recoupment in terms of s 8(4)(a) of the Income Tax Act of the s
14bis allowances previously granted to the taxpayer?
Held: in the affirmative. The acquisition by the taxpayer of a share in the aircraft enti-
tled the taxpayer to a pro rata share of the s 14bis allowance in respect of the cost of the
aircraft. When the taxpayer disposed of 99% its 30% interest in the partnership, it dis-
posed of a corresponding percentage of its undivided share in the aircraft. On such
disposal, the taxpayer recouped the cost to it of its share in the aircraft, being the asset in
respect of which the tax deduction had been granted. There was thus a recovery or
recoupment of a pro rata portion, calculated in terms of s 24H(5)(b), of the s 14bis
allowance granted in respect of the purchase by the partnership of an aircraft.
________________________

76 Ordinary partners are jointly and severally liable for partnership debts. En commandite partners (who must
take no active role in the partnership business and who are not disclosed to the outside world as partners)
incur no liability toward creditors of the partnership, and are liable to their co-partners for an amount not
exceeding their respective contributions to the capital of the partnership.
 Statutory inclusions in gross income 413

Cloete JA:
[4] Section 14bis of the Income Tax Act provides for an allowance to be deducted from ‘the
income of any person’ in respect of an aircraft acquired by such person on or after the first day
of April 1965. The definition of ‘person’ in s 1 does not include a partnership and a partnership
is not a person at common law.
[5] Income that has accrued to partners in common is deemed to have accrued to each of the
partners individually in their proportionate shares by s 24H(5)(a) . . .
[8] The Commissioner held the view that by virtue of the disposal, the pro rata s 14bis allowanc-
es previously claimed by the appellant were recouped in terms of s 8(4)(a) of the Act. That sec-
tion at all material times provided, to the extent relevant, that:
‘There shall be included in a taxpayer’s income all amounts allowed to be deducted or set off under the
provisions of sections 11 to 20, inclusive . . . whether in the current or any previous year of assessment
which have been recovered or recouped during the current year of assessment . . .’.
The Commissioner accordingly issued the appellant’s original income tax assessment for the
1992 tax year on the basis that there had indeed been a recoupment.
[9] In my judgment, the approach of the Commissioner and the conclusion reached by the tax
court are undoubtedly correct. The appellant’s counsel stressed the distinction between the cost
to a partner of acquiring a share in the partnership and the cost to the partnership of acquiring
77
an asset. That distinction was made by this court in Rane Investment Trust v CSARS.
‘The Commissioner argued further, however, that Rane’s expenditure was in respect of its acquisition of
its partnership share, not in the acquisition of the film. That argument loses sight of the principle that in
acquiring the share, Rane was also acquiring, as part of the business of the former partnership, a share in
the film – already an asset. It was the expenditure on the film as an asset taken over by the new partnership
that was deductible, and not the amount of R90 000 paid to become a partner’.
The appellant’s counsel also emphasised the distinction between the disposal by a partner of an
interest in a partnership, and the disposal by the partners of a partnership asset. But it does not
follow from these distinctions that the appellant did not recover or recoup (as envisaged in
s 8(4)(a)) a pro rata portion (calculated in terms of s 24H(5)(b)) of the allowance deducted
under s 14bis. The appellant made a capital contribution to the partnership that gave it, simulta-
neously, a 30% share in the partnership, and an undivided share in the aircraft. The acquisition
of the share in the aircraft entitled the appellant to a share of the s 14bis allowance for the cost
of the aircraft. Because of the provisions of s 24H(5)(b), the acquisition of the 30% interest in
the partnership determined the appellant’s share of that allowance at 30%. When the appellant
disposed of 99% of its 30% interest in the partnership, it disposed of a corresponding percent-
age of its undivided share in the aircraft. As Schreiner J (Maritz J concurring) said in Whiteaway’s
78
Estate v CIR :
‘[E]ven when no change in the membership of the firm took place, whenever there was a change in the
proportion in which the partners were to share in the profits and losses of the business, there was a change
in their rights in the partnership assets’.
. . . The appellant accordingly recouped the cost to it of its share in the asset in respect of which it had
made the tax deductions . . .
10] The appellant’s counsel submitted that the allowances were recouped only when the part-
nership sold the aircraft in 1995. The foundation for that submission was that the allowances had
accrued to the partnership (when it acquired the aircraft) and not to the partners individually
(when they each acquired their proportionate shares in the aircraft upon becoming partners)
and by the same token it was only when the partnership disposed of the aircraft that the allow-
ances were recouped.. . .
[11] . . . The Act does not recognise a partnership. It recognises only income (gross income
after allowing for tax-exempt income) that accrues to partners in common (in accounting terms,
the income of the partnership) which it attributes to them proportionally, and it similarly attrib-
utes, to the individual partners, deductions and allowances that are granted by the Act, with a
resultant ‘taxable income’ of the partners individually. A partnership cannot have a taxable in-
come, simply because it is not a taxable entity. . . . Because the partnership is not a taxpayer and

________________________

77 2003 (6) SA 332 (SCA) at [35].

78 1938 TPD 482 at 491.
414 Income Tax in South Africa: Cases and Materials

regard must therefore be had to the taxable income of each individual partner, and because a
portion of the allowance is granted in the determination of each individual partner’s taxable
income, it is possible for one partner to recoup the amount of the allowance previously granted
to such partner even if the other partners recoup nothing. It is to the individual partner that a
proportionate share of the allowance accrues when he becomes a partner, and it is the partner
who recoups that allowance when he disposes of his interest.
[12] . . . Section 24H(5)(b) itself expressly provides that the deductions and allowances may be
granted in respect of the income each partner is deemed to derive from the partnership busi-
ness in terms of subs (5)(a). What must happen in the ordinary course is that for tax purposes at
the end of a partner’s tax year (which may not coincide with the interval agreed on by the part-
ners in sharing profits), the income of the partnership will be determined; amounts exempt
from tax will be deducted; each partner’s share of the income will then be calculated; and each
partner will then be entitled to that partner’s portion of any deduction or allowance in respect
of that partner’s share to produce that partner’s taxable income derived from the partnership.
...
[13] It remains for me to deal with the anomalies which the appellant’s counsel said would re-
sult from this approach.
[14] First it was submitted that the s 14bis allowances will be recouped twice: when the appellant
sold its partnership interest and again when the partnership sold the aircraft. The answer is that
only such portion of the s 14bis allowance as had not already been recouped by the appellant,
would be recouped by the appellant when the aircraft was sold.
[15] Second, it was submitted that the Act does not contemplate a recoupment when an asset,
in respect of which allowances have been deducted, is still in use. The answer is that a recoup-
ment occurs when a taxpayer recovers what the taxpayer expended and for which the taxpayer
was allowed a deduction; and whether or not the asset is still in use, is irrelevant.
[16] . . . In the present matter there is much to be said for the blunt comment by the court a quo
that ‘the disposal of the share in the partnership is a poorly disguised manner of disposing, inter
alia, of ownership of a share in the aircraft’ . . . [T]he fact that in a particular case (unlike the
present) it may be difficult to calculate the different recoupments and allowances, does not de-
tract from the fact that an individual partner may have recouped what such partner expended.
[17] The appeal is dismissed with costs . . .
HOWIE P, CAMERON JA, NUGENT JA and PONNAN JA concurred.

Notes
At common law, a partnership, unlike a company, is not a legal persona, separate from its
members. (Although it is true that, for certain limited purposes, such as on insolvency, a
partnership is treated as though it were a legal persona.) The Income Tax Act does not
include a partnership in its definition of a ‘person’.
From this fundamental distinction between a partnership and a company, flow im-
portant consequences.
A member of a company does not own and has no real right in property owned by the
79 80
company, even where that member holds all the shares in the company.
Thus, where a company acquires or disposes of an asset, this has no impact on the tax
situation of the members or directors. The tax consequences of a disposal or acquisition
by the company (for example, the inclusion of an amount in gross income, or the incur-
ring of tax-deductible expenditure) impact only on the company.
By contrast, partnership property is jointly owned by the partners. Each partner there-
in partnership property, and the partners own such property jointly81
fore has a real right 82
in undivided shares.
________________________

79 Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530 550–551; Francis George Hill Family Trust v South
African Reserve Bank 1992 (3) SA 91 (A) 102G.
80 Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL).
 Statutory inclusions in gross income 415

From this it follows, ineluctably, that where a partner ceases to have a real right in a
partnership asset – for example, where the partnership itself disposes of the asset in
question, or where the particular partner leaves the partnership or otherwise disposes of
all or part of his interest in the partnership – there is a disposal by that partner of his
interest in that asset, and a potential recoupment by that particular partner of any previ-
ously-deducted expenditure or allowances in respect of that asset.

________________________

81 Robson v Theron 1978 1 SA 841 (A).

82 In other words, each of the partnership assets is jointly owned by all the partners.
 9
DEDUCTIONS: GENERAL PRINCIPLES; ASSESSED
LOSSES OF PRIOR YEARS

§ Page
1 General principles ................................................................................................... 418
[223] Sub-Nigel Ltd v CIR .................................................................................... 419
2 The general deduction formula .............................................................................. 420
2.1 Carrying on a trade ......................................................................................... 420
[224] ITC 697 ................................................................................................ 420
[225] Borstlap v SBR ..................................................................................... 421
[226] Reef Estates Ltd v CIR ......................................................................... 422
[227] Practice Note 31 .................................................................................. 423
2.2 Expenditure or loss ......................................................................................... 424
[228] Port Elizabeth Electric Tramway Co v CIR ........................................ 424
[229] Joffe & Co (Pty) Ltd v CIR .................................................................. 424
2.3 Actually incurred ............................................................................................. 424
[230] Pyott Ltd v CIR .................................................................................... 424
[231] Port Elizabeth Electric Tramway Co v CIR ........................................ 425
[232] Nasionale Pers Bpk v KBI.................................................................... 425
[233] Caltex Oil (SA) Pty Ltd v SIR.............................................................. 428
[234] CIR v Felix Schuh (SA) (Pty) Ltd ....................................................... 431
[235] Edgars Stores Ltd v Commissioner for Inland Revenue ................... 433
[236] CIR v Golden Dumps (Pty) Ltd .......................................................... 436
[237] Unquantified and defeasible expenses incurred in the production
of income ............................................................................................. 439
2.4 During the year of assessment ........................................................................ 445
[238] Sub-Nigel Ltd v CIR............................................................................. 446
[239] Caltex Oil (SA) Pty Ltd v SIR.............................................................. 446
2.5 In the production of the income ................................................................... 446
[240] Port Elizabeth Electric Tramway Co v CIR ........................................ 446
[241] CIR v Genn & Co (Pty) Ltd ................................................................ 449
[242] Sub-Nigel Ltd v CIR............................................................................. 449
[243] Provider v COT.................................................................................... 450
[244] W F Johnstone & Co Ltd v CIR ........................................................... 451
[245] Port Elizabeth Electric Tramway Co v CIR ........................................ 453
[246] Joffe & Co (Pty) Ltd v CIR .................................................................. 453
[247] COT v Cathcart.................................................................................... 456
[248] CIR v Drakensburg Garden Hotel (Pty) Ltd...................................... 459
[249] Ward and Co Ltd and Commissioner of Taxes ................................. 463
[250] Warner Lambert SA (Pty) Ltd v CSARS ............................................. 464
417
418 Income Tax in South Africa: Cases and Materials

§ Page
3 The deductibility of allegedly excessive or exorbitant expenditure
[251] ITC 1847 ...................................................................................................... 470
4 Apportionment of lump-sum expenditure incurred partly to produce assessable
income and partly to produce exempt income ...................................................... 472
[252] CSARS v Mobile Telephone Networks Holdings (Pty) Ltd ...................... 472
5 The deductibility of interest in terms of s 11(a) .................................................... 478
[253] RC Williams, “Can expenditure on interest be ‘of a capital
nature’ and on that ground be non-deductible for income tax purposes?” 478
[254] CIR v Giuseppe Brollo Properties (Pty) Ltd.............................................. 478
[255] Ticktin Timbers CC v CIR .......................................................................... 479
[256] CSARS v Scribante Construction (Pty) Ltd ............................................... 482
[257] CSARS v BP South Africa (Pty) Ltd ........................................................... 484
6 Prohibited deductions ............................................................................................. 493
6.1 Expenditure and losses of a capital nature; see CHAPTER 10 –
CAPITAL EXPENDITURE AND LOSSES: ................................................... 494
6.2 Section 23(a): ‘the cost incurred in the maintenance of any taxpayer,
his family or establishment’ ............................................................................ 494
[258] L v Commissioner of Taxes................................................................. 494
6.3 Section 23(b): ‘domestic or private expenses’ ............................................... 496
[259] CIR v Hickson ...................................................................................... 497
[260] KBI v Van der Walt .............................................................................. 498
6.4 Section 23(f): ‘any expenses incurred in respect of any amounts received
or accrued which do not constitute income as defined in section one’ ...... 499
[261] CIR v Nemojim (Pty) Ltd .................................................................... 500
[262] Mallalieu v Drummond ....................................................................... 503
[263] Solaglass Finance Co (Pty) Ltd v CIR ................................................. 505
[264] CIR v Standard Bank of SA Ltd .......................................................... 511
6.5 Section 23(g): any moneys, claimed as a deduction from income derived
from trade, to the extent to which moneys were not laid out or expended
for purposes of trade ....................................................................................... 518
[265] ITC 734 ................................................................................................ 518
[266] CIR v Pick ’n Pay Wholesalers (Pty) Ltd ............................................ 519
6.6 Section 20(1)(a): set-off of assessed losses incurred in prior years ............. 523
[267] SA Bazaars (Pty) Ltd v CIR ................................................................. 523
[268] CIR v Louis Zinn Organization (Pty) Ltd .......................................... 525
[269] New Urban Properties Ltd v SIR ........................................................ 525
[270] Robin Consolidated Industries Ltd v CIR .......................................... 526
[271] CSARS v Megs Investments (Pty) Ltd ................................................. 530
[272] Interpretation Note no 33 .................................................................. 533

§1 General principles
Income tax is calculated and levied on a taxpayer’s ‘taxable income’, as defined in the
Act.1 This definition can be expressed in the following formula:
gross income (other than exempt income)
minus allowable deductions
equals taxable income

________________________

1 Section 1 sv ‘taxable income’.

 Deductions: General principles; Assessed losses of prior years 419

‘Taxable income’ is therefore an artificial and purely statutory concept, and is not synon-
ymous with ‘income’ or ‘profit’ as conceived in accountancy or economics. Only those
deductions that are permitted by the Act may be off-set against the taxpayer’s gross
income; the fact that accounting principles or business practice would treat an amount as
deductible is irrelevant.
The provisions of the Act relating to deductions fall into two categories. First, the so-
called ‘general deduction formula’ consisting of s 11(a) read with s 23(g), which lays
down the general principles of deductibility. Second, various deductions which are
specifically authorised by the Act. Section 23B prevents an amount from qualifying more
than once as a deduction or allowance.
This chapter deals with the general deduction formula.

The threshold requirement for deductibility: the taxpayer must be ‘trading’

The opening words of s 11 are as follows (italics added):
‘For the purpose of determining the taxable income derived by the taxpayer from carrying on any trade,
there shall be allowed as deductions from the income of the person so derived . . .’
The italicised words make clear that the deductions permitted by s 11(a) (and by the
various other subsections of s 11) are available only if the taxpayer is carrying on a trade.
This is therefore a threshold requirement for all the deductions falling under s 11.
Thus, for example, expenditure which is incurred by the taxpayer before he com-
mences trading (colloquially called ‘preliminary’ or ‘pre-production’ expenditure) is not
deductible under any of the subsections of s 11, except the now-repealed s 11(bA); see
[224] ITC 697. Prior to its repeal and the simultaneous coming into force of s 11A,
section 11(bA) permitted the deduction of ‘interest, including related finance charges’
which were not otherwise deductible by the taxpayer, and which were incurred by him
for ‘the acquisition, installation, erection or construction of any machinery, plant or
building, or any improvement to a building, to be used by him for the purposes of his
trade’. If such expenditure was incurred prior to the commencement of trading, it could
be carried forward and deducted in the tax year in which the taxpayer commenced
trading. The deductibility of preliminary or pre-production expenditure is now governed
by s 11A which came into force on 1 January 2014 and applies to all forms of preliminary
or pre-production expenditure, including interest.

The deductibility or otherwise of expenditure or losses is determined in accordance with the provisions
of the Income Tax Act as interpreted by the courts. The dictates of accountancy principles or sound
business practice in this regard are irrelevant.

[223]
Sub-Nigel Ltd v CIR
1948 (4) SA 580 (A), 15 SATC 381
For the facts of this case, see extract [238].
Centlivres JA: At the outset it must be pointed out that the Court is not concerned with deduc-
tions which may be considered proper from an accountant’s point of view or from the point of
view of a prudent trader, but merely with the deductions which are permissible according to the
2
language of the Act. See Joffe & Co Ltd v CIR. Regard, therefore, must be had to the Act and the
Act alone in order to ascertain whether the deductions sought to be made by the Company are
permissible.

________________________

2 1946 AD 157 at 165, 13 SATC 154.

420 Income Tax in South Africa: Cases and Materials

Notes
In terms of the Income Tax Act, tax is levied on a taxpayer’s ‘taxable income’, as statuto-
rily defined,3 not on his ‘profits’ as a businessperson or accountant would understand the
latter term.
‘Taxable income’ is an artificial, purely statutory term, to be determined in accord-
ance with the provisions of the Income Tax Act.

§2 The general deduction formula

The general deduction formula consists of s 11(a) read with s 23. These lay down certain
positive requirements (which must be fulfilled in order for an amount to be deductible)
and certain negative requirements (which, if present, are a bar to deductibility).
In order for an amount to qualify for deduction under s 11(a):
– the taxpayer must be carrying on a trade; and
– an expenditure or loss must have been
– actually incurred
– in the production of the income
– not of a capital nature.
These requirements will now be discussed seriatim.

§2.1 Carrying on a trade

The opening words of s 11 read as follows (italics added):
‘For the purpose of determining the taxable income derived by any person from carrying on any trade, there
shall be allowed as deductions from the income of such person so derived:
‘(a) . . .
...
(n) . . .’
It is thus a pre-condition to the deductibility of all the items in sub-paragraphs (a) to (n)
of s 11 that the taxpayer was carrying on a trade. (The deductibility of expenditure in-
curred prior to the commencement of a trade is governed by s 11A.) The question of
what constitutes a ‘trade’ was discussed in chapter 5, above.
Expenditure incurred before a taxpayer commences trading is of a ‘preliminary’ nature and is not
deductible under the general deduction provisions.

[224]
ITC 697
(1950) 17 SATC 94
The taxpayer company owned property on which there was an old building from which,
for a period, it derived rent which was less than the expenditure incurred by way of
interest, rates, etc. On 1 December 1947 the taxpayer commenced the demolition of the
building and, immediately the demolition was accomplished, erected a new building
which was completed in October 1948 and was thereafter let to tenants. For the tax year
ended 30 June 1948 the taxpayer claimed deductions in respect of rates, sanitary fees and
interest totalling £1 110. The Commissioner allowed a deduction of five-twelfths of the
sum of £1 110 and disallowed the balance, in other words, he disallowed any deduction
for the period 1 December 1947, when the demolition of the building commenced, to
30 June 1948 by which date the new building was not yet complete.
________________________

3 Income Tax Act 58 of 1962, s 1 sv ‘taxable income’.

 Deductions: General principles; Assessed losses of prior years 421

Issue: was the taxpayer entitled to deduct expenditure incurred during the period
when the building was being demolished and prior to the erection of a new building?
Held: in the negative. During this period the taxpayer was not trading. The expendi-
ture incurred during this period was of a preliminary nature, in other words of a capital
nature, and was not laid out for the purposes of trade or in the production of income
and was therefore not deductible.
Price J: The question in this case is not whether an income was produced or not, but whether
there was in existence a business which was being carried on for the purpose of producing in-
come. It is one thing for a taxpayer to conduct a business for the purpose of producing income
and to fail to produce that income, and quite another thing for such a taxpayer to be in the pro-
cess of equipping an undertaking which he intends to turn into a business for the purpose of
producing income. The real question which is involved in this case is whether, during the period
when the undertaking is being equipped, expenditure then incurred, during that period, is ex-
penditure incurred in the production of income or in an attempt to produce income.
...
The items disallowed by the Commissioner were disallowed because for a proportionate period
in respect of which the expenditure was incurred the building was in the course of erection and
was not an asset which could be used to let and to produce income, and that the expenditure,
therefore, was of a preliminary or capital nature. It seems to me clear that until the asset be-
comes an asset capable of producing income, any expenditure upon it is of a preliminary nature
and is not deductible, because the rates and interest were not laid out exclusively or at all, in
point of fact, for the purposes of trade. If a taxpayer has no asset with which he can trade then
he cannot be trading. That seems to me to be a simple, logical statement, and it seems to me
that it is the simple, logical statement which determines the issue in this case. During the period
in respect of which the rates and interest were disallowed, the taxpayer had no asset with which
he could trade and he was not trading, and if he was not trading the expenditure was not in-
curred in the production of income. The expenditure was incurred in the creation or equip-
ment of an asset which was intended to be used at a later stage for the purpose of earning
income. It was initial or preliminary expenditure designed to extend the scope of the business or
to improve its earning capacity. It was money spent in an attempt to create a source of income or
to acquire an advantage for the benefit of the business which was later to be undertaken.

Notes
As from 1 January 1982 (and prior to its repeal with effect from 1 January 2012) s 11(bA)
would have been effective in this situation, and would permit the taxpayer to carry for-
ward the interest (but not the rates) incurred during the period prior to the com-
mencement of the trade, and to deduct it in the year of assessment in which the building
was brought into use for the purposes of the taxpayer’s trade. Outside of this statutory
exception, the principle laid down in this case is still applicable, but it should be borne
in mind that s 11A, which came into force on 1 January 2004, is a wide-ranging provision
permitting the deductibility of pre-trading expenditure, including pre-trading interest.
Preliminary or pre-production expenditure (ie expenditure incurred before the taxpayer has com-
menced trading) is not deductible in terms of s 11(a).

[225]
Borstlap v SBR
1981 (4) SA 836 (A), 43 SATC 195
Corbett AR: [translated] The general understanding of the courts is that where premises are
acquired with the object of erecting a building thereon and leasing it – and deriving an income
from it – expenses such as interest on a mortgage, municipal taxes, etc, that are incurred before
the development has taken place and produced income, are expenses of a preliminary nature
and are not deductible in terms of s 11(a); (see for example ITC 697 4 and the cases there cited;
________________________

4 17 SATC 93.
422 Income Tax in South Africa: Cases and Materials

ITC 736;5 Reef Estates Ltd v CIR;6 CIR v Allied Building Society.7

Notes
The deductibility of expenditure incurred by a taxpayer prior to the commencement of
trading is now governed by s 11A.

Expenditure not incurred for the purpose of producing income is not deductible in terms of s 11(a)

[226]
Reef Estates Ltd v CIR
1954 (2) SA 593 (T), 19 SATC 153
The taxpayer company carried on the business of letting property, and for this purpose it
held ten properties, eight of which were township stands and two were farming properties.
One of these properties consisted of a vacant stand (stand 485 Vereeniging) situated in
an out-of the way side street in Vereeniging, purchased by the taxpayer in 1935. No
income was derived from this site until 1948 when it was let as a parking-site for motor
vehicles at a rental of £15 per annum. The taxpayer had acquired the stand with the
intention of building shops on it as an investment, and deriving rental from them. Dur-
ing the year in question, the taxpayer had incurred expenditure of £366 in respect of
rates levied on the site by the local authority. The taxpayer claimed a deduction in re-
spect of this expenditure, which the Commissioner disallowed.
Issue: was the expenditure of £366 deductible in terms of [what is presently] s 11(a)
read with [what is presently] s 23(g)?
Held: the expenditure in question was not incurred for the purpose of earning the in-
come which the asset produced; it was of a capital nature, and therefore not deductible.
Rumpff J: The facts of this matter indicate that stand 485 was acquired and is still being held
with the intention of building shops thereon and deriving rentals therefrom. It is being held in
order that it may in future become an income-producing unit. Even if the other properties of
the appellant company together are considered as one business (a point which we need not
decide) it cannot be said that stand 485 has become qualified to be regarded as part of that
business.
...
In the present matter, according to the intention of the company, and in fact, the stand has not
become part of the business of the company, assuming it to have only one business.
...
We are not concerned here with a class of thing that takes a number of years to mature before
you can pluck it or tap it. The appellant company holds a stand on which it intends to build in
future and the expenses have not been incurred in connection with the combination of ground
and buildings from which the revenue will eventually come.
In regard to the question whether expenditure is capital or revenue it has been held that the act
to which the expenditure is attached must be performed in the production of income and that
the expenditure must be closely linked to this act; see Port Elizabeth Electric Tramway Co Ltd v CIR.8
It is necessary to consider the purpose of the act entailing expenditure. In New State Areas Ltd v
CIR 9 Watermeyer CJ after reviewing a number of cases, said:
________________________

5 18 SATC 207 te 209.

6 1954 (2) SA 593 (T).
7 1963 (4) SA 1 (A) te 18-19.
8 1936 CPD 241.
9 1946 AD 610.
 Deductions: General principles; Assessed losses of prior years 423

The conclusion to be drawn from all these cases seems to be that the true nature of each transaction must
be enquired into in order to determine whether the expenditure attached to it is capital or revenue
expenditure. Its true nature is a matter of fact and the purpose of the expenditure is an important factor;
if it is incurred for the purpose of acquiring a capital asset for the business it is capital expenditure . . .’
In the present matter the expenditure of £366 was not incurred for the purpose of earning the
£15 revenue . . .
Without the preservation of the property by, inter alia, the payment of rates there would not have
been the £15 income, but it is clear that the expenditure was primarily incurred for the purpose
of holding the stand as an asset to be used at a later stage for the purpose of earning income
from buildings. The letting of the stand at £15 per annum for parking purposes did not affect,
wholly or partially, the existing purpose for which the ground was held.
For purposes of the Act the expenditure is in my view analogous to that incurred in the creation
or equipment of an income-producing asset and is therefore of a capital nature.
In regard to s 12(g) [see now s 23(g)] of the Act, I do not think that it can be said that the
expenditure in this case was wholly or exclusively laid out for the purposes of trade. It was mainly
made for the purpose set out above.

Notes
The court’s conclusion that the expenditure in question was of a capital nature, being
‘analogous to that incurred in the creation or equipment of an income-producing asset’
is not persuasive. Expenditure that is of a recurrent nature and which produces no new
asset, is intrinsically of a revenue nature. The essence of the judgment is however that the
expenditure on rates for the vacant stand was not deductible because it was of a ‘prelim-
inary’ nature in that the taxpayer had not yet commenced trading in relation to that
stand. (cf [125] Borstlap.)
The court arrived at this finding by holding that the vacant stand ‘has not become part
of the business of the company, assuming it to have only one business’. This conclusion
follows from the thinly reasoned and barely articulated premiss that the taxpayer’s trade
had to be narrowly defined as the letting of immovable property. If the court had been
persuaded that the taxpayer’s trade should be more widely defined as (for example)
‘holding, developing and leasing immovable property’, the expenditure in question
would have fallen within the ambit of its trade.
Note that, under the now-repealed s 11(bA), interest which was incurred in the ‘acquisi-
tion, installation, erection or construction of any . . . building’ used to be deductible,
even where it was of a ‘preliminary’ nature; but expenditure on rates was not covered by
that section. The deductibility of preliminary expenditure, that is to say expenditure
incurred by the taxpayer prior to the commencement of trading is now governed by
s 11A.

[227]
Practice Note 31
3 October 1994
Income tax: Interest paid on moneys borrowed
1. To qualify as a deduction in terms of section 11(a) of the Income Tax Act (‘the Act’),
expenditure must be incurred in the carrying on of any ‘trade’ as defined in section 1 of the
Act. In determining whether a person is carrying on a trade, the Commissioner must have
regard to, inter alia, the intention of the person. Should a person, therefore, borrow money
at a certain rate of interest with the specific purpose of making a profit by lending it out at a
higher rate of interest, it may well be that the person has entered into a ‘venture’ and is thus
carrying on a trade (50 SATC 40). In other words, interest paid on funds borrowed for pur-
poses of lending them out at a higher rate of interest will, in terms of section 11(a) of the
Act, constitute an admissible deduction from the interest so received by virtue of the fact that
this activity constitutes a profit making venture.
424 Income Tax in South Africa: Cases and Materials

2. While it is evident that a person (not being a moneylender) earning interest on capital or
surplus funds invested does not carry on a trade and that any expenditure incurred in the
production of such interest cannot be allowed as a deduction, it is nevertheless the practice
of Inland Revenue to allow expenditure incurred in the production of interest to the extent
that it does not exceed such income. This practice will also be applied in cases where funds
are borrowed at a certain rate of interest and invested at a lower rate. Although, strictly in
terms of the law, there is no justification for the deduction, this practice has developed over
the years and will be followed by Inland Revenue.

§2.2 Expenditure or loss

[228]
Port Elizabeth Electric Tramway Co v CIR
1936 CPD 241, 8 SATC 13
For the facts of this case, see extract [240].
Watermeyer AJP: . . . the word ‘losses’ in this section appears to mean losses of floating capital
employed in the trade which produces the income.

[229]
Joffe & Co (Pty) Ltd v CIR
1946 AD 157, 13 SATC 354
For the facts of this case, see extract [246].
Watermeyer CJ: The word ‘loss’ has several meanings . . . In relation to trading operations
the word is sometimes used to signify a deprivation suffered by the loser, usually an involuntary
deprivation, whereas expenditure usually means a voluntary payment of money.

Notes
For further discussion of what is meant by ‘expenditure’ and ‘loss’ respectively, see [286]
Stone v SIR 1974 (3) SA 584, 36 SATC 117 at 128.

§2.3 Actually incurred

The question whether an amount qualifies for deduction does not depend on the principles of
accountancy or on sound business practice, but upon the provisions of the Income Tax Act.
[230]
Pyott Ltd v CIR
1945 AD 128, 13 SATC 121
The taxpayer, a biscuit manufacturer, also had a factory which manufactured the tins in
which the biscuits were sold. The tins were charged out to customers at a price slightly in
excess of their cost to the taxpayer. Prior to the war the price at which they were charged
out was two shillings, and customers were entitled to a refund of this sum on the return
of the tins in good condition. Under these conditions some 25% to 30% of the tins were
returned. On the outbreak of war, tinplate became scarce, and in October 1941 the
taxpayer increased the price at which tins were charged out to six shillings. Thereafter
some 90% of the tins were returned. For the tax year ending in June 1941, the taxpayer
set aside the sum of £9 000 as a provision for allowances on returnable tins, and did not
include this sum in its taxable income. The Commissioner refused to allow this sum to be
so excluded.
 Deductions: General principles; Assessed losses of prior years 425

Issue: whether the ‘provision’ made by the taxpayer for amounts which he would have
to refund on the return of the tins qualified as a deduction.
Held: the amount in issue was a mere estimate of a contingent liability and was not
expenditure ‘actually incurred’ as required by the Act. The fact that it was in accordance
with accountancy practice was irrelevant. Moreover, such a deduction was explicitly
prohibited by s 12(e) (now s 23(e)).
Davis AJA: Reliance was . . . placed, for the making of this provision, generally upon the princi-
ples of sound accountancy and upon English cases. While, no doubt, it is in accordance with
those principles to make this provision in the Balance Sheet, the answer is that our Income Tax
Act has laid down what is to be taxed, even if in so doing it may be said to disregard those prin-
ciples. No one could for an instance doubt that the method adopted by the company in the case
of CIR v George Forest Timber Co Ltd 10 was the only proper one from the point of view of sound
accountancy: yet that fact made no difference to its liability for assessment . . . But since 1917 we
have had in South Africa an artificial and purely statutory definition of ‘taxable income’, derived
ultimately from the definition of ‘gross income’ as set out above . . . and it is by no means neces-
sarily synonymous with ‘profits or gains’.
...
The second part of the third question raises the point whether this ‘provision’ is not in conflict with
s 12(e) of the Act, which forbids any deduction in respect of ‘income carried to any reserve fund
. . .’: in my opinion it is, as soon as it is found to have been made out of ‘income’, as it undoubtedly
was made in the present case. It is a reserve out of income to provide for a contingent liability, and,
as such, it seems to me to be the very thing which is forbidden by the sub-section in question.
The appeal is dismissed with costs.

In order to be deductible, s 11(a) does not require that the expenditure or losses be ‘necessarily’
incurred.

[231]
Port Elizabeth Electric Tramway Co v CIR
1936 CPD 241, 8 SATC 13
For the facts of this case, see extract [228].
Watermeyer AJP: . . . the words of the statute are ‘actually incurred’ not ‘necessarily incurred.’
The use of the word ‘actually’ as contrasted with the word ‘necessarily’ may widen the field of
deductible expenditure. For instance, one man may conduct his business inefficiently or extrav-
agantly, actually incurring expenses which another man does not incur; such expenses therefore
are not ‘necessary’ but they are actually incurred and therefore deductible.

Where the taxpayer’s legal obligation in respect of expenditure is, at the end of the tax year, uncer-
tain, in the sense that the obligation will come into existence on the occurrence of a future uncertain
event, the expenditure has not been ‘actually incurred’ during that tax year.

[232]
Nasionale Pers Bpk v KBI
1986 (3) SA 549 (A)
In the conditions of service for its employees, the taxpayer company made provision for
an annual bonus equal to one month’s salary. The service regulation read as follows:
‘The annual holiday bonus is equal to a full month’s salary for officials who have completed a full year’s
service and pro rata less for officials who have completed less than a full year’s service. A bonus will only be
________________________

10 (1924) AD 516.
426 Income Tax in South Africa: Cases and Materials

paid to officials who are in service on 31 October. The full amount of the bonus will be recovered from an
official who after payment thereof gives notice of termination of service and leaves the service before
31 October.’
In fact, the taxpayer paid the bonuses on 30 September.
The taxpayer’s financial year and its tax year ended on 31 March. In its tax returns for
the tax years ended on 31 March 1980 and 1981 respectively, the taxpayer claimed to
deduct, in terms of s 11(a) an amount for ‘bonuses due to employees’. The amount was
calculated as a pro rata portion of the bonus which would be payable to employees in
September of that year. The Commissioner disallowed the deduction.
Issue: whether the expenditure on bonuses, claimed as a deduction, was ‘actually in-
curred’ during the tax year in question.
Held: at the end of the tax year (31 March) it was uncertain whether the taxpayer was
under an obligation in respect of leave pay in respect of any given employee. The tax-
payer’s obligation was subject to a condition that the employee did not leave the taxpay-
er’s service voluntarily or was not dismissed for misconduct before 31 October, and this
obligation would only become unconditional after the end of the tax year. Hence, the
expenditure in relation to leave pay was not ‘actually incurred’ during that tax year.
Hoexter AR: Na die mening van die Hof a quo het die Spesiale Hof gefouteer deur die aftrek-
kings as ‘onkoste werklik aangegaan’ aan te merk, en wel op grond daarvan dat op 31 Maart in
albei betrokke belastingjare daar onsekerheid geheers het –
. . . ten opsigte van die vraag of ’n verpligting om bonusse te betaal inderdaad tot stand sou kom al dan nie.’
Dit is ’n bekende grondstelling dat, vir doeleindes van art 11(a) van Wet 58 van 1962, onkoste
werklik aangegaan is in daardie belastingjaar waarin aanspreeklikheid daarvoor regtens ontstaan,
en nie (vir geval betaling daarvan later sou plaasvind) in die belastingjaar waarin daadwerklike
11
vereffening van die skuld geskied het nie. Kyk Port Elizabeth Electric Tramway Co v CIR; Concentra
(Pty) Ltd v CIR;12 Caltex Oil (SA) Pty Ltd v SIR.13 Die vereiste dat die onkoste ‘werklik aangegaan’
moet word, het egter tot gevolg dat moontlike toekomstige uitgawes wat bloot as waarskynlik
geag word nie ingevolge art 11(a) aftrekbaar is nie. Alleen onkoste ten opsigte waarvan die
belastingbetaler ’n volstrekte en onvoorwaardelike aanspreeklikheid op die hals gehaal het, mag
in die betrokke belastingjaar afgetrek word . . . Aan die hand van die beginsels hierbo aangedui,
het die Hof a quo tot die gevolgtrekking geraak dat die bedrae wat die appellant wou aftrek nie
as onkoste binne die betrokke belastingjare werklik aangegaan, soos by art 11(a) van die Wet
bedoel, beskou kan word nie.
Voor hierdie Hof is the appel namens die appellant deur mnr Cilliers beredeneer. Die appellant
se advokaat het aangevoer dat die Hof a quo se siening van die probleem gebrekkig is omdat dit
op ’n verkeerde uitgangspunt berus. Wat die Hof benede oor die hoof gesien het, aldus die argu-
ment, is dat die onkoste waaroor die saak gaan nie aan ’n individuele diensverhouding met ’n
enkele werknemer gekoppel is nie maar dat dit, soos die advokaat dit gestel het, ‘oor ’n hele
bevolking diensnemers versprei is’. Op hierdie breë en meer realistiese siening van die saak, so
het mnr Cilliers betoog, sou dit heel kunsmatig wees om die onkoste anders as ’n onafwendbare
‘kommersiele werklikheid’ te bestempel . . . [The judge here made certain observations on this
argument, and continued:] In werklikheid het die appellant die verbintenisse met sy werk-
nemers nie kollektief maar suiwer individueel aangegaan en sodanige verbintenisse kan nie
goedsmoeds bymekaar gegooi word nie. Kumulatief beskou is die appellant se aanspreeklikheid
teenoor sy werknemers as ’n groep om ’n vakansiebonus aan hulle te betaal niks meer nie as die
aggregaat van die verbintenisse wat die appellant met al sy individuele werknemers aangegaan
het. Waar die betaling van ’n jaarlikse bonus aan werknemers aan ’n voorwaarde onderhewig is,
kan in die algemeen aanvaar word dat hoe groter die getal werknemers hoe sterker die kanse dat
die werknemer aan die einde van die jaar een of ander bedrag as ’n bonus wel sal moet betaal.
Maar die getal werknemers raak nie die aard en wese van die werkgewer se voorwaardelike
aanspreeklikheid ten opsigte van die betaling van die bonus nie . . .
________________________

11 1936 CPD 241 at 244; 8 SATC 13.

12 1942 CPD 50 at 513; 12 SATC 95.
13 1975 (1) SA 665 (A) at 674D-E; 37 SATC 1.
 Deductions: General principles; Assessed losses of prior years 427

Voorts het die appellant se advokaat sterk gesteun op die bepalings van die diensreglement
waarvolgens amptenare wat minder as ’n volle jaar diens voltooi ’n pro rata-verminderde bonus
ontvang. Uit hoofde hiervan is in bedenking gegee dat ’n werknemer met elke maand se diens
wat hy voor 31 Maart aan die appellant lewer sy aanspraak op die vakansiebonus verstewig en dat
hy sodoende (as ek die argument reg begryp) by stukkies en brokkies ’n gevestigde reg ten op-
sigte van die bonus verkry. Met die oog op die kernfeit in die saak dat ’n bonus betaal word al-
leen aan ’n amptenaar wat op 31 Oktober in diens van die appellant is, het ook hierdie
argument na my mening min om die lyf.
Met betrekking tot die toelaatbaarheid van nie-kapitale aftrekkings van die belasbare inkomste
van die belastingbetaler toon die hoofinhoud van die inkomstebelastingwetgewing van Australie
’n bree ooreenkoms met die desbetreffende bepaling van art 11(a) van ons eie Wet. By beoor-
deling van sommige van die argumente wat in die onderhawige appel namens die appellant
opgewerp is, is die benadering van ’n Voltallige Regbank van die High Court of Australia in die
gelyksoortige saak van FCT v James Flood (Pty) Ltd 14 insiggewend. . . . In die loop van die eenparige
uitspraak word15 die volgende opmerkings gemaak wat by uitstek op die feite van die onder-
hawige geval toepaslik is:
‘It is one thing . . . to say that it is not necessary for the purposes of s 51(1), that an actual disbursement
should have taken place. It is another thing to say that in the present case the taxpayer had incurred a loss
or outgoing in the year of income in respect of the pay of its men during the annual leave to be taken in
the ensuing accounting period by employees whose service had not as yet qualified them for annual leave.
In respect of those employees there was no debitum in praesenti solvendum in futuro. There was not an ac-
crued obligation, whether absolute or defeasible. There was at best an inchoate liability in process of ac-
crual but subject to a variety of contingencies. It may be true, that regarding the labour employed as a
whole, the accrual of an amount of the order claimed had, by 30 June 1947, become predictable with cer-
tainty. But that is not the test.’
Kyk verder RACV Insurance (Pty) Ltd v Federal Commissioner of Taxation;16 Nilsen Development Labora-
17
tories (Pty) Ltd v FCT.
Sowel in die Hof a quo as in hierdie Hof was ’n verdere twispunt tussen die partye of die voor-
waarde waaraan die appellant se verpligting om ’n vakansiebonus te betaal, onderworpe is, ’n
opskortende dan wel ’n ontbindende voorwaarde daarstel . . .
In die onderhawige geval is die kwalifikasie aan die diensreglement toegevoeg waarvolgens ’n
bonus betaal word alleen aan amptenare wat nog op 31 Oktober in diens van die appellant is,
klaarblyklik ’n opskortende voorwaarde. Die inwerkingtreding van die verbintenis word hier
afhanklik gestel van die voorwaarde en pendente conditione is die prestasie (betaling van die bo-
nus) nie opeisbaar nie. In weerwil hiervan en ingevolge die appellant se interne administratiewe
reëlings, word amptenare reeds op 30 September die bonus betaal. Hierdie vervroegde betaling
moet beskou word as ’n bloot voorwaardelike prestasie deur die appellant waarby die
verstandhouding (en trouens ook die by die diensreglement-uitgesproke bedoeling) is dat die
volle bonusbetaling teruggevorder sal word van ’n amptenaar wat na betaling daarvan maar voor
31 Oktober die appellant se diens verlaat. Dit lê eweseer voor die hand, so meen ek, dat die
voorwaarde rakende die appellant se vroegtydige lewering (dws betaling op 30 September in
plaas van 31 Oktober) ’n ontbindende voorwaarde is . . . Dit is in die onderhawige saak egter
onnodig om die betrokke voorwaardes ’n presiese juridiese etiket om te hang. Oorheersend is
die feit dat die toekomstige onsekere gebeurtenis waarvan die inwerkingtreding van die betrokke
gevolg afhanklik gestel is hier ’n gebeurtenis is wat buite die belastingbetaler se belastingjaar val.
Onderhewig aan die voorbehoud hieronder aangestip, gaan ek met eerbied akkoord met die
volgende opmerking van Friedman R:18
‘Of die voorwaardes ontbindend of opskortend is, is nie relevant nie. Wat wel relevant is, is dat wanneer
die state op 31 Maart opgestel word, daar nie met sekerheid in die geval van enige amptenaar – behalwe
diegene wat op daardie datum aftree of wie se dienste op daardie datum weens reorganisasie of swang-
erskap (in die geval van vroulike werknemers) beëindig word – vasgestel kan word of respondent [dws die

________________________

14 (1953) 88 CLR 492.

15 At 507-508.
16 (1974) 4 ATR 610 (Supreme Court of Victoria).
17 (1981) 11 ATR 505 (High Court of Australia).
18 At 556B-D.
428 Income Tax in South Africa: Cases and Materials

appellant in hierdie Hof] werklik verplig is om betaling op 30 September te maak nie. Sodanige ver-
pligting is aan die voorwaardes onderhewig dat die betrokke amptenaar nie voor 30 September respond-
ent se diens vrywillig verlaat en dat sy diens nie weens wangedrag voor daardie datum beeindig word nie.’
Wat hier gekwalifiseer moet word is die volgende: met inagneming van die feit dat betaling op
30 September geskied, en afgesien van die uitsonderingsgevalle (nl aftrede weens ouderdom of
swak gesondheid, swangerskap, of hervorming van die appellant se bedrywighede), kan die
antwoord op die vraag of die appellant regtens verplig is al dan nie om aan ’n werknemer ’n
vakansiebonus te betaal, verstrek word eers op 31 Oktober en nie op 30 September nie. ’n
Dergelike regstelling is ook nodig waar die Hof a quo in sy uitspraak19 sê:
‘of ’n verpligting ontstaan om ’n bedrag te betaal . . . kan eers op 30 September vasgestel word wanneer
sekerheid ontstaan insake die gemelde voorwaardes.’
Ingevolge art 82 van Wet 58 van 1962 het die appellant die las gedra om te bewys dat die
Kommissaris se beslissing om die aftrekkings af te wys verkeerd is. Dit blyk geensins dat die
Kommissaris tot ’n verkeerde gevolgtrekking geraak het nie, en na my oordeel was die beslissing
van die Hof a quo volkome korrek.
Die appel word met koste afgewys.
CORBETT JA, HEFER JA, NICHOLAS AJA and NESTADT AJA concurred.

It is in the tax year in which liability for the expenditure is incurred, and not in the tax year in
which it is actually paid (if paid in a subsequent year), that the expenditure is ‘actually incurred’ for
the purposes of s 11(a).

[233]
Caltex Oil (SA) Pty Ltd v SIR
1975 (1) SA 665 (A)
The taxpayer carried on business in the Republic as an importer, manufacturer and
distributor of petroleum products. It incurred liabilities to two of its co-subsidiaries,
Caltex (UK) Ltd and Caltex Services Ltd, which carried on business in the United King-
dom. The taxpayer was obliged to pay them in sterling. By agreement the taxpayer
obtained supplies of crude oil and other petroleum products from Caltex (UK) Ltd.
Sterling was devalued on 19 November 1967. The taxpayer paid one of the UK compa-
nies after that date but did not pay the other company during the tax year in question.
Issue: whether the taxpayer was entitled to a deduction under s 11(a) for the debts
payable by the taxpayer to the two UK companies.
Held: the taxpayer could claim a deduction in respect of the amount actually paid to
the one UK company during the tax year; that debt had been incurred in sterling and
the taxpayer could claim the expenditure actually incurred in rands to pay the debt. As
regards the debt which the taxpayer had not discharged, the amount of the expenditure
incurred during the tax year had to be brought into account at the end of the 1967 tax
year, taking into account the intervening devaluation of sterling.
Botha JA: It was common cause, both in the Special Court and in this court, that the expendi-
ture incurred by the appellant in the acquisition of the products and supplies in question was
incurred in the production of its income, that such expenditure was not of a capital nature, and
that, leaving aside the amount thereof for the moment, it was wholly expended for the purpose
of appellant’s trade. (Sections 11(a) and 23(g) of the Act). The sole question was and is now
whether the two sums aforesaid, which the appellant was by reason of the devaluation of sterling
not required to expend in rands in order to discharge its obligations in sterling to its suppliers,
can be said to be part of the ‘expenditure actually incurred’ by the appellant within the meaning
of that expression in s 11(a).
...
________________________

19 At 556F.
 Deductions: General principles; Assessed losses of prior years 429

It is clear from these provisions that income tax is assessed on an annual basis in respect of the
taxable income received by or accrued to any person during the period of assessment, and deter-
mined in accordance with the provisions of the Act. In determining the taxable income of a
person carrying on any trade in any year of assessment there is, in terms of s 11(a), deductible
from such person’s income the expenditure actually incurred by him in the production of the
income during that year of assessment. (Sub-Nigel Ltd v CIR.20) It is only at the end of that year of
assessment that it is possible, and then it is imperative, to determine the amounts received or
accrued on the one hand and the expenditure actually incurred on the other during the year of
21 22
assessment (cf Port Elizabeth Electric Tramway Co v CIR and CIR v Delfos ).
The expression ‘expenditure actually incurred’ in s 11(a) does not mean expenditure actually
paid during the year of assessment, but means all expenditure for which a liability has been in-
curred during the year, whether the liability has been discharged during that year or not (Port
Elizabeth Electric Tramway Co v CIR 23 and ITC 542.24) It is in the tax year in which the liability for
the expenditure is incurred, and not in the tax year in which it is actually paid (if paid in a subse-
quent year), that the expenditure is actually incurred for the purposes of s 11(a).
...
It is clear that the appellant’s liability as incurred in sterling remained unaffected by the devalu-
ation, and that the contract prices expressed in sterling remained unaltered. The only effect of
the devaluation in relation to the transactions in question was that the appellant was in conse-
quence thereof required to expend less in rands to discharge its liabilities incurred in sterling.
The appellant actually discharged its liability to Caltex Services Ltd after the devaluation and
before the end of the 1967 tax year by expending R14 031 less than the amount of R98 217 en-
tered in its books of account. It seems to me quite impossible to say that, merely, because the
higher amount of R98 217 was entered in appellant’s books of account as the equivalent, as at
the date of the relevant transactions, of £48 925 sterling, the expenditure actually incurred in
connection with the Caltex Services Ltd transactions, was anything more than the amount actual-
ly expended by the appellant . . . It is important to bear in mind that the liability to Caltex Ser-
vices Ltd was incurred in sterling and not in rands, and the amount of expenditure actually
incurred for the purpose of s 11(a) can only be the amount required in rands to discharge that
liability in the tax year in which it was incurred.
The appellant did not discharge its liability to Caltex (UK) Ltd in its 1967 tax year, the year in
which the liability was incurred, but the position is, in my view, no different in principle from
that in Caltex Services Ltd where the liability was discharged in the same tax year in which it was
incurred. At the end of its 1967 fiscal year the appellant was entitled to deduct from its income
during that year the expenditure actually incurred by it during that year. It could not deduct the
expenditure actually incurred during that year from its income in any other year, even though
actually paid in that other year.
It was at the end of the 1967 tax year that the amount of the expenditure actually incurred dur-
ing the year had to be determined and brought into account. The liability contractually incurred
and remained unchanged at £4 659 486, in sterling, but sterling not being legal tender in South
Africa, that amount had to be reflected in appellant’s income tax return not in sterling but in
the equivalent thereof, converted as at the end of the fiscal year, in the currency of South Africa,
which came to the amount of R8 017 647, as against the amount of R9 353 920 before the
devaluation, and at the time the relevant entries were made in the appellant’s books of account.
For the same reasons mentioned in the case of Caltex Services Ltd it seems to me to be wrong to
say that the expenditure actually incurred in connection with the purchases of trading stock
from Caltex (UK) Ltd was, as at the end of the year of assessment, anything more than
R8 017 647. The appellant never incurred a liability to pay an amount of R9 353 920 to Caltex
(UK) Ltd, but an amount expressed in sterling which, for the purposes of the Income Tax Act,
had to be reflected in the equivalent thereof in rands converted as at the date at which the
expenditure actually incurred during the fiscal year is required to be quantified and brought
________________________

20 1948 (4) SA 580 (A).

21 1936 CPD 241 at 244.
22 1933 AD 242 at 257.
23 1936 CPD 241 at 244.
24 13 SATC 116 at 118.
430 Income Tax in South Africa: Cases and Materials

into account for the purpose of s 11(a) of the Act, or at the date of the discharge of that liability
within that fiscal year.
Were it otherwise a completely unrealistic result would be achieved . . .
The views thus far expressed find support in ITC 116025 and in the passage cited in that case
from the judgment of Isaacs J in Moreau v FCT 26 in the High Court of Australia.
Counsel for the appellant, however, contended, in effect, that where a trader incurs a liability to
pay for trading stock in a foreign currency, it is necessary for the purposes of the Republic’s taxa-
tion laws . . . that the conversion from the foreign currency to rands should be made at the rate
of exchange prevailing at the date of the relevant transactions, and that the amount so reflected
in rands should be regarded as the amount of the expenditure actually incurred by the trader
for the purposes of s 11(a) of the Act, irrespective of subsequent fluctuations in the applicable
rate of exchange. For this submission counsel relied on the judgments in South African Marine
Corporation Ltd v CIR 27 and Payne v Deputy Commissioner of Taxation 28 . . .
. . . The court is only concerned with deductions permissible according to the language of the
Income Tax Act and not debits made in a taxpayer’s books of account for deduction even
though considered proper from an accountant’s point of view (Joffe & Co Ltd v CIR)29 . . .
...
We are here concerned only with the case when the foreign currency is devalued in the same tax
year in which the liability to make payment in that currency was incurred, and before that liabil-
ity is discharged. We are not concerned with the case where the devaluation occurs in a subse-
quent year before the liability is discharged. In the latter case the quantification, for the purpose
of s 11(a), at the end of the tax year, of the expenditure actually incurred during that year, is
not affected by the subsequent devaluation of the foreign currency . . . but in such a case the
devaluation may attract other tax consequences in the fiscal year in which the devaluation takes
place, depending upon whether or not the tax legislation provides for such a contingency, ex-
pressly or impliedly. It is not necessary in this case to express any views on that aspect of the mat-
ter. What is clear, I think, is that events which may have an effect upon a taxpayer’s liability to
normal tax are relevant only in determining his tax liability in respect of the fiscal year in which
they occur, and cannot be relied upon to re-determine such liability in respect of a fiscal year in
the past.
...
For these reasons the Special Court was in my view correct and the appeal cannot succeed. It is
accordingly unnecessary to consider respondent’s alternative argument that the aforesaid sums
of R14 031 and R1 136 271 represented recoupments which should be included in the appel-
lant’s income for the tax year ended 25 December 1967 in terms of s 8(4)(a) of the Act.
The appeal is dismissed with costs . . .
HOLMES JA, TROLLIP JA, RABIE JA, and CORBETT JA concerned.

Notes
As was pointed out in [234] Felix Schuh, the facts in Caltex were that the taxpayer had
made two purchases of trading stock during the tax year in question, and had incurred
an absolute and unconditional obligation during that year. Devaluation of sterling oc-
curred thereafter, but during that same tax year. The taxpayer paid the one debt, but
after devaluation. The court held that what was deductible was the amount in rands
which it cost the taxpayer to pay this debt. The other debt remained unpaid at the end of
the tax year, and the amount thereof had to be quantified because the liability had been
‘actually incurred’ in that year and therefore could claimed as a deduction only in that
________________________

25 33 SATC 193 at 196.

26 39 CLR 65 at 69-70.
27 1935 (1) SA 654 (C) at 659.
28 (1936) 2 All ER 793 at 796.
29 1946 AD 157 at 165.
 Deductions: General principles; Assessed losses of prior years 431

year. It was clear that the expenditure on the latter debt had been ‘incurred’, and the
only issue was whether, in quantifying the deduction, the deductible amount was the
original invoiced price as it was reflected in the taxpayer’s books before devaluation, or
whether the deductible amount was the sum outstanding at the end of the tax year,
taking into account the intervening devaluation. The court held that the latter was the
correct method of quantifying the deductible amount.
In [234] Felix Schuh, by contrast, it was held that the foreign currency debt in issue in
that case had not been ‘actually incurred’ during the tax year in question; therefore no
question of quantification arose. It is also important to note that Felix Schuh concerned a
loan, whereas Caltex involved the purchase of trading stock. A loan is not itself deducti-
ble; therefore no deductible expenditure is ‘incurred’ when the loan is taken out. The
issue of a deductible loss or expenditure arises only when the loan has to be repaid, at
which point an intervening movement in exchange rates may make it more expensive or
less expensive to repay in rands the original capital amount of the loan.
In Caltex the court was concerned only with the situation where a debt is incurred dur-
ing a given tax year and devaluation occurs before the end of that same year. Where
devaluation occurs after the end of that tax year, the deductible amount of the debt is
not affected by the devaluation; in other words, the deductible amount will be the rand
equivalent of the debt calculated at the rate of exchange prevailing at the end of the tax
year in which the debt was incurred, unless some statutory provision provides otherwise – see
now s 24I.

[234]
CIR v Felix Schuh (SA) (Pty) Ltd
1994 (2) SA 801 (A)
The taxpayer had been lent a sum of money by a German company, the capital amount
of which was repayable in Deutschmarks on an unspecified future date. In the 1985 tax
year, the taxpayer claimed a deduction in respect of the loss which it would incur in
repaying the loan, by reason of fluctuations in the exchange rate. The taxpayer had not
actually repaid the capital sum which it had received.
Issue: was the taxpayer entitled to a deduction of its loss in the repayment of the loan,
consequent upon a movement in exchange rates, in a tax year prior to repayment of the
capital of the loan?
Held: the taxpayer could claim a deduction of the loss only in the year of repayment,
since it was only in that year that the loss was ‘actually’ incurred.
Corbett CJ: It is common cause that the resolution of this issue depends on whether a foreign
exchange ‘loss’ such as that referred to above constitutes, in terms of s 11(a) of the Act, an
expenditure or loss –
30
‘. . . actually incurred in the Republic in the production of the income.’
The further question whether, accepting that it is such an expenditure or loss, it is of a capital
nature or not does not, as I have indicated, arise for decision in these proceedings.
...
With respect, I am unable to agree with either the reasoning or the conclusion of the Court a
quo. In my view the so-called foreign exchange ‘loss’ claimed as a deduction under s 11(a) by the
respondent in this case was not a loss ‘actually incurred . . . in the production of the income’ . . .
Section 11(a) speaks of ‘expenditure’ and ‘losses’. The distinction between these two concepts
has been discussed by this Court relatively recently in the cases of Stone v SIR;31 Burman v CIR;32
________________________

30 The words ‘in the Republic’ no longer appear in s 11(a).

31 1974 (3) SA 584 (A) at 593E-594H.
432 Income Tax in South Africa: Cases and Materials

Solaglass Finance Co (Pty) Ltd v CIR.33 Broadly speaking, as these cases show, ‘expenditure’ refers
to disbursements or expenses incurred or paid voluntarily, whereas ‘losses’ connote involuntary
deprivations occurring fortuitously. In individual cases, however, it may be difficult to decide
which side of the dividing line a particular outgoing falls.
In the present case appellant’s counsel submitted that the deduction claimed by the respondent
should be categorised as a loss because it was an involuntary liability arising from the extraneous
and fortuitous occurrence of an adverse decline in currency exchange rates. I am inclined to
agree, but I do not think that this categorisation is of critical importance. The real question is
whether, by reason of currency fluctuations, the respondent actually incurred during the year of
assessment any outgoing or liability in respect of its foreign loan which could be classed as either
an expenditure or a loss in the production of the income.
In this connection it is important to obtain clarity on precisely what it is that the respondent
seeks to deduct. The respondent was lent a sum of money and it incurred an obligation to repay
this capital sum in DM on some unspecified (and, during the relevant tax year, unascertained)
future date. The loan and the obligation to repay by themselves have no fiscal consequences
whatever. They do not figure in either the computation of the respondent’s receipts and accru-
als or in the determination of its deductible expenditure and losses for the tax year in question.
The loan itself is what has been termed ‘a neutral factor’. But because the loan has to be repaid
in a foreign currency, viz DM, there is inherent in the transaction the possibility that when the
repayment is eventually made, exchange rate fluctuations may result in the respondent having to
pay in rands either more, or perhaps less, than it originally received in rands from the lender. If
in some future fiscal year, when repayment is made, to do so costs the respondent more in
rands than the capital amount in rands which was originally advanced to it, then it will have in-
curred a loss which, provided the other requirements of s 11(a) are satisfied, will be deductible.
But it will only be deductible in the year of repayment because only then will such a loss have
actually been incurred. To my mind, it is as simple as that.
The reliance of the Court a quo, and of respondent’s counsel, on the decision of this Court in
the Caltex case is, with respect, misplaced. In that case the Court dealt with an instance of ex-
penditure par excellence, viz the purchase price of stock-in-trade acquired by the taxpayer during
the fiscal year in question. An absolute and unconditional (cf CIR v Golden Dumps (Pty) Ltd 34 and
the cases there cited) obligation to pay for the goods was incurred during that fiscal year. In
respect of the one creditor, payment was made during the year, but after devaluation. The Court
held the amount to be deducted in terms of s 11(a) was the amount in rands which it actually
cost the taxpayer to make this payment. The factual situation in respect of the other creditor is
more relevant to the present case in that at the end of the fiscal year the obligation remained
undischarged. Nevertheless, for the reasons which I have fully indicated in dealing with the Cal-
tex case, at that year-end this obligation had to be quantified. This was because only in that fiscal
year was the expenditure actually incurred and, therefore, only in that fiscal year could the de-
duction be claimed. The problem which arose did not relate to the question as to whether ex-
penditure had actually been incurred: clearly it had. The problem related merely to the question
whether in quantifying that expenditure regard should be had to the original invoiced price of
the goods in rands, as it was before devaluation and as it was reflected in the taxpayer’s books, or
to the outstanding price owing in rands as at the end of the fiscal year and taking into account
devaluation. The Court chose the latter basis of quantification. That the problem in question was
merely one of quantification and did not relate to the issue as to whether expenditure had actu-
ally been incurred appears clearly from the Court’s judgment.35 . . .
It is true that where such adverse alterations in the exchange rates take place and continue year
by year, the prudent borrower will no doubt make annual provision for the possible additional
cost (in rands) of discharging the loan obligation. And this provision will be reflected in his
books and annual accounts. But this cannot affect the income tax position as I have expounded

________________________

32 1991 (1) SA 533 (A) at 536D-F.

33 1991 (2) SA 257 (A) at 297B-H.
34 1993 (4) SA 110 (A) at 117A-118H.
35 At 675H, 677H, 678A-D.
 Deductions: General principles; Assessed losses of prior years 433

it. As has frequently been pointed out, the Court is concerned with the deductions permitted in
terms of the Act and not with debits or other provisions made in a taxpayer’s accounts, even
though these may be regarded as prudent and proper from an accounting point of view.
The main argument of counsel for the respondent was that the deduction of the foreign ex-
change ‘loss’ claimed was justified on the authority of the Caltex case. I have dealt fully with this
argument.
Finally, I must mention certain amendments to the Act. The first is s 24B which was introduced
by s 13(1) of the Income Tax Act 104 of 1979 and dealt with realised gains or losses on the repay-
ment of loans or advances in foreign currency. This clearly had no application in the present
case. The second is the new s 24I, introduced by s 21 of the Income Tax Act 113 of 1993, which
deals with realised and unrealised foreign exchange gains and losses which came into operation
only on 1 January 1994 and does not affect this case.
The appeal is accordingly allowed with costs . . .
SMALBERGER JA, NIENABER JA, HOWIE JA and OLIVIER AJA concurred

Notes
The deductibility of foreign exchange losses is now governed by s 24I, and this decision is
thus significant only for its affirmation of the general principle that the taxpayer can
deduct expenditure or loss only in the tax year in which it is ‘actually incurred’. On the
facts, the court held that this occurred in the year of payment. It is, however, still true
that mere accounting ‘provisions’ for future liabilities are not deductible when the
expenditure or loss is no more than threatened or pending; (see for example [230] Pyott
Ltd v CIR. It also remains true that ‘actually incurred’ does not necessarily mean ‘actual-
ly paid’; (see for example [240] PE Electric Tramway Co Ltd v CIR.)

[235]
Edgars Stores Ltd v Commissioner for Inland Revenue
1988 (3) SA 876 (A), 50 SATC 81
The taxpayer conducted its retail business in premises leased from various lessors under
long-term leases. The leases provided for a ‘basic rental’ and a ‘turnover rental’, the
latter being related to the annual turnover of the store concerned. The turnover rental
took account of the net turnover of the store during each 12-month period of the lease
(the ‘lease year’). Such periods ended on various different dates, depending on the
commencement of the lease. If the turnover rental for the lease year turned out to be
less than the basic rental, then no turnover rental was payable. Where the lease year
ended after the end of the taxpayer’s year of assessment, it was not possible to ascertain,
for purposes of the taxpayer’s income tax return for that year, the net annual turnover
and hence the turnover rental. The taxpayer sought to deduct the turnover rental, not in
the year in which it was paid, but in the year in which the taxpayer contended its liability
arose. The deduction which it claimed was based on an estimate of the amount by which
the turnover rental exceeded the basic rental for the lease year.
Issue: it was common cause that the turnover rental owing by the taxpayer was deduct-
ible. The issue was whether, in terms of the relevant leases, such turnover rental was
‘actually incurred’ during a tax year which ended prior to the end of the lease year.
Held: that the provisions of the leases relating to turnover rental created a contingent
liability which was only determined at the end of the lease year; therefore it was not
‘actually incurred’ in a tax year which ended prior to the termination of the lease year.
Corbett JA: [T]he case hinges on the application of the general deduction formula in s 11(a) of
the Income Tax Act 58 of 1962 – and more particularly the words ‘expenditure . . . actually in-
curred . . .’ (Afrikaans text: ‘onkoste . . . werklik . . . aangegaan’) appearing therein – to the
434 Income Tax in South Africa: Cases and Materials

rentals paid or payable by the appellant in respect of the various business premises hired by it. In
the recent case of Nasionale Pers Bpk v KBI 36 this court had occasion to consider the meaning of
these words in s 11(a) and Hoexter JA stated the position as follows:37
‘Dit is ’n bekende grondstelling dat, vir doeleindes van art 11(a) van Wet 58 van 1962, onkoste werklik
aangegaan is in daardie belastingjaar waarin aanspreeklikheid daarvoor regtens ontstaan, en nie (vir geval
betaling daar van later sou plaasvind) in die belastingjaar waarin daadwerklike vereffening van die skuld
geskied het nie . . . Die vereiste dat die onkoste “werklik aangegaan” moet word, het egter tot gevolg dat
moontlike toekomstige uitgawes wat bloot as waarskynlik geag word nie ingevolge art 11(a) aftrekbaar is
nie. Alleen onkoste ten opsigte waarvan die belastingbetaler ’n volstrekte en onvoorwaardelike aanspreek-
likheid op die hals gehaal het, mag in die betrokke belastingjaar afgetrek word.’
Thus it is clear that only expenditure (otherwise qualifying for deduction) in respect of which
the taxpayer has incurred an unconditional legal obligation during the year of assessment in
question may be deducted in terms of s 11(a) from income returned for that year. The obli-
gation may be conditional ab initio or, though initially conditional, may become unconditional
by fulfilment of the condition during the year of assessment; in either case the relative expendi-
ture is deductible in that year. But if the obligation is initially incurred as a conditional one dur-
ing a particular year of assessment and the condition is fulfilled only in the following year of
assessment, it is deductible only in the latter year of assessment (the other requirements of de-
ductibility being satisfied).
It is, of course, important in this context to distinguish between (i) expenditure in respect of
which the obligation is conditional and remains so during the year of assessment, and (ii)
expenditure in respect of which the obligation is or during the year of assessment becomes un-
conditional, but cannot be quantified until after the termination of the year of assessment. The
latter situation, with reference to a loss instead of an expenditure, is exemplified by the Rhode-
sian Appellate Division case of COT v ‘A’ Company,38 which was concerned with a loan made by
the taxpayer, a merchant banker, to a company which subsequently was placed in liquidation.
For portion of this loan, amounting to $72 000, the taxpayer ranked as a concurrent creditor.
The taxpayer sought to deduct this amount, as a loss incurred, in the year in which the company
was placed in liquidation. At that stage the probabilities indicated that concurrent creditors
would receive a dividend of not more than 5c in the $1, which would yield a recoupment to the
taxpayer of $3 600. The court held that, as the loss had been suffered once and for all during the
tax year in question, it was deductible even though final quantification thereof, which was de-
pendent on the exact amount of the dividend, could take place only after the end of the tax
year. It was further held that in the unlikely event of the dividend exceeding 5c, the excess would
constitute gross income in the taxpayer’s hands in the year in which it accrued . . .
In the present case counsel were agreed that the crux of the matter was whether the provisions
in clause 5 of the standard form of lease relating to a turnover rental created a contingent obli-
gation which was incurred, if at all, only at the end of the annual lease period (as defined in
clause 5.2.6 and which I shall call ‘the lease year’) or whether they gave rise to an unconditional
obligation the quantification of which took place at the end of the lease year. This is not an easy
question – as the differences of judicial opinion in this court and between the courts a quo
demonstrate – but I have come to the conclusion that the former of these propositions is the
correct one and that, therefore, the Transvaal Provincial Division (‘the TPD’) reached a correct
decision.
Essentially clause 5, as I see it, provides not for a single rental obligation, as argued by appel-
lant’s counsel and as held by my Brother Nicholas, but two alternative rental obligations: the
obligation to pay a basic rental or in certain circumstances the obligation to pay a turnover rent-
al. The obligation to pay the basic rental accrues from month to month during the lease year
and must be discharged in advance. It is payable ‘until the nett annual turnover figures in re-
spect of (the) year are available’ (clause 5.2.4). The obligation to pay the turnover rental is de-
pendent upon the turnover produced from the leased premises during the lease year being such
that the turnover rental, as calculated in accordance with the formula laid down in clause 5.2.2,
exceeds the basic rental. In that event it replaces the basic rental; otherwise the rental obligation
remains one to pay merely the basic rental . . .
________________________

36 1986 (3) SA 549 (A).

37 At 654A-C.
38 1979 (2) SA 409 (RAD).
 Deductions: General principles; Assessed losses of prior years 435

To sum up the position as I see it, the standard form of lease makes provision for two alternative
rental obligations: one to pay the basic rental and one to pay the turnover rental. Appellant as
tenant is obliged to pay whichever of these rentals, each as calculated according to a certain
formula, is the greater. The basic rental accrues and is paid from month to month in advance.
The liability to pay the turnover rental can only be determined at the end of the lease year, when
the annual turnover is known. If the turnover is below a certain level, and the turnover rental as
calculated is less than the basic rental, then there is no obligation to pay turnover rental. There
cannot be a vested obligation to pay nil rental. In that case the obligation to pay the basic rental
prevails. If, on the other hand, the turnover level is such that the turnover rental, as calculated,
exceeds the basic rental, then the obligation to pay it displaces the obligation to pay basic rental,
subject to the lessee not being obliged to pay more than the excess. The obligation to pay turno-
ver rental is thus contingent until the turnover for the lease year is determined at the end of the
year. The expenditure relating to the payment of turnover rental can, therefore, not be regard-
ed as having been actually incurred in a tax year which ended prior to the termination of the
lease year. It can, therefore, not be deducted in that tax year.
...
HOEXTER JA, VIVIER JA and VILJOEN JA concurred.
Nicholas AJA: (dissenting) The principles which apply to this case are well established. I have
extracted them . . . from the judgement of Ackerman J [in the court a quo] . . .
‘For the purpose of s 11(a) a deduction in respect of rental is properly to be made in the tax year in which
the rental is ‘actually incurred’. ‘Actually incurred’ does not mean ‘actually paid’, but means all expendi-
ture actually incurred during the tax year, whether the liability has been discharged during that tax year or
not. A distinction must be drawn between:
(a) the case where the existence of the liability itself is conditional and dependent upon the happening
of an event after the tax year in question, in which event the liability is not incurred in the tax year in
question; and
(b) the case where the existence of the liability is certain and established within the tax year in question,
but the amount of the liability cannot be accurately determined at the tax year-end, in which event
the liability is nevertheless regarded as having been incurred in the tax year in question.’
The application of these principles to the present case is governed by the proper construction of
the relevant provisions of the leases. [The judge here examined the terms of the leases.]
...
Although the balance of the turnover rental (if there is any) only becomes calculable and hence
payable after the end of the 12-month period, the liability to pay it (like the liability to pay the
basic rental) arises month by month. That that is so is shown by the fact that the turnover rental
is subsumed under the ‘monthly rental payable’ . . .
In my opinion, therefore, there was under the lease a single obligation to pay rent which was
made up of two components: basic rental, and the surplus, if any, of turnover rental over basic
rental. The quantum of the turnover rental component could not be ascertained during the tax
year in question, but nevertheless the liability to pay it was certain and established within that tax
year.
...
In the course of the reported judgment, Ackerman J held [in the court a quo] that:
‘. . .
The contract envisages a definite unconditional primary basic rental which, may, depending on the net
annual turnover rental be replaced by the turnover rental after the 12-month lease period. The very obli-
gation to pay turnover rental is conditional and dependent on the fulfilment of a condition after the end
of the year of assessment.’
In my respectful opinion, the learned judge fell into error . . . There is . . . only one single obli-
gation to pay rent. The obligation to pay basic rent and turnover rent can and do co-exist.
Properly interpreted, [clause] 5.2 does not provide for the substitution by turnover rental of
basic rental . . .
...
I would make an order upholding the appeal with costs . . .
436 Income Tax in South Africa: Cases and Materials

Notes
In this case, what was in dispute was the proper interpretation of the lease; there was no
disagreement on the applicable legal principles. In issue was whether, in terms of the
lease, the taxpayer’s liability for turnover rental for a given ‘lease year’ was a conditional
obligation which became unconditional only after the end of the relevant tax year or,
alternatively, whether the liability for turnover rental had become unconditional by the
end of the tax year, although it was only quantified after the end of the tax year. The
majority judgment held that, on a proper interpretation of the lease, the liability for
turnover rental fell into the former category; the minority judgment held that it fell into
the latter category.
The majority and the minority judgments are ad idem on the legal principle that
where a liability has become unconditional by the end of year 1 and only the quantification
of that liability is delayed beyond the end of the tax year, the liability is ‘actually in-
curred’ in year 1. (An important gloss on this principle was laid down in [236] CIR v
Golden Dumps (Pty) Ltd.) In this situation, it seems that an estimate must be made of
the liability, so that it can be reflected as a deduction in year 1. But what happens if, in
year 2, when he discharges the liability, that estimate turns out to have been too low or
too high? If the estimate of the liability was too low, the taxpayer has paid too much tax
in year 1; but, in principle, it seems that he cannot be allowed a deduction of the differ-
ence in year 2 because no liability was ‘incurred’ in that year. If, however, the estimate
was too high, and he has paid too little tax in year 1, then it seems he can only be
taxedon the difference in year 2 if there has been a ‘receipt or accrual’ in that year or if
a specific recoupment provision in the Act applies. (It seems that s 8(4)(a) only applies
if there has been a receipt or accrual.) Generally on this problem, see [237] Vorster,
‘Unquantified and Defeasible Expenses incurred in the Production of Income’.39

In order to be deductible under s 11(a), expenditure must have been ‘actually incurred’ during the tax
year in question. Where a liability is subject to a condition (ie is contingent) the expenditure is ‘actually
incurred’ in a given tax year only if the condition is fulfilled during that year, and the liability becomes
unconditional. A liability is not ‘actually incurred’ where the claim in question is genuinely and not
vexatiously or frivolously disputed for the purpose of delay; in such event, the expenditure is ‘actually
incurred’ only when the claim is admitted or finally upheld by a court or arbitrator

[236]
CIR v Golden Dumps (Pty) Ltd
1993 (4) SA 110 (A), 55 SATC 198
Golden Dumps claimed a deduction of some R3 million in terms of s 11(a) of the In-
come Tax Act, being the expenditure incurred by it in the 1985 tax year in purchasing
200 000 shares in other companies which Golden Dumps was contractually obliged to
transfer to one Nash, a former employee.
The background was that Golden Dumps had offered employment to Nash, who ac-
cepted the offer. In terms of their agreement, Nash was entitled to be allotted certain
shares at a stipulated price. A short time later, Golden Dumps summarily dismissed Nash,
who then demanded delivery of shares and tendered the agreed price. (Clearly, the value
of the shares had escalated in the meantime, and Nash wanted to buy them in at the
price fixed by the contract.) Golden Dumps disputed his entitlement to the shares.
In February 1981 Nash instituted legal proceedings to claim the shares. The matter
eventually went to the Appellate Division which gave judgment in his favour in March
1985.
________________________

39 (1985) 1 SATJ 1.
 Deductions: General principles; Assessed losses of prior years 437

Issue: whether the expenditure incurred by Golden Dumps in purchasing the shares
which it was obliged to deliver to Nash was ‘actually incurred’ in 1981 (when Nash insti-
tuted legal proceedings) or in 1985 (when the dispute was finally resolved by the Appel-
late Division).
Held: that the expenditure outlaid by Golden Dumps in purchasing the shares in ques-
tion had been ‘actually incurred’, for the purposes of s 11(a), not in 1981 when Nash
claimed the shares, but in 1985 when the Appellate Division finally resolved the dispute
by giving judgment in favour of Nash.
Nicholas AJA: In argument on behalf of the Commissioner in this Court, counsel relied on one
ground only, viz that the Special Court erred in finding that the expenditure was actually in-
curred during the 1985 year of assessment . . .
Counsel for the appellant contended that the rights and obligations of the parties existed at the
time of the institution of the action in February 1981. The obligation of Golden Dumps to deliv-
er the shares, and any loss which such delivery might occasion, had been ‘actually incurred’ with-
in the meaning of s 11(a) of the Act during the 1981 year of assessment. The judgment did not
constitute a novation and it did not amount to the fulfilment of a condition which resulted in
the liability of Golden Dumps arising, but it served only to confirm the rights and obligations
which already existed in 1981. Relying on the dictum in Sub-Nigel Ltd v CIR 40
‘. . . the whole scheme of the Act shows that, as the taxpayer is assessed for income tax for a period of one
year, no expenditure incurred in a year previous to the particular tax year can be deducted’,
counsel submitted that the deduction was not claimable in the 1985 tax year.
The validity of the argument depends on the proper interpretation of the words ‘expenditure
and losses actually incurred’ in s 11(a) of the Act. This provides:
‘Section 11. For the purpose of determining the taxable income derived by any person from carrying on
41
any trade within the Republic, there shall be allowed as deductions from the income of such person so
derived –
42
(a) expenditure and losses actually incurred in the Republic in the production of the income, provided
such expenditure and losses are not of a capital nature.’
In Caltex Oil (SA) Pty Ltd v SIR 43 Botha JA . . . said:
‘. . . The expression “expenditure actually incurred” in s 11(a) does not mean expenditure actually paid
during the year of assessment, but means all expenditure for which a liability has been incurred during the
year, whether the liability has been discharged during that year or not. (Port Elizabeth Electric Tramway Co v
CIR . . .) It is in the tax year in which the liability for the expenditure is incurred, and not in the tax year in
which it is actually paid (if paid in a subsequent year), that the expenditure is actually incurred for the
purposes of s 11(a).’
44
In ITC 1117 decided in the Rhodesia Special Court Macaulay QC, President, said that he did
not regard the presence of the qualifying word ‘actually’ in s 11(a) of the South African Income
Tax Act as adding anything to the plain and ordinary meaning of ‘incurred’, observing that
‘expenditure is either incurred or it is not incurred and if no legal liability for it arises it is not
“incurred”’.
The dictum was adopted in the judgment of the Full Court of the Transvaal Provincial Division
in CIR v Edgars Stores Ltd.45
If the implication is that the word ‘actually’ is mere surplusage and can be ignored, that would
be contrary to the firmly established rule of statutory construction that a meaning must be given
to every word . . .
According to the Shorter Oxford English Dictionary, the adverb ‘actually’ means ‘in act or fact; really’
...
In the case of a liability which is contingent in the legal sense, the expenditure is incurred dur-
ing the year of assessment only if the condition on which it depends is fulfilled during that year.
See Nasionale Pers Bpk v KBI 1986 (3) SA 549 (A) where Hoexter JA said: [translated]
________________________

40 1948 (4) SA 580 (A) at 589.

41 The words ‘in the Republic’ have been deleted.
42 The words ‘in the Republic’ have now been deleted.
43 1975 (1) SA 665 (A).
44 (1968) 30 SATC 130.
45 (1986) 48 SATC 89 at 94.
438 Income Tax in South Africa: Cases and Materials

“The requirement that the expenditure must be ‘actually incurred’ has the consequence that possible fu-
ture expenditure which is regarded as merely probable is not deductible in terms of s 11(a). Only ex-
penditure in respect of which the taxpayer has taken upon himself an absolute and unconditional liability
may be deducted in the relevant tax year.”
46
After quoting this passage in Edgars Stores Ltd v Commissioner for Inland Revenue, Corbett JA said:
‘Thus it is clear that only expenditure (otherwise qualifying for deduction) in respect of which the taxpay-
er has incurred an unconditional legal obligation during the year of assessment in question may be de-
ducted in terms of s 11(a) from income returned for that year. The obligation may be unconditional ab
47
initio or, though initially conditional, may become unconditional by fulfilment of the condition during
the year of assessment; in either case the relative expenditure is deductible in that year. But if the obliga-
tion is initially incurred as a conditional one during a particular year of assessment and the condition is
fulfilled only in the following year of assessment, it is deductible only in the latter year of assessment (the
other requirements of deductibility being satisfied).’
There is no difference in principle between a case where liability is contingent in the legal sense
and one where it is contingent in the popular sense. In the field of accounting a contingency is
understood as –
‘. . . a condition or situation, the ultimate outcome of which, gain or loss, will be confirmed only on the
48
occurrence, or non-occurrence, of one or more uncertain future events’.
Liability is contingent in that sense in a case where there is a claim which is disputed, at any rate
genuinely disputed and not vexatiously or frivolously for the purposes of delay. In such a case
the ultimate outcome of the situation will be confirmed only if the claim is admitted or if it is
finally upheld by the decision of a court or arbitrator. Where, at the end of the tax year in which
a deduction is claimed, the outcome of the dispute is undetermined, it cannot be said that a
liability has been actually incurred. The taxpayer could not properly claim the deduction in that
tax year, and the receiver of revenue could not, in the light of the onus provision of s 82 of the
Act, properly allow it.
A prudent accountant would no doubt require that provision be made in the taxpayer’s financial
statements for the expenditure that might be incurred . . . but any reserve thereby created would
not be a permissible deduction. Section 23(e) of the Act provides that no deduction shall in any
case be made in respect inter alia of income carried to any reserve fund.
What then was the situation regarding the liability of Golden Dumps to deliver Modderfontein
shares to Nash as at the crucial date, namely the last day of the 1981 year of assessment?
Nash had claimed delivery in January 1981 and his claim had been rejected because, according
to Pouroulis in his evidence in the Special Court, he had formed the view, acting on legal advice,
that Nash was not entitled to the shares. Nash had instituted an action claiming delivery and this
was being defended. On the crucial date the outcome was undetermined. Liability was then, to
use the words of Sir Owen Dixon, no more than impending or threatened. The ultimate out-
come would be known only upon the delivery of the Appellate Division’s judgment, which lay
four years in the future.
In my view, therefore, the decision of the Special Court was clearly right. The appeal is dismissed
...
CORBETT CJ, VAN HEERDEN JA, SMALBERGER JA and KUMLEBEN JA concurred.

Notes
In law, a ‘condition’ relates to a future, uncertain event. Thus, a promise that, ‘I will pay
you R100 if you pass your examination’ is conditional (contingent) on your performing
this task, and it is uncertain whether you will do so. My obligation becomes uncondition-
al only if and when you pass the examination. But if I were to promise that, ‘I will pay you
on 20 September 2015’ my obligation is not conditional (contingent) because the stipu-
lated future event is not uncertain. Hence, in the latter case, my obligation is
unconditional, even though I do not have to pay you until the stipulated date.
________________________

46 1988 (3) SA 876 (A).

47 From the outset.
48 See Faul et al, Financial Accounting at 475.
 Deductions: General principles; Assessed losses of prior years 439

The decision in Golden Dumps holds that, even where the taxpayer’s legal obligation is
(in the strict legal sense) not conditional, it has nevertheless not been ‘actually incurred’
for the purposes of s 11(a) if that obligation is genuinely (and not vexatiously or friv-
olously) disputed. In such circumstances, the obligation is ‘actually incurred’ in the tax
year in which the dispute is resolved by an admission of liability or by agreement or is
finally resolved by a court (in other words, if the decision of the first court is taken on
appeal to a higher court, the dispute is not resolved until the last court of appeal gives its
decision) or by an arbitrator.
The facts of Golden Dumps did not involve a ‘conditional’ obligation in the strict legal
sense. The case involved a ‘disputed’ obligation, that took several years to resolve, and
was ultimately resolved by a judgment of the Appellate Division.
In this case, SARS had argued that the judgment of the Appellate Division, handed
down in 1985, was merely declaratory of an obligation that had existed in 1981. In other
words, the argument was that Golden Dumps’ liability to Nash had never been ‘condi-
tional’. If this argument was correct, it followed that Golden Dumps ought to have
claimed the s 11(a) deduction in the 1981 tax year, and that such deduction could not
be claimed in the 1985 tax year. It is trite that there is only one correct tax year in which
a deduction under s 11(a) may be claimed, namely the tax year in which the relevant
expenditure was ‘actually incurred’. SARS argued that the correct year for claiming this
expenditure was the 1981 tax year, and that Golden Dumps was not entitled to a deduc-
tion in the 1985 tax year. It was, of course, too late for Golden Dumps to object to
the1981 assessment and lodge an amended return including a claim for a deduction in
respect of the cost of the shares in issue. Hence, if Golden Dumps did not succeed in its
argument that the expenditure had been ‘actually incurred’ in 1985, when the Appellate
Division finally resolved the matter, it would forfeit the deduction altogether.
It was clear that Golden Dumps’ liability to Nash had not been ‘conditional’ (ie ‘con-
tingent’) in the strict legal sense. There was no future, uncertain event on which such
liability depended. The judgment of the Appellate Division did not constitute the fulfill-
ment of a condition, nor did it create a new liability; it merely declared what the true
position had been all along.
However, the court said that the word ‘actually’ in the phrase ‘actually incurred’ in
s 11(a) could not be ignored, and had to be given some meaning. Its dictionary meaning
was ‘in fact; really’. Hence, the word ‘actually’ allowed the court to hold that the phrase
‘actually incurred’ must take account of the ordinary meaning of ‘contingent liability’
and its meaning in the field of accountancy, where it connotes ‘a situation, the ultimate
outcome of which, gain or loss, will be confirmed only on the occurrence, or non-
occurrence, of one or more uncertain future events’.
It was held that, on this interpretation, a liability is ‘contingent’ for the purposes of
s 11(a) where the liability is genuinely and not frivolously or vexatiously disputed. Hence,
Golden Dumps’ liability (the cost of purchasing the shares to be delivered to Nash) was
‘actually incurred’ for the purposes of s 11(a) in 1985 when the Appellate Division
handed down its judgment, resolving the dispute.
Until that date, said the court, Golden Dumps’ liability was no more than impending
or threatened and the threatened expenditure could not be claimed as a deduction
under s 11(a). The correct tax year for claiming the deduction was 1985, when the
liability became certain in the sense that it had been finally resolved by the court.

[237]
Unquantified and defeasible expenses incurred in the production of income
Henry Vorster, ‘Unquantified and defeasible expenses incurred in the production of
income’ (1985) 1 South African Tax Journal 1.
440 Income Tax in South Africa: Cases and Materials

Introduction
In terms of s 11(a) of the Income Tax Act 1962, as amended (‘the Act’),
49
‘expenditure and losses actually incurred in the Republic in the production of the income, provided
such expenditure and losses are not of a capital nature’
are allowed as deductions from the income of the taxpayer.
It is an established principle in our law that an expenditure must be claimed in the year of assess-
ment in which it is incurred.50
An expenditure incurred by a taxpayer during a year of assessment and qualifying for deduction
in terms of s 11(a) of the Act may in a variety of circumstances be unquantified as at the last day
of the year of assessment during which it is incurred, in the sense that although incurred, the
quantum of the expenditure can be determined only in a subsequent year of assessment.
The liability to pay an expenditure in a year of assessment subsequent to the one in which the
expenditure was incurred may in the subsequent year be reduced, waived or otherwise be extin-
guished without actual payment.
The following questions arise from the propositions just stated:
– When is an expense incurred for the purposes of s 11(a)?
– Can an expense be said to have been incurred in one fiscal year if the obligation to pay in a
subsequent fiscal year is defeasible?
– Can the expense by incurred in one fiscal year if the quantum of the expense can be deter-
mined only in a subsequent fiscal year, and if so, how is the quantum of the deduction in
the first fiscal year determined?
– What are the tax consequences if the payment obligation once quantified, exceeds or is
less than the amount of the deduction allowed in a prior year? . . .
South Africa
The income tax system in South Africa requires the taxable income of the taxpayer to be deter-
mined from year to year so that his liability for taxation may be determined annually. An ex-
pense incurred in the production of income and which otherwise qualifies for deduction must,
on the basis of Caltex and other cases51 be claimed in the year of assessment in which it is in-
curred. As appears from the preceding discussion, the same principle applies in Australia. This
principle extends in our law even to the determination of the quality of receipts at financial year-
52
end.
The principle enunciated in PE Electric Tramway Co Ltd v CIR 53 with regard to the meaning of
‘actually incurred’ has been applied and confirmed in our courts on several occasions: ‘actually
incurred’ does not mean ‘actually paid’. So long as a liability to pay certain costs has actually
been incurred, they are deductible. To return to the example of the trader cited by Watermeyer
AJP in PE Electric Tramway, the trader may owe money for stock purchased during the fiscal year
but if at the end of the fiscal year he has not yet paid the debt, he is still entitled to the deduc-
tion. This principle, it is submitted, applies in our law even if, by agreement with the supplier,
the payment obligation is postponed to a subsequent fiscal year. The trader would have incurred
the liability in year one even if the purchase price were not due and payable until some future date
in year two. ‘Actually incurred’ does not mean ‘due and payable’, and once the concept that
‘incurred’ does not mean ‘paid’ is accepted, as it is in our law, it is implicit that a claim for
deduction cannot be defeated on the ground that the liability is defeasible.
The facts of ITC 674 54 are in all material respects with regard to holiday pay the same as those of
Nilsen. In the former case the court held that the right of the employee to holiday pay propor-
tionate to his leave is absolute, and that there was no contingency upon which it could be with-
held, the same as in Nilsen. Being calculated on the period of service and the wages earned
________________________

49 The words ‘in the Republic’ have been deleted from s 11(a).
50 Baikie v CIR 1931 AD 496; (1931) 5 SATC 193; Concentra (Pty) Ltd v CIR (1942) CPD 509; (1942) 12 STAC
95; Caltex Oil (SA) Pty Ltd v SIR 1975 1 SA 665 (A); (1975) 37 SATC 1.
51 See the cases cited in the first footnote to this article.
52 See, for example, COT v Rezende Gold and Silver Mines (Pty) Ltd 1975 (1) SA 968 (RA), (1975) 37 SATC 39.
53 1936 CPD 341 at 244; (1936) 8 SATC 13 at 15.
54 ITC 674 (1949) 16 SATC 235.
 Deductions: General principles; Assessed losses of prior years 441

during such period, the holiday pay was due to the employee as it accrued to him, and it was
only the payment thereof that was postponed in terms of the agreement until the last working
day before his leave had commenced, as in Nilsen. In the result, the court found that, as at the
end of the financial year of the taxpayer on 30 June, he had incurred a liability to pay, the fol-
lowing December, the amount claimed as at 30 June; this was not the same as in Nilsen. This, said
the court, with respect correctly in my view, was in accordance with PE Electric Tramway.
The facts of KBI v Nasionale Pers Beperk55 are clearly distinguishable from those of ITC 674. The
taxpayer in that case had a 31 March year-end and paid annual bonuses in September of each
year. The bonus was, however, payable only to employees in actual employment on 31 October
and it was specifically provided that the employer would be entitled to repayment of any bonus
paid in September, if employment were terminated prior to 31 October. Unlike ITC 674 and
Nilsen, there would be no obligation on Nasionale Pers to pay any portion of the bonus were the
employee to resign before 31 October. The deduction was disallowed on the basis that the liabil-
ity was at 31 March contingent upon whether the employees, in respect of whom the deduction
was sought, remained in employment until at least 30 September. It made no difference, said
Friedman J, whether the contingency was suspensive or resolutive. Friedman J’s reasoning can-
not, with respect, be faulted.
It may also be assumed that in ITC 674 the deduction that was allowed was also subject to fluctu-
ation, although this aspect was not discussed in the judgment or raised in argument. The holiday
pay was to be calculated on the basis of total salary over the period and, presumably, the possibil-
ity of an increase in salary after 30 June but before December could not be excluded.
The first case in which our Appellate Division had to consider the amount of the expenditure to
be allowed as a deduction, as at the year-end, was Caltex56 which involved the repayment by Caltex
to two foreign suppliers. Supplier ‘A’ was paid prior to the end of the year of assessment in
which the liability was incurred, and supplier ‘B’ was to be paid only after the closing of the fiscal
year. In relation to the topic under discussion two questions arose:
– if a liability is incurred in one fiscal year and is discharged subsequent to the date on which it
is incurred, but in the same fiscal year, which is the relevant date for determining the
amount of the deduction?
– if the liability is incurred in one fiscal year but cannot be quantified until payment in the
following fiscal year, does the taxpayer qualify for deduction, and if so, in what amount?
On the facts of Caltex the liability to supplier ‘A’ was incurred for a fixed amount in sterling, but
by the time that payment had to be made, during the same fiscal year, a devaluation of sterling
had reduced the Rand amount which the taxpayer, but for the devaluation, would have had to
pay. In these circumstances the court held that the liability had been incurred in sterling and,
for tax purposes, it had to be converted into Rands at the rate of exchange ruling on the date of
payment. The only effect of the devaluation was that the taxpayer had to expend less in Rand to
discharge its sterling liabilities. Just because the taxpayer had entered a greater Rand amount in its
books when the liability was incurred, prior to devaluation, did not mean that the expenditure
actually incurred was anything more than the amount actually spent in discharging the obligation.
More significant is Botha JA’s finding in respect of the obligation to supplier ‘B’ which was due
to be discharged in the following fiscal year. In principle, said the court, there was no difference.
The court accepted that a liability to supplier ‘B’ had been incurred. The distinction between
57
Pyott Ltd v CIR and Caltex is immediately apparent. In Pyott the liability to the customers was
contingent upon the return of the containers but in Caltex the liability to supplier ‘B’ had been
unconditionally incurred; but the quantum of the liability would depend on the rate of ex-
change ruling on the date of payment. Botha JA then stated that it was ‘only at the end of the
year of assessment that it is possible, and then it is imperative, to determine the amounts re-
ceived or accrued on the one hand and the expenditure actually incurred on the other during
the year of assessment’. Here then is the acknowledgement, as in Australia, that the expenditure
must be determined and claimed in the year of assessment in which it is incurred. Botha JA felt
that it was appropriate to quantify the deduction with reference to the rate of exchange ruling on
________________________

55 1984 (4) SA 551 (C).

56 1975 (1) SA 665 (A), 37 SATC 1.
57 1945 AD 128; (1945) 13 SATC 121.
442 Income Tax in South Africa: Cases and Materials

the last day of the year of assessment. This approach incidentally raises the question whether
Caltex would have been entitled to claim a higher amount in Rand if the rate of exchange ruling
on the last day of the fiscal year had fluctuated in favour of sterling and against the Rand. In
terms of Botha JA’s approach this would have to be allowed and would result in a deduction of
unrealized losses being claimable.
The same question arose in COT v ‘A’ Company58 in which the court (ZA) had to consider wheth-
er the expenditure had to be quantified before it qualified for deduction. Relying on RACV In-
surance and James Flood, Lewis JP came to the conclusion that there was nothing in the Rhodesian
Act which precluded the deduction in the tax year in question, and there was no logical reason
why the taxpayer should have to wait until the precise amount had been ascertained at some
future date.
59
The question of quantification did not arise in the case of COT v ‘T’ Company Ltd. It was common
cause in that case that the value of the debentures could be brought to account, not at cost price,
but at the value, which was less than cost price, that they would yield in Rhodesian currency at the
rate of exchange ruling on the last day of the fiscal year. The only dispute was whether the deben-
tures constituted trading stock. The court held that they did and the taxpayer was in effect allowed
a deduction in respect of an unrealized loss. The question also did not arise in Plate Glass and Shat-
60
terprufe Industries Finance Co (Pty) Ltd v SIR, although the losses there in question were also subject
to fluctuation and final determination in subsequent fiscal years. Nevertheless the Commissioner’s
representative had conceded that the loss had been incurred but questioned its deductibility on
another ground. Margo J held that if a fluctuation in exchange rates, after a loss had been brought
to account, necessitated an adjustment, that adjustment would have to be accounted for in a later
trading period.
More significant is Botha JA’s finding in respect of the obligation to supplier ‘B’ which was due
to be discharged in the following fiscal year. In principle, said the court, there was no difference.
The court accepted that a liability to supplier ‘B’ has been incurred. The distinction between
Pyott Ltd v CIR 61 and Caltex is immediately apparent. In Pyott the liability to the customers was
contingent upon the return of the containers but in Caltex the liability to supplier ‘B’ had been
unconditionally incurred; but the quantum of the liability would depend on the rate of ex-
change ruling on the date of payment. Botha JA then stated that it was ‘only at the end of the
year of assessment that it is possible, and then it is imperative, to determine the amounts re-
ceived or accrued on the one hand and the expenditure actually incurred on the other during
the year of assessment’. Here then is the acknowledgement, as in Australia, that the expenditure
must be determined and claimed in the year of assessment in which it is incurred. Botha JA felt
that it was appropriate to quantify the deduction with reference to the rate of exchange ruling on
the last day of the year of assessment. This approach incidentally raises the question whether the
Caltex would have been entitled to claim a higher amount in Rand if the rate of exchange ruling
on the last day of the fiscal year had fluctuated in favour of sterling and against the Rand. In
terms of Botha JA’s approach this would have to be allowed and would result in a deduction of
unrealized losses being claimable.
The same question arose in COT v ‘A’ Company 62 in which the court63 had to consider whether
the expenditure had to be quantified before it qualified for deduction. Relying on RACV Insur-
ance and James Flood, Lewis JP came to the conclusion that there was nothing in the Rhodesian
Act which precluded the deduction in the tax year in question, and there was no logical reason
why the taxpayer should have to wait until the precise amount had been ascertained at some
future date.
The question of quantification did not arise in the case of COT v ‘T’ Company Ltd.64 It was common
cause in that case that the value of the debentures could be brought to account, not at cost price,
but at the value, which was less than cost price, that they would yield in Rhodesian currency at the
________________________

58 1979 (2) SA 409 (ZA), 41 SATC 59.

59 1980 (4) SA 738 (ZA), 42 SATC 167.
60 1979 (3) SA 1124 (T), 41 SATC 103.
61 1945 AD 128, 13 SATC 121.
62 1979 (2) SA 409 (ZA), 41 SATC 59.
63 The Appellate Division of the High Court of Zimbabwe.
64 1980 (4) SA 738 (ZA), 42 SATC 167.
 Deductions: General principles; Assessed losses of prior years 443

rate of exchange ruling on the last day of the fiscal year. The only dispute was whether the de-
bentures constituted trading stock. The court held that they did and the taxpayer was in effect
allowed a deduction in respect of an unrealized loss. The question also did not arise in Plate
Glass and Shatterprufe Industries Finance Co (Pty) Ltd v SIR,65 although the losses there in question
were also subject to fluctuation and final determination in subsequent fiscal years. Never-
theless the commissioner’s representative had conceded that the loss had been incurred but
questioned its deductibility on another ground. Margo J held that if a fluctuation in exchange
rates, after a loss had been brought to account, necessitated an adjustment, that adjustment
would have to accounted for in a later trading period.
It is submitted that the basis of our Act is such that an expenditure qualifying for deduction in a
particular year must be claimed in that year, and the claim for that deduction is not defeated by
the fact that the quantum of the liability may be subject to fluctuation or dispute or precise
quantification in a subsequent year. In respect of a liability incurred in a foreign currency, it
must now be regarded as settled that the amount of the liability must be quantified on the last
day of the fiscal year, and there is no distinction in principle between a liability which cannot be
quantified as a result of exchange-rate fluctuations and a liability which cannot be quantified for
any other reason. This seems to me to be a necessary consequence of accepting the proposition
that ‘incurred’ does not mean ‘paid’. While the exchange rate may serve as a convenient and
practical basis for the quantification of a liability, it is relevant only in particular circumstances.
In those circumstances it is for the taxpayer claiming the deduction to prove, on the balance of
probability, that he is entitled to a deduction in the amount claimed.66 This was accepted by the
court in ‘A’ Company and it concluded that the taxpayer had discharged the onus. It is submitted
that the taxpayer is not required in terms of s 82 to prove the amount of the deduction with
precision. He has merely to establish the amount on balance of probability and it is submitted
that a South African court, faced with suitable evidence in the nature of the kind submitted in
RACV Insurance, would accept the probabilities suggested by such evidence.
Estimates of expenditure
The concept of estimates is not entirely foreign to tax practice. The problem of quantification,
for instance, also arose prior to the amendments to the Act introduced in terms of the Income
Tax Amendment Acts of 1981 and 1984. The initial and investment allowances in terms of s 12 of
the Act were, until August 1981,67 calculated on the cost of the plant or machinery in question to
the taxpayer. The ‘cost to the taxpayer’, for the purposes of these allowances, included the fi-
nance charges payable by the taxpayer where he had purchased the plant and machinery in
terms of a suspensive sale agreement. The same approach was followed until 15 March 1984 for
the purposes of the allowance in terms of s 11(e) of the Act.68 The suspensive sale agreement was,
however, frequently subject to a fluctuating interest rate, so that the cost to the taxpayer could
not be established, until the final payment of the purchase price and interest payable in terms of
the suspensive sale agreement had been made, which in most cases took place several years after
the plant and machinery had been brought into use. The Commissioner’s practice was always
that the allowances in terms of ss 11(e) and 12 of the Act would be allowed on the basis of an
estimated cost, with an adjustment being accounted for in the final year in which the taxpayer’s
liability under the suspensive sale was discharged. There is no authority for this procedure in the
Act, but again, it is a practical solution which is supportable in principle. The same procedure
was not followed in ITC 1333,69 a decision of the Zimbabwe special court. In that case the court
held that the capital allowances had to be claimed year by year, in respect of the expenditure
incurred each year on the rising value of the foreign currency.
The problem that arose with regard to unreported claims in RACV Insurance is dealt with
s 28(2)(f) of our Act, in that it specifically allows the deduction of an allowance in respect of
such claims, against the premium income of the taxpayer. It is an allowance determined in the
discretion of the Commissioner and is a ‘carry-forward’ type of allowance. Any allowance granted
in one year is included in the insurer’s income in the next year, when he gets a further allow-
ance. Statutory provision is made in the Act for the deduction of provisions in exceptional cases.
________________________

65 1979 (3) SA 1124 (T), 41 SATC 103.

66 See s 82 of the Act.
67 For the present position see s 12(3A) of the Act.
68 For the present position see s 11(e)(vii) of the Act.
69 (1981) 43 SATC 90.
444 Income Tax in South Africa: Cases and Materials

Adjustments in second year

The question of the tax treatment of any adjustment, which may have to be made in respect of
an estimated amount allowed as a deduction in a previous year of assessment, has not really been
considered by our courts. The passing reference by Margo J in Plate Glass to the way in which the
actual profit or loss would properly be brought to account in the subsequent fiscal year was really
obiter, not argued or considered, and based on a reference to Simon’s Taxes which discusses the
procedure in English law. As was pointed out above, courts in Australia, South Africa and Zim-
babwe have cautioned against the reliance on English authority dealing with this subject, precise-
ly because of the different basis of taxation in England, that is, ‘profits’ or ‘gains’ as opposed to
‘taxable income’. The Appellate Division in Caltex is also lacking in assistance in this regard.
Botha JA felt that the quantification for the purposes of the tax year in question is not affected
by a subsequent devaluation. In such a case, the devaluation may attract other consequences in
the year in which the devaluation takes place depending on whether the tax legislation provides for such
a contingency. In his words:
‘Events which may have an effect upon a taxpayer’s liability to normal tax are relevant only in determining
his tax liability in the fiscal year in which they occur, and cannot be relied upon to determine such liability
in respect of a fiscal year in the past.’
In Australia, it appears that the position has also not finally been determined. In Commonwealth
70
Aluminium the court stated, with a discernible measure of hesitancy, that the adjustment might
have to be accounted for in the ensuing fiscal year although not simply because it had been allowed as
a deduction in a previous year. One of the reasons it may have to be accounted for in the ensuing
fiscal year is furnished in ‘A’ Company. In that case the bad debt, in respect of which the deduc-
tion was claimed, had to be quantified and the court, correctly, accepted that if a greater amount
than the actual loss were allowed as a deduction, the excess would have to be included in the
taxpayer’s income in the ensuing fiscal year. This is so because the applicable provision in the
Zimbabwe Act71 specifically provides for the recoupment or recovery of a bad debt previously
72
written off. There is an obscure reference in ITC 1333 to ‘A’ Company which appears to suggest,
obiter, that the deduction was allowed on the basis of an estimate, only because of a provision in
the Act, which specifically enjoins the bringing back into the income of subsequent years any
recoveries and recoupment of debts previously allowed. This is, with respect, not the basis of the
decision in ‘A’ Company.
Applying the reasoning of Botha JA in Caltex, it would seem that if a deduction is allowed in one
fiscal year and the amount of the deduction in a subsequent fiscal year proves inadequate, the
shortfall will not be claimable. It cannot be claimed in respect of the first fiscal year because
events in the subsequent fiscal year cannot affect the taxpayer’s liability in the first fiscal year. It
can also not be claimed in the subsequent fiscal year because it relates to an expenditure in-
curred in the first fiscal year! In relation to foreign-exchange liabilities, it may be arguable that
the loss occasioned by adverse exchange-rate fluctuations in the subsequent fiscal year does not
relate to an expenditure incurred in the previous year. It could, however, be argued that the
excess expenditure, incurred in the subsequent year in discharging the obligation incurred in
the previous year, is in itself an expense incurred in the production of income, and properly
allowable under s 11(a).73 It is submitted that on the facts of RACV Insurance, for instance, the act
of payment of a claim notified in the first fiscal year cannot be distinguished to the same degree
as the act of purchasing foreign exchange in order to discharge a foreign liability. The expendi-
ture made by RACV Insurance related directly to the liability incurred in the previous year and if
the expenditure exceeded the deduction allowed, no further deduction could be claimed.
If the deduction allowed in year one proves insufficient in year two, it means that the taxpayer
has paid too much tax in year one. In terms of s 102 of the Act the taxpayer can claim a refund
of tax overpaid, whether as a result of a mistake of fact or a mistake of law.74 The Commissioner
must, in his discretion, which is not subject to objection or appeal, decide whether there has
been an overpayment, but once he has applied his mind and decided that there has been an
________________________

70 (1977) 7 ATR 376.

71 See s 8(4)(a) of the Act for the position in South Africa.
72 (1981) 43 SATC at 97.
73 See C Divaris, ‘The Caltex case’, (1975) 14 Income Tax Reporter 1.
74 See Crown Mines Ltd v CIR 1922 AD 91; (1970) 32 SATC 190.
 Deductions: General principles; Assessed losses of prior years 445

overpayment he is obliged to order a refund.75 The problem is that no refund is permitted if the
taxpayer accepted the assessment and it was made in accordance with the practice generally
prevailing as at the date of the assessment. The result is that s 102 of the Act will be of assistance
to the taxpayer only within the limited scope of its application.
The next question concerns the fiscal consequences in a subsequent year, if the liability is dis-
charged for an amount which is less than the deduction allowed in respect thereof, in the first
fiscal year. In order for such a ‘saving’ to be subjected to tax, it must either be brought within
the ambit of the definition of ‘gross income’ in s 1 of the Act, or it must fall within a specific
recoupment provision in the Act. It is submitted that there exists no other basis on which the
‘saving’ can be subjected to tax. With regard to the first possibility, one must consider whether
there has, in these circumstances, been any amount received by or accrued to the taxpayer which
can be included in his gross income. It is submitted that the answer to this question is, generally
speaking, in the negative. With regard to recoupment, Silke 76 states that if a reduction in the
taxpayer’s liability takes the form of an actual receipt or accrual, s 8(4)(a) of the Act will come
into operation; he submits that this section is not wide enough to bring a compromise benefit
within its ambit. This argument was considered in CIR v Louis Zinn Organization (Pty) Ltd,77 in
which the Special Court held that a compromise benefit was to a recoupment, but the Appellate
Division left the matter undecided. The opinion of Meyerowitz78 is that cogent arguments can be
advanced for either view.
In Caltex the question of a possible recoupment was raised in argument, but the conclusion of
the court rendered it unnecessary for it to express any views on the matter. On the facts of Caltex
and the reasoning of Botha JA, the liability was incurred in a foreign currency and this remained
constant until actual payment. Thus to tax a recoupment on this reasoning would in effect be to
tax a recoupment of an expense which the taxpayer had failed to incur! It is submitted that no
assistance is gained by comparing the reverse situation, where the taxpayer returns an accrual at
the year-end at the rate of exchange ruling on that date, and as a result of a favourable move-
ment in exchange rates actually receives a greater amount in Rand in the following fiscal year. In
those circumstances the taxpayer would be taxed in the second year because he had received the
excess in year two. In the light of the rule against double taxation, he is not taxed on the full
amount received, since he would in the previous fiscal year have paid tax on the accrued
amount. This is also the practice of Revenue.
The precise scope of the recoupment provision in our Act has not been finally determined by
our courts. It is submitted that unless s 8(4)(a) of the Act were interpreted to include a recoup-
ment not accompanied by a receipt or an accrual, or unless the Act were specifically amended to
make provision for a recoupment in circumstances such as those in ‘A’ Company, when expendi-
ture would subsequently be discharged for an amount less than the deduction allowed in a pre-
vious fiscal year, there would not be a recoupment in terms of s 8(4)(a); and, since there would
be no receipt or accrual for tax purposes, the benefit gained by a reduction or discharge of a
liability would not be subject to tax.

§2.4 During the year of assessment

A claim, in terms of s 11(a), for the deduction of expenditure or loss must be made in
the year of assessment (the ‘tax year’)79 tax year in the expenditure or loss was ‘actually
incurred’. (There are a few statutory provisions which allow a deduction to be claimed in
a tax year other than that in which it was actually incurred.)80 There is no element of
choice in this respect, on the part of either the taxpayer or the Commissioner, and if the
expenditure is not claimed in that tax year, it is forfeited.

________________________

75 See Stroud Riley & Co Ltd v SIR 1974 4 SA 534 (E), 36 SATC 143
76 Silke on South African Income Tax 10 ed at 400.
77 1958 (4) SA 477 (A), 22 SATC 85 at 93.
78 D Meyerowitz and E Spiro, Income Tax in South Africa 1984 para 531.
79 The use of the shorthand term ‘tax year’ has been adopted by the Appellate Division; see for example,
Edgars Stores Ltd v Commissioner for Inland Revenue 1988 (3) SA 876 (A) at 884, 50 SATC 81; CIR v Golden
Dumps (Pty) Ltd (1993) 55 SATC 198 at 206.
80 See for example s 11(bA); s 24C; First Schedule, para 13(1).
446 Income Tax in South Africa: Cases and Materials

[238]
Sub-Nigel Ltd v CIR
1948 (4) SA 580 (A), 15 SATC 381
For the facts of this case, see extract [274].
Centlivres JA: [T]he whole scheme of the Act shows that, as the taxpayer is assessed for income
tax for a period of one year, no expenditure incurred in a year previous to the particular tax year
can be deducted.

[239]
Caltex Oil (SA) Pty Ltd v SIR
1975 (1) SA 665 (A)
For the facts of this case, see extract [233].
Botha JA: In determining the taxable income of a person carrying on any trade in any year of
assessment there is, in terms of s 11(a), deductible from such person’s income the expenditure
actually incurred by him in the production of the income during that year of assessment. (Sub-
Nigel Ltd v CIR.)81

§2.5 In the production of the income

The leading decision on the interpretation of s 11(a) is [240] Port Elizabeth Electric Tramway.
The principles laid down in this case have never since been doubted, and have been restated many
times in the same or similar words.
An amount is deductible in terms of s 11(a) if the purpose of the taxpayer in doing the act which
entailed the expenditure was to produce income, and if the expenditure was so closely linked to that
act as to be regarded as part of the cost of performing it.

[240]
Port Elizabeth Electric Tramway Co v CIR
1936 CPD 241, 8 SATC 13
The taxpayer company carried on business as a tramway company. A driver in its employ
lost control of a tram-car whilst descending a steep hill. In the ensuing collision with a
building, he was killed. Prior to his death, the driver claimed compensation under the
Workmens’ Compensation Act. The taxpayer defended the claim, but judgment was
given against it, and it was ordered to pay a monetary amount as compensation to the
driver’s widow. The taxpayer also incurred legal costs in defending the claim.
Issue: whether the compensation and legal costs payable by the taxpayer were deducti-
ble in terms of [what are now] s 11(a) and s 23(g).
Held: the compensation paid satisfied the tests for deductibility, but the legal costs did
not.
Watermeyer AJP: A little reflection will show that two questions arise: (a) whether the act, to
which the expenditure is attached, is performed in the production of income, and (b) whether
the expenditure is linked to it closely enough. Now, at first sight, it would appear that only acts
necessary to earn the income and expenditure necessarily attendant upon such acts should be de-
ducted; but this is not so. As pointed out above, businesses are conducted by different persons in
different way. The purpose of the act entailing expenditure must be looked to. If it is performed
for the purpose of earning income, then the expenditure attendant upon it is deductible . . .
[P]rovided the act is bona fide done for the purpose of carrying on the trade which earns the
income the expenditure attendant on it is deductible.
________________________

81 1948 (4) SA 580 (A).

 Deductions: General principles; Assessed losses of prior years 447

It seems, however, that this statement may require qualification in one respect. If the act done is
unlawful or negligent and the attendant expense is occasioned by the unlawfulness or, possibly,
the negligence of the act, then probably it would not be deductible.
There are two English cases which point that way. In the case of CIR v Van Glehn and Co Ltd 82 a
trader, in the course of his business, traded with the enemy and became liable to a fine; it was
held that he could not deduct such fine.
In the case of Strong & Co of Romsey Ltd v Woodifield 83 an innkeeper incurred liability towards a
guest in his inn owing to the collapse of a chimney and it was held that this expense could not be
deducted . . .
I shall not, however, deal further with the question of unlawfulness of a business operation or
negligence in carrying it out because they do not arise in this case.
The other question is, what attendant expenses can be deducted? How closely must they be
linked to the business operation? Here, in my opinion, all expenses attached to the performance
of a business operation bona fide performed for the purpose of earning income are deductible
whether such expenses are necessary for its performance or attached to it by chance or are bona
fide incurred for the more efficient performance of such operation provided they are so closely
connected with it that they may be regarded as part of the cost of performing it.
...
In the present case the employment of drivers is necessary in carrying on the business of the
tramway company, and the employment of drivers carries with it as a necessary consequence a
potential liability to pay compensation if such drivers are injured in the course of their employ-
ment. This compensation is not in any way a penalty for an infraction of the law; it is payable
even if the driver is injured through no fault of his own or of the tramway company. It is due to
him in a sense as part of his contract of employment; it partakes of the nature of a sick benefit
(such as payment of wages while ill) or of a pension. There is a possible ground upon which it
may be contended that the payment of compensation is not deductible viz that the occurrence
of the expense is fortuitous and dependent upon an accidental injury, and in that sense not
sufficiently closely connected with the employment of drivers to allow of its deduction. But many
business expenses stand on the same footing. Bad weather, for instance, must cause numerous
additional expenses to trades such as transport by sea or land. Chance, in other words, increases
the expenses, or makes additional expenses, but though chance causes them to arise they never-
theless remain expenses so closely linked to a necessary business operation that they can be re-
garded as part of the cost of performing such operation. In this case the potential liability is
there all the time and is inseparable from the employment of drivers – that is to say, inseparable
from the carrying on of the business. Moreover, it is a potential liability that is bound, human
nature being what it is, to become at intervals in greater or lesser degree an actual liability by the
occurrence of accidents.
...
With regard to the amount paid in legal costs no ground for allowing these as a deduction has
been advanced in argument save that they stand upon the same footing as the compensation. In
my opinion they do not. Legal costs can sometimes be deducted, as was done in the case of Usher’s
Wiltshire Brewery Ltd v Bruce;84 but they must be so closely connected with the earning of the income
as to be regarded as part of the cost of earning it. In the present case they were expended in resist-
ing a demand for compensation; this is not an operation entered upon for the purpose of earning
income.

Notes
This decision is the locus classicus on the interpretation of s 11(a). Watermeyer AJP held
that the section imposes two tests, one subjective (whether the purpose of the taxpayer,
________________________

82 [1920] 2 KB 553.
83 (1906) AC 448.
84 (1915) AC 433.
448 Income Tax in South Africa: Cases and Materials

in performing the act which entailed the expenditure, was to produce income), and the
other objective (whether the expenditure was so closely linked to that act as to be re-
garded as part of the cost of performing it) – in short, a subjective purpose test and an
objective nexus test.
Of critical importance in applying these tests was to identify ‘the act which entailed the
expenditure’. A casual reader might assume that this act was the (probably negligent)85
driving of the driver of the tramcar. If this had indeed been held to be the ‘act entailing
the expenditure’, the compensation paid by the taxpayer would apparently not have
been deductible, for Watermeyer AJP explicitly held that: ‘If the act done is unlawful or
negligent and the attendant expense is occasioned by the unlawfulness or, possibly, the
negligence of the act, then probably it would not be deductible.’
The judge makes this inquiry into the driver’s negligence unnecessary by holding that
‘the act which entailed the expenditure’ was not the driving of the tram, but the employ-
ment of the drivers. The judge justifies this conclusion by saying:
‘the employment of drivers carries with it as a necessary consequence a potential liability to pay
compensation if such drivers are injured in the course of their employment. This compensation
is not in any way a penalty for an infraction of the law; it is payable even if the driver is injured
through no fault of his own or of the tramway company. It is due to him in a sense as part of his
contract of employment;’
By inference, therefore, the compensation payable by the taxpayer in this case was
deductible only through the happenstance that the claim was brought in terms of the
Workmens’ Compensation Act. If a bystander had been injured in the same incident and
had sued the taxpayer for damages in delict, it seems that any compensation payable by
the taxpayer would not have been deductible, because the act which entailed the ex-
penditure would have been ‘unlawful or negligent’. That this was indeed the view of
Watermeyer AJP may be seen from his judgment in [246] Joffe & Co Ltd v CIR.
The logical inconsistency of the judgment in allowing the compensation to be deduct-
ed, but not the legal costs, has since been remedied by the enactment of s 11(c) which
allows legal expenses to be deducted even though they have not been incurred ‘in the
production of income’, but have merely arisen out of a claim ‘arising in the course of or
by reason of the ordinary operations undertaken by him in the carrying on of his trade’ –
a far wider criterion than that imposed by s 11(a).
To return to the question of ‘purpose’. Watermeyer uses the word in several different
ways, inter alia, ‘the purpose of the act entailing expenditure’. Did he mean the purposes
which the act served or the purpose of the taxpayer in outlaying the money? In Mallalieu v Drum-
mond 86 Lord Brightman said that the words in the United Kingdom legislation, ‘“expend-
ed for the purposes of the trade” . . . do not refer to “the purposes” of the taxpayer as
some of the cases appear to suggest. They refer to “the purposes” of the business which is
a different concept . . .’
However, it seems that in Port Elizabeth Electric Tramway, when Watermeyer referred to
‘the purpose of the act entailing expenditure’ he meant the subjective purpose of the
taxpayer, and that when spoke of the requirement that the expenditure be ‘closely con-
nected with [the business operation]’ he meant the objective link between the two.

Expenditure is sufficiently closely linked to an income-earning operation if it would be proper,

natural or reasonable to regard the expenses as part of the cost of performing it, having regard both
to the purpose of the expenditure and to what it actually effects.
________________________

85 The report is silent on whether the driving was negligent. But the headnote says that the driver of the
tramcar ‘lost control’ whilst descending a steep gradient.
86 [1983] 2 All ER 1095 (HL).
 Deductions: General principles; Assessed losses of prior years 449

[241]
CIR v Genn & Co (Pty) Ltd
1955 (3) SA 293 (A), 20 SATC 113
Schreiner JA: For present purposes the chief importance of the Port Elizabeth Tramways case lies
in its reference to the factor of the closeness of the link which must exist between the expendi-
ture and the production of the income in order to make the expenditure deductible. At 246 the
learned judge said that
‘all expenses attached to the performance of a business operation bona fide performed for the purpose of
earning income are deductible whether such expenses are necessary for its performance or attached to it
by chance or are bona fide incurred for the more efficient performance of such operation provided they
are so closely connected with it that they may be regarded as part of the cost of performing it.’
If I am right in understanding the words ‘they may be regarded’ as connoting that it would be
proper, natural or reasonable to regard the expenses as part of the cost of performing the opera-
tion, this passage seems to state the approach to such questions correctly. Whether the closeness
of the connection would properly, naturally or reasonably lead to such treatment of the expens-
es must remain dependent on the court’s view of the circumstances of the case before it.
...
In deciding how the expenditure should properly be regarded the Court clearly has to assess the
closeness of the connection between the expenditure and the income-earning operations having
regard both to the purpose of the expenditure and to what it actually effects.87

Section 11(a) does not require the expenditure, which is claimed as a deduction, to have produced
income in the same year of assessment, or indeed at all. There is no requirement that the expenditure
be ‘matched’ to income.

[242]
Sub-Nigel Ltd v CIR
1948 (4) SA 580 (A), 15 SATC 381
The appellant company carried on the business of mining for gold. It made a practice of
taking out insurance against loss incurred by fire in respect of its net profits and standing
charges. The purpose of the fire insurance was to enable the company to maintain a
steady rate of dividends to its shareholders, despite the partial or complete cessation of
mining operations as a result of fire. The insurance against standing charges was to
enable the company to carry on its essential services without loss, despite the cessation of
mining activities. The company claimed a deduction in respect of the insurance premiums.
Issue: whether the insurance premiums outlaid by the taxpayer were expended in the
production of income, and whether they constituted expenditure of a capital nature.
Held: the expenditure was incurred in order to earn income in the event of certain
occurrences, and was not of a capital nature; further, any amount received under the
policies would be a trading receipt and consequently the expenditure was expended for
the purposes of the company’s trade.
Centlivres JA: I am fortified in the view I have expressed above by a decision of the Full Bench of
the Australian High Court in Amalgamated Zinc (de Bavay’s) Ltd v FCT.88 The Australian Income
Tax Assessment Act 1922-1930 provided in s 23(1)(a) that
‘in calculating the taxable income of a taxpayer, the total assessable income derived by the taxpayer shall
be taken as a basis and from it there shall be deducted all losses and outgoings . . . actually incurred in
gaining or producing the assessable income.’

________________________

87 This principle was affirmed in CIR v Standard Bank of SA Ltd 1985 (4) SA 485 (A) at 500-501, 47 SATC 179
at 196.
88 3 ATC at 297.
450 Income Tax in South Africa: Cases and Materials

This provision is similar to s 11(2)(a) of our Act. Dixon J, in the case cited, said:
‘. . . In a continuing business, items of expenditure are commonly treated as belonging to the accounting
period in which they are met. It is not the practice to institute an enquiry into the exact time at which it is
hoped that expenditure made within the accounting period will have an effect upon the production of
assessable income, and to refuse to allow it as a deduction if that time is found to lie beyond the period.’
...
. . . It seems to me clear on the authorities that the Court is not concerned whether a particular item
of expenditure produced any part of the income what it is concerned with is whether that item of
expenditure was incurred for the purpose of earning income . . .
The whole raison d’etre of the Company is to earn profits, and in taking out these policies it was
endeavouring to maintain its profits by making provision against loss in the event of a fire. Now,
was the act entailing the expenditure of the amounts paid by way of premium performed for the
purpose of earning income? In my opinion the answer to this question is in the affirmative. The
mere fact that no income has actually resulted is, in my view, irrelevant: the purpose was to ob-
tain income on the happening of a fire which would prevent the carrying on of income-
producing operations. There can, to my mind, be no doubt that, if a fire had occurred, the pro-
ceeds paid by the Company’s insurer in respect of the policies ensuring nett profits would have
been of a non-capital nature and would therefore have had to be included in the Company’s
‘gross income’ as defined . . .

For expenditure to be incurred ‘in the production of income’, it does not have to be expenditure which
the taxpayer is obliged to incur. Voluntary expenditure incurred in order to induce an employee to
enter and remain in the taxpayer’s service is incurred ‘in the production of income’.

[243]
Provider v COT
1950 SR 161, 17 SATC 40
The taxpayer company initiated two schemes for the benefit of its employees, namely a
service bonus scheme and a life assurance scheme. These schemes were non-contributory
and could be withdrawn by the taxpayer at will. Under these schemes, the taxpayer
undertook to pay, firstly, a bonus on retirement to any employee who had been in the
taxpayer’s employ for a certain period, and secondly, a benefit to dependants of employ-
ees who died while in the taxpayer’s service, the bonus or benefit being linked to the
length of service. The taxpayer claimed a deduction for the payments which it had made
in terms of these schemes on the grounds that they constituted ‘expenditure actually
incurred by the employer in the production of income’. The Commissioner allowed as a
deduction the bonuses but not the benefits paid to dependants.
Issue: whether the amounts paid by the taxpayer to dependants under the life assur-
ance scheme were deductible as ‘expenditure incurred . . . in the production of income’.
Held: no distinction could be drawn between the two types of payments. Both were de-
signed by the taxpayer to induce employees to enter and remain in its service. Both types
of payment were therefore expenditure incurred in the production of income.
Tredgold CJ: For the payments to be allowable they must be shown, in terms of s 14(a) of the
Income Tax Consolidation Act, 1948 . . . to be ‘expenditure actually incurred by the employer in
the production of the income’.
Now, the motives with which the schemes were introduced may have been somewhat mixed but
their main purpose is clear. The company is a commercial undertaking and not a philanthropic
institution, and the whole tenor of the schemes makes it clear that they are designed to secure a
contented staff, giving long and continuous service with the benefits to production which must
follow such conditions. They are closely analogous to the annual bonuses and other deferred
emoluments which are clearly allowable for income tax purposes.
 Deductions: General principles; Assessed losses of prior years 451

For the Commissioner, considerable reliance was placed on the fact that the payments were
voluntary and not under contract. But, whilst the fact that a payment is made without any pre-
ceding contractual obligation may point towards the conclusion that it is not an allowable
deduction, it cannot possibly be conclusive. Many voluntary payments are obviously made in the
production of income, as, for example, advertising expenses or the ex gratia annual bonuses so
often paid to employees, to which reference has already been made. Indeed, the bonuses paya-
ble to retiring employees by the appellant company are, in this respect, on exactly the same foot-
ing as the benefits payable to their dependants. Both are advantages offered by the company as
inducements to enter and remain in its employment. Whilst both are revocable at will, the un-
dertaking is given that both will be continued in the absence of special circumstances compel-
ling their withdrawal; and the widespread unrest and dissatisfaction which would inevitably
follow their withdrawal gives reasonable assurance of their continuance.
I consider the Commissioner was undoubtedly right in allowing the bonuses paid, and I find it
exceedingly difficult to distinguish in principle the benefits payable on the death of an employ-
ee. It was argued that benefits afforded to the dependants of employees, as opposed to employ-
ees themselves, could never be allowed, but this is clearly unsupportable. A commercial
undertaking which, with the object of securing satisfactory conditions of employment, gave
rations to the dependants of employees or afforded educational or recreational facilities, could
clearly deduct the expenditure involved. The argument must, therefore, be narrowed to the
contention that payments made to dependants of employees after their death cannot be related
to the production of the income of the concern making such payments. [The judge here dis-
cussed certain previous decisions of the Special Court.] But in each of these cases the payment
was made without any previous undertaking or promise. Under such circumstances it is easy to
understand that the Court must entertain a doubt as to the purpose with which the payment was
made. It may well be simply an act of gratitude for past services. As I understand it, it was uncer-
tainty upon this point which was the basis of each of these decisions. But the position is disting-
uishable when a clearly defined scheme of specified benefits is offered in advance. Where every
employee entering the service of a concern knows that, should he die, his dependants will, in the
ordinary course, receive certain benefits, it seems to me that the offer of these benefits should
properly be regarded as an inducement to him to enter such service. Where these benefits in-
crease with the length of his service, there is a further incentive to give long and continuous
service. It seems to me that such a scheme must, in the case of a commercial concern, and in the
absence of any indication to the contrary, be regarded as designed to promote settled conditions
of employment and through these the production of income. I consider that the deductions in
this case should have been allowed.

Notes
An ex gratia payment by the taxpayer to his employees or their dependants must, in order
to be deductible under s 11(a), be made in circumstances which show that was incurred
‘in the production of income’ in the wide sense in which that phrase has been interpret-
ed, namely that the purpose of the taxpayer must have been to increase productivity,
improve staff morale or loyalty, or reduce staff turnover. The decision in Provider is
authority that a prior contractual obligation is not a sine qua non for the deductibility of
such expenditure.
An ex gratia payment which does no more than reward past service would, it seems, not
be incurred ‘in the production of income’ and would therefore not be deductible; see
[244] W F Johnstone.

Ex gratia payments to employees or their dependants purely as consideration for past services are not
incurred ‘in the production of income’ and are therefore not deductible under s 11(a).
[244]
W F Johnstone & Co Ltd v CIR
1951 (2) SA 283 (A), 17 SATC 235
In 1934 the taxpayer company instituted a superannuation and provident fund for its
employees. Four of its employees, who had each been employed by the taxpayer for over
452 Income Tax in South Africa: Cases and Materials

30 years, were ineligible for membership of these funds as they were too old. The taxpay-
er paid these employees lump-sum gratuities and paid a pension to one of them. These
amounts were ex gratia payments on account of old age and honourable services. The
policy of the taxpayer’s board of directors was to ‘look after’ its employees, and this
involved the making of payments to or for the benefit of employees over and above the
company’s legal obligations to them. The payments in question were made in accord-
ance with this policy, which the board considered tended to increase efficiency.
Issue: was the ex-gratia lump-sum payment and pension paid to the taxpayer’s employ-
ees deductible [under what is now] s 11(a)?
Held: in the negative. The finding of the Special Court that these payments were made
for past services could not be overturned. As such, the payments did not satisfy the
requirements of s 11(a).
Centlivres CJ: In giving judgment the President of the Special Income Tax Court, when consid-
ering the reasons that induced the payments to the four ex-employees said:
‘. . . The Court is not satisfied that beyond the idea, which may be considered to be generally prevalent,
that it is good business for an employer to treat his employees with liberality in such cases as occurred
here, that the directors were actuated by any other motive than that of providing for ex-employees who
were retiring for reasons of old age and who in the particular circumstances were ineligible for pensions.
The Court therefore is of opinion that . . . the real reason that influenced the directors in making them
was in recognition of past services rendered to the company. As such they did not form part of the ordinary
operations undertaken by the company for the purpose of conducting its business; nor were they pay-
ments made for the purpose of earning income. Lastly they were not payments made wholly and exclusive-
ly for the purpose of the appellant’s trade.’
The Special Income Tax Court accordingly dismissed the appeal and confirmed the assessments.
...
. . . The Special Court . . . found that the real reason that influenced the directors in making the
payments was in recognition of past services rendered to the Company. It cannot be said that
there was no evidence on which the Special Court could make the finding I have referred to, for
not only did the resolution, which authorized the payments to Powell, Turrell and Hunter,
specifically state that the payments were in recognition of services rendered to the Company and
make no mention of any other reason for such payments but there was also the evidence of the
Secretary of the Company who stated that the payments were purely and simply ex gratia pay-
ments on account of their old age and long and honourable service. A finding of fact by a
Special Court cannot be disturbed on appeal when there was material before the Special court
from which a finding might legitimately be made.
This court must, therefore, accept it that the payments in question were made in recognition of
past services rendered to the Company. That being the position, they did not constitute ‘ex-
penditure and losses actually incurred in the Union in the production of the income’ within the
meaning of s 11(2)(a) of the Income Tax Act nor were they ‘wholly and exclusively paid out or
expended for the purposes of trade’ within the meaning of s 12(g) of the Act. The fact that the
payments made constituted gross income in the hands of the recipients in terms of para (b) of
the definition of ‘gross income’ in s 7 of the Act is irrelevant to the question whether they fall
within s 11(2)(a) or 12(g) of the Act. There is nothing in the last-mentioned sections which sug-
gests that if a payment which is made by a taxpayer is income in the hands of the recipient the
taxpayer can deduct that payment for the purpose of assessing his income tax.
. . . The appeal is dismissed with costs.
FAGAN JA and DE VILLIERS AJA concurred.

Notes
This decision rested on the specific finding of fact that the director’s reason (which
seems to mean ‘purpose’) for making the ex gratia payments was as recognition for past
services to the company. Having been made solely for this purpose, the payments were
 Deductions: General principles; Assessed losses of prior years 453

not incurred ‘in the production of income’ as required by s 11(a). By contrast, if the
court had found that the purpose of the payments was to increase staff morale or to
attract and keep employees, the payments might have been deductible (even if made ex
gratia – see [243] Provider) because there would then have been a link between the
payments and the production of income. (An ex gratia Christmas bonus to staff for good
work done during the year would fall into this category.) If the payments had been made
by way of annuity, then under the present Act they might89 have been deductible under
s 11(m) (up to the limit laid down in that provision) which does not require that they be
incurred ‘in the production of income’ (see L Feldman Ltd v SIR).90 If the employer’s
payments to the employee or his dependants had been made in terms of an antecedent
contractual obligation, the expenditure would have been deductible. Indeed, even if the
promise of such benefits had been revocable at will, but subject to an understanding that
they would not be revoked in the absence of special circumstances, there is authority that
they would be deductible – see [243] Provider.

Damages or compensation payable by the taxpayer will be deductible if the requirements of s 11(a) are
satisfied.

[245]
Port Elizabeth Electric Tramway Co v CIR
1936 CPD 241, 8 SATC 13
For the facts of this case, see extract [240].
Watermeyer AJP: In the present case the employment of drivers is necessary in carrying on the
business of the tramway company, and the employment of drivers carries with it as a necessary
consequence a potential liability to pay compensation if such drivers are injured in the course of
their employment. This compensation is not in any way a penalty for an infraction of the law; it is
payable even if the driver is injured through no fault of his own or of the tramway company. It is
due to him in a sense as part of his contract of employment; it partakes of the nature of a sick
benefit (such as payment of wages while ill) or of a pension.

[246]
Joffe & Co (Pty) Ltd v CIR
1946 AD 157, 13 SATC 354
The taxpayer company carried on business as engineers in reinforced concrete. In March
1939 a concrete structure, erected by the taxpayer as a sub-contractor, collapsed and
killed a workman employed by the building contractor. It was later established that
reinforcing steel rods within the concrete structure had become displaced from their
proper position whilst concrete was being poured. This weakened the structure and
caused it to collapse.
The workman’s dependants brought an action against the taxpayer which established
that the latter had been negligent in the performance of its work. Judgment was given
against the taxpayer for damages and costs, which the taxpayer duly paid. The taxpayer
claimed the damages and costs which it had been ordered to pay, together with its own
legal costs, as a deduction.
Issue: were the damages paid by the taxpayer to the workman’s dependants deductible
under s 11(a)?

________________________

89 If the employees in question were found to have retired from the taxpayer's employ on the grounds of old
age, ill health or infirmity, as required by s 11(m).
90 1969 (3) SA 424 (A), 31 SATC 121.
454 Income Tax in South Africa: Cases and Materials

Held: in the negative. There was no evidence that the negligence which caused the
damages was an inevitable concomitant of the taxpayer’s business.
Watermeyer CJ: The damages which were paid are . . . only deductible if they constitute expend-
iture not of a capital nature, which was incurred in producing the income in respect of which
the tax was levied. Section 12(g) which, in the case of income derived from trade, prohibits the
deduction of any moneys ‘which are not wholly or exclusively expended for the purposes of
trade’ makes it clear that such expenditure, in order to be deductible, must not only be con-
nected with the production of income but must have been paid out for the purposes of trade.
‘These words,’ said Lord Davey, in the case of Strong & Co Ltd v Woodifield,91 when speaking of
similar words in the English Income Tax Act of 1842, ‘appear to me to mean for the purpose of
enabling a person to carry on and earn profits in the trade, etc. I think the disbursements per-
mitted are such as are made for that purpose. It is not enough that the disbursement is made in
the course of, or arises out of, or is connected with the trade or is made out of the profits of the
trade. It must be made for the purpose of earning the profits: . . .’
The damages paid out in this case do not pass that test. They were paid out to discharge a debt
or legal liability to the plumber’s dependants, arising out of appellant’s negligence in perform-
ing a trading operation. There is nothing in the stated case to suggest that such negligence, and
the consequent liability which negligence entailed, were necessary concomitants of the trading
operations of a reinforced concrete engineer; nor was it shown that the liability was incurred
bona fide, for the purpose of carrying on any trading operation. Consequently, according to the
interpretation which I have suggested above, the payment of the damages was not made for the
purposes of trade.
. . . [The judge referred to the Australian case of The Herald and Weekly Times Ltd v FCT 92 and
went on to say:] In that case the publishers of a newspaper claimed to deduct from their income
money paid out to satisfy certain claims for damages made against them, arising out of the publi-
cation of defamatory matter in their newspaper, and also to deduct money paid out as costs in
connection with those claims. That case is relevant to the question under consideration because
the Australian statute is similar to ours . . . But, however that may be, when the reasons given by
the Judges for their decision are examined it will be found that the majority took the view that
the publication of defamatory matter, and the consequent liability entailed thereby, were the
inevitable, or ‘practically inevitable’, concomitants of the newspaper business carried on by the
appellant, and consequently, when such damages were paid, an expenditure in the production
of income was incurred . . . The majority judgment takes the same line as was taken by the Cape
Provincial Division in the Port Elizabeth Tramway case (supra) and it does not support
Mr Rosenberg’s contention, because, as I have pointed out above, there is no suggestion in the
stated case that negligence such as occurred when the cantilever hood was being constructed
and the liability incurred thereby are the inevitable concomitants of the business of a reinforced
concrete engineer. Consequently, this case does not fall within the principle applied by the
majority of the Court in the Australian case.
...
Mr Rosenberg further contended that even if the expenditure in question was not the necessary
concomitant of the business of a reinforced concrete engineer, it was an expenditure necessarily
arising out of the business methods employed by the appellant and consequently was a deduc-
tible expenditure. This argument can be put in a slightly different form as follows: Appellant has
chosen to conduct his business in a manner which necessarily leads to accidents in which third
parties are injured and in respect of which appellant has to pay damages, consequently such
damages are a deductible expenditure. It is possible that this argument can be refuted upon
more grounds than one, but I shall only mention the following one: There is nothing in
the stated case to show that the appellant’s method of conducting his business necessarily leads
to accidents, and it would be somewhat surprising if there were. Consequently the basis of
Mr Rosenberg’s argument disappears and it cannot be supported.

________________________

91 (1906) AC 448 at 453.

92 2 ATD 169.
 Deductions: General principles; Assessed losses of prior years 455

The word ‘loss’ has several meanings . . . In relation to trading operations the word is sometimes
used to signify a deprivation suffered by the loser, usually an involuntary deprivation, whereas
expenditure usually means a voluntary payment of money . . . The word ‘loss’ is also sometimes
used as the antonym of ‘profit’, but then it denotes the final result of a trading operation after
the expenditure has been deducted and it seems inappropriate to speak of a loss, in that sense,
in conjunction with expenditure, as something which is incurred in the production of income. If
any income at all (ie any return) is produced by a trading operation, then clearly the expendi-
ture and the loss, in that sense, cannot both be deducted from the income in order to arrive at
taxable income, because it would entail a double deduction of so much of the expenditure as is a
loss. A trading operation may, however, sometimes produce no income at all. In such a case a
loss is incurred in attempting to produce income, and not ‘in the production of the income’.
Such a loss would, however, be deductible from income earned by the taxpayer in other trading
operations and it may be that the word ‘losses’ was inserted in s 11(2)(a) in order to sanction
such a deduction. If the taxpayer earned no other income his loss could probably be set off in
future years as an ‘assessed loss’ in terms of s 11(3).
. . . [W]hen a claim is made to deduct a loss, represented by a sum of money, from income de-
rived from trade, s 12(g) of Act 31 of 1941 prohibits such deductions unless the money was laid
out or expended wholly and exclusively for the purpose of trade. That prohibition, in my opin-
ion, operates to defeat the appellant’s claim in this case, because, for the reasons given above
when dealing with the word ‘expenditure’, it cannot be contended successfully that the damages
which were paid even if it can properly be called a loss, were laid out or expended wholly and
exclusively for the purposes of trade.
That conclusion also disposes of the appellant’s claim to deduct the costs of his unsuccessful
attempt to defend the action brought against him by the dependants of the man who was killed
...

Notes
In [240] Port Elizabeth Electric Tramway (a decision involving the deductibility of dam-
ages paid by the taxpayer in terms of the Workmens’ Compensation Act to the depend-
ants of an employee who had been fatally injured in the course of his employment by the
taxpayer) Watermeyer AJP had held that ‘the employment of drivers carries with it as a
necessary consequence a potential liability to pay compensation [in terms of the Work-
mens’ Compensation Act] if such drivers are injured in the course of their employment’.
Why did the judge in that case not regard it as necessary to have any evidence before the
court on whether motor accidents were ‘inevitable or practically inevitable concomitants’
of a tramway business? The answer is that once Watermeyer had determined that ‘the act
entailing expenditure’ was the employment of drivers, other factors such as whether motor
accidents are an inherent risk of carrying on the business of a tramway became irrele-
vant. Clearly, the taxpayer’s purpose in employing drivers was to produce income.
By contrast, the claim in Joffe was an ordinary delictual action for damages, not a claim
under the Workmens’ Compensation Act.93 (It was not a claim under the Workmens
Compensation’ Act because the deceased was not an employee of the taxpayer, who was
a sub-contractor for the project, but was an employee of the head contractor.) The
taxpayer’s claim failed because he did not or could not adduce evidence to show that
accidents of the kind which gave rise to the damages were an inherent risk of the taxpay-
er’s trade. As Watermeyer CJ said, ‘‘There is nothing in the stated case to suggest that
such negligence, and the consequent liability which negligence entailed, were necessary
concomitants of the trading operations of a reinforced concrete engineer’.
This is surely unpersuasive. The damages in question were the result of human error
or negligence. Does a court require evidence that error and negligence are inevitable in
all human activities? Moreover, the issue is surely whether a particular hazard is an
________________________

93 The Workmens’ Compensation Act since has been repealed and replaced by the Compensation for
Occupational Injuries and Diseases Act.
456 Income Tax in South Africa: Cases and Materials

inherent risk of the business of a concrete engineer, and not (as Watermeyer suggests)
whether the particular taxpayer carried on business in a way which was likely to lead to acci-
dents. The bizarre corollary of this line of reasoning would be that irresponsible and
reckless engineers would be entitled to the fiscal benefit of a tax deduction for damages
paid by them to injured parties, whereas careful and responsible engineers would be
denied the benefit.

[247]
COT v Cathcart
1965 (1) SA 507 (SRAD), 27 SATC 1
In the course of his practice as an architect in partnership with one Hendry, the taxpayer
designed a building for Kaufman Sons and Co Ltd, and gave a guarantee that the build-
ing would be waterproof. The giving of such a guarantee was unusual for an architect,
but Kaufman Sons and Co Ltd required the guarantee as a condition of giving the tax-
payer the contract. In 1958 Kaufman Sons and Co Ltd sued the taxpayer and Hendry for
damages allegedly suffered for a breach of the guarantee. The taxpayer initially resisted
the claim but later, on legal advice, he settled the claim out of court, and agreed to pay
damages and costs.
Issue: was the taxpayer entitled to deduct the damages and costs paid by him in terms
of the settlement agreement?
Held: the taxpayer was not entitled to a deduction unless the sum was paid in pursu-
ance of a legal liability; he had failed to prove this, and was therefore not entitled to the
deduction.
Lewis AJA: . . . the learned President came to the conclusion that the respondent was entitled,
under s 13(2)(a) of the Act [which was substantially identical to s 11(a) of the South African
Income Tax Act] to deduct from his income that proportion of the amount paid by him to
Kaufman Sons & Co Ltd by way of damages and costs which the respondent would have been
obliged to pay in terms of the partnership agreement between himself and Hendry.
The Commissioner of Taxes now appeals against this decision on a number of grounds, includ-
ing the ground that the respondent failed to discharge the onus of proving that the amount paid
in respect of damages and costs was deductible as
‘expenditure and loss . . . wholly and exclusively incurred by the taxpayer for the purposes of his trade or
in the production of his income’
in terms of s 13(2)(a) of the Act, in that there was no evidence to support the decision of the
learned President.
...
Mr Pudney, who appeared for the Commissioner . . . contended that even on the basis of the
correctness of all the facts found by the learned President, the payment of damages for breach of
the alleged guarantee in the instant case could never be deductible as an expenditure or loss
‘wholly and exclusively incurred by the taxpayer for the purposes of his trade or in the produc-
tion of his income’, because it would not satisfy either of the two requirements of the test formu-
lated by Watermeyer CJ in the case of Joffe & Co Ltd v CIR 94 of the report. In that case the
learned Chief Justice said:
‘All expenditure, therefore, necessarily attached to the performance of the operations which constitute
the carrying on of the income-earning trade, would be deductible and also all expenditure which, though
not attached to the trading operations of necessity, is yet bona fide incurred for the purpose of carrying
them on, provided such payments are wholly and exclusively made for that purpose and are not expendi-
ture of a capital nature.’
Using this test as the basis of his argument, Mr Pudney submitted that in a case such as the pre-
sent, the expenditure is not a payment for the purpose of earning income because the liability to
________________________

94 1946 AD 157 at 163.

 Deductions: General principles; Assessed losses of prior years 457

pay arises not from the giving of the guarantee in the first place, but only from the subsequent
breach of it; nor, he submitted, is the expenditure necessarily attached to the performance of
the operations which constitute the carrying on of the income-earning trade.
In my view, this submission places too restrictive an interpretation on the test formulated by
Watermeyer CJ in Joffe’s case. It seems to me that it is the giving of the guarantee that must be
looked to. It is given in order to secure the work which earns the income, and that guarantee
carries with it the inherent risk that the income to be earned may be diminished by the cost of
fulfilling the guarantee. For example, it frequently happens that a building contractor under-
takes to complete a contract by a specified date and undertakes to pay so much per day as liqui-
dated damages for every day by which that completion date is exceeded. In the event of his
becoming liable to pay damages for delay in the completion of the building, it does not seem to
me that it could be validly contended that the payment of such damages was not an expenditure
or loss ‘wholly or exclusively incurred for the purposes of his trade or in the production of his
income’. The building owner could insist on paying him only the balance of the contract price
less the amount of the liquidated damages and the practical effect would be that his anticipated
profit on the contract would be diminished by the amount of damages for which he had ren-
dered himself contractually liable. That was a risk or contingent liability for which he deliberate-
ly bargained in order to secure the contract and so to derive income from it.
The question of the correct interpretation of s 13(2)(a) was dealt with very extensively by the
Chief Justice of this Court in his judgment in the recent case of COT of Taxes v Rendle 95 . . . In the
course of that judgment the learned Chief Justice said:
‘For the purposes of this case, expenditure incurred for the purpose of trade may be grouped broadly un-
der two heads. First, money voluntarily and designedly spent by the taxpayer for the purpose of his trade;
and second, money which is what I might call involuntarily spent because of some mischance or misfor-
tune which has overtaken the taxpayer. For the sake of convenience, I will refer to the first type of ex-
penditure as “designed expenditure”, and to the second as “fortuitous expenditure”.’
It seems to me that the sort of case with which the Court is concerned here has elements of both
heads of the learned Chief Justice’s classification in the passage quoted above. The contingent
liability or risk is deliberately and bona fide undertaken by the taxpayer for the purpose of earning
the income; to that extent, the expenditure, when it occurs, is designed; and, inasmuch as when
payment is actually made, it has been made through the risk having been fulfilled, to that extent
it has occurred through the misfortune of the taxpayer.
[The judge quoted from the decision in COT v Rendle and continued:] It does not seem to me,
therefore, that it is a correct approach to look solely to the period when the event which gives
rise to the expenditure occurs in order to determine whether it is expenditure solely and exclu-
sively made in the production of income or for the purposes of trade. If the risk of incurring the
particular type of expenditure in question is deliberately undertaken by contract in order to
earn the income then, when that risk is fulfilled and the expenditure is in fact incurred, it is so
closely connected with the performance of the business operation that it would be proper, natu-
ral or reasonable to regard it as part of the cost of performing the operation. It seems to me that
such expenditure is properly deductible in terms of s 13(2)(a).
The fact that architects do not normally give guarantees is irrelevant. If an architect chooses to
give one in order to earn his income then, as the learned Chief Justice pointed out in Rendle’s
case, supra,
‘it is not for the Commissioner to direct how a taxpayer should run his business’.
If, therefore, an architect or a building contractor gives a guarantee that a building to be de-
signed or built by him will be free of certain defects, then it seems to me that if those defects do
occur in the building, then the reasonable cost of remedying them is properly deductible. If the
defects become immediately apparent, the building owner would be entitled to withhold pay-
ment, at least in part, until the defects were put right in terms of the guarantee. And in my view
it would be artificial to hold that the extra cost incurred by the architect or building contractor
in putting right the defects in order to earn his full fee or contract price would not be expendi-
ture ‘wholly or exclusively incurred for the purposes of his trade or in the production of his
________________________

95 1965 (1) SA 59 (SRAD), 26 SATC 326.

458 Income Tax in South Africa: Cases and Materials

income’. I cannot see that there is any difference in principle when the defects covered by the
guarantee occur at a later stage after the architect or building contractor has been paid the fee
or the contract price as the case may be.
In my view, however, it would only be the bare cost of putting right the defects which would be
deductible under such a guarantee, unless the contract expressly provided for liability for conse-
quential loss to the building owner as well . . . He would have to sue separately for those damag-
es, and if they were paid by the taxpayer, it could not be said that they represented expenditure
or loss
‘wholly or exclusively incurred for the purposes of his trade or in the production of his income’.
They would not have been paid for the purpose of earning the income, and it could not be said,
in normal circumstances, that they were a necessary concomitant of the income-earning operation.
...
There is a further ground upon which, it seems to me, the respondent was not entitled to deduct
the sum paid by him. In my view, it must be shown by the taxpayer that he paid the damages in
question in pursuance of a liability to pay. If he is not liable to pay but pays purely to avoid the
embarrassment or the expense of litigation, or for any other similar reason, then the sum paid
cannot be said to be a payment made for the purposes of trade or in the production of income.
It does not seem to me that this view is affected by what was said by Roper J in ITC 815.96 In that
case a firm of attorneys had been induced by means of false representation to hand over trust
moneys belonging to their client by way of loan on mortgage to a party who was subsequently
convicted of forgery, and from whom the moneys handed over could not be recovered. In the
result, the firm of attorneys had to make good the loss of the client’s money to the client. The
firm of attorneys claimed this loss as a deduction because it was incurred in the production of
income, and this contention was upheld by the learned Judge. At p 494 of the report the learned
Judge said:
‘During the course of his evidence the partner who handled the transaction admitted that in deciding to
settle the claim the firm had been influenced not only by counsel’s advice, but partly by the consideration
that it would be better for the professional reputation of the firm to settle the case than to encounter the
publicity of court proceedings. The latter motive, said Mr Barnard, was directed to the preservation of the
firm’s goodwill, the payment of the claim was therefore in that respect expenditure of a capital nature and
accordingly the expenditure was not wholly and exclusively laid out for purposes of trade. He relied for
97
this proposition upon ITC 698. I do not consider that this argument can be supported. The firm was in
my view rightly advised by counsel to settle the claim, and the fact that, apart from the merits of the claim,
it may have considered it good policy, from the motive mentioned, to follow the advice does not affect the
matter. In any event the case referred to does not appear to me to support the contention.’
It seems to me that that case is distinguishable from the present. In that case a sum certain had
been lost and either the whole of that sum was repayable to the attorneys’ client or nothing at
all. There was no question, so it seems to me, of a compromise in a lesser sum. Moreover, it
seems clear from the learned Judge’s remarks, when he said that the firm was, in his view, rightly
advised by counsel to settle the claim, that he was of the opinion that there was a legal liability on
the firm to repay the whole of that sum to their client. In those circumstances, as the learned
Judge pointed out, the fact that another additional motive might have influenced the payment
as well was irrelevant.
In the present case, as I have pointed out, the taxpayer has nowhere said that he paid because he
was liable to pay. In fact, in his statement of case before the Special Court, he makes reference to
the fact that the legal proceedings in question were to be ‘lengthy and expensive’ . . .
...
. . . It does not seem to me that the learned President was justified in drawing the inference that
the sum paid was in pursuance of a legal liability. If, in fact he was able to settle the action by
payment of a sum very much less than that claimed in the action, he may well have been advised
to settle, and he may well have acted on that advice, purely to avoid the unpleasantness of
________________________

96 29 SATC 487.
97 17 SATC 97.
 Deductions: General principles; Assessed losses of prior years 459

lengthy and expensive litigation, not to mention the possible prejudice to his professional repu-
tation. It was for him to prove to the Court that he settled the action because he was liable to pay
the damages which he in fact paid and he failed to produce any proof of this.
Accordingly, for the above reasons, I am of the opinion that the respondent failed to discharge
the onus resting upon him of proving that the sum paid by him fell within the scope of
s 11(2)(a) of the Act . . .

QUENET JP concurred.

Notes
The judge in this case held that the principle governing the deductibility of damages was
that if the risk of incurring the particular expenditure was deliberately undertaken to
earn the income, then it would satisfy the requirement of having been incurred ‘in the
production of income’ and would be deductible under the general deduction formula.
But where, as in this case, the expenditure arose out of a contractual guarantee, only the
bare cost of putting right the defects would be deductible unless the contract expressly
provided for liability for consequential damages.
The taxpayer in this case failed in his claim for deduction because he had failed to
discharge the onus of proving: (1) what amount was paid to the client as damages; (2)
what proportion thereof was for putting right the defects and what amount was for (non-
deductible) consequential damages; (3) that he paid the damages in pursuance of a legal
liability; (4) that he had not paid the damages merely to avoid the embarrassment or
expense of litigation.

Interest incurred on the purchase price of shares which are acquired not to produce exempt income by
way of dividends, but to obtain an income-producing capital asset is deductible in terms of s 11(a).

[248]
CIR v Drakensberg Garden Hotel (Pty) Ltd
1960 (2) SA 475 (A)
The taxpayer was a private company, the sole shareholders being Robinson and his wife.
The company leased a hotel and a trading store on the same property from the Stiebel
company. The taxpayer company then sub-let the hotel to a partnership consisting of
Robinson and his wife. The taxpayer company derived rental income from this sub-lease,
and it operated the trading store itself, from which it derived income. In order to obtain
absolute control of the premises that it had previously been leasing, thereby ensuring
security of tenure and a continuing flow of income from the sub-leases, the taxpayer
company acquired from the shareholders in the Stiebel company all the shares held by
them in the latter company. The taxpayer paid interest on the outstanding balance of
the purchase price of the shares in the Stiebel company, and claimed a deduction of the
interest. The Commissioner disallowed this deduction, but the taxpayer’s appeal to the
Special Court was upheld.
On further appeal, the Commissioner contended that, since the interest in question
was in respect of the outstanding balance of the purchase price of the shares in the
Stiebel company, and since the dividends on the shares would be exempt income, the
interest was not deductible. (Expenditure incurred for the purpose of producing exempt
income is not deductible.) The Commissioner contended, further, that the link between
the purchase of the shares and the production of income by way of rent was not suffi-
ciently close to warrant the deduction of the interest.
On appeal, it was held that the shares had been purchased, not for the purpose of
producing dividend income, but for the purpose of providing security of tenure of the
460 Income Tax in South Africa: Cases and Materials

premises that the taxpayer company had previously leased, and to provide a continuing
income flow by way of rental from sub-lease of the hotel. This satisfied the requirement
for deductibility that the expenditure be incurred in the production of income.
Issue: Was the interest, paid by the taxpayer company on the outstanding balance of
the purchase price of the shares, deductible [in terms of the counterpart to the present
s 11(a)]?
Held: in the affirmative. The shares were purchased, not for the purpose of producing
income in the form of tax-exempt dividends, but to provide security of tenure over
trading premises which the taxpayer company had previously leased, and thereby provide
income by way of rental and business profits. Having been outlaid for this purpose, the
interest was deductible.
Schreiner JA: The respondent’s object in acquiring the shares was (I quote from the stated case):
‘to enable it to have absolute control of the hotel and the store premises, thereby ensuring for itself securi-
ty of tenure and the rights to make improvements as it desired and to sub-let at such increased rental or
otherwise as it might determine without having to obtain the consent of third parties or itself having to pay
an increased rental, as well as to secure for itself all rights to the hotel and store licences.’
The hotel business had improved considerably. It was felt that there was a very good potential,
but certain buildings were obsolete and other improvements were required. The Stiebel compa-
ny under Stiebel control was not prepared to finance these changes or to permit the respondent
to do so . . . The transaction took the form it did, ie the purchase of the shares instead of the
purchase of the land owned by the Stiebel company, in order to avoid the liability to pay transfer
duty.
After the purchase of the shares, the hotel and the store continued to be run as before. In prac-
tice, the Robinson partnership paid the debts of the respondent and of the Stiebel company as
they fell due, adjustments being made at the end of the financial year. The rental payable by the
Robinson partnership under the sub-lease from the respondent was determined in any year at a
little less than the amounts owed by the Stiebel company and the respondent, the balance being
met out of the store profits accruing to the respondent . . .
The respondent’s objection and appeal [against the disallowance of the deduction claimed for
interest] alleged that the respondent incurred liability for the interest in carrying on its business
for the purpose of gaining or producing its income, of which a substantial part consisted of the
rent received from the Robinson partnership. It was contended that the whole of the interest was
therefore deductible . . .
The Commissioner contended that, since the interest payment arose out of the purchase of the
shares in the Stiebel company the fruits of which shares could never be included in ‘income’ as
defined in . . . the Act [ie because it was exempt income] there was no room for deduction of
the interest payment under s 11(2)(a) [the counterpart of the present s 11(a)] read with the rest
of the Act. In any event, the link between the purchase of the shares and the production of in-
come by way of rent was not, it was contended, sufficiently close to warrant the deductions of the
interest payment under s 11(2)(a).
In allowing the appeal of the respondent the Special Court held that . . . the purpose of the re-
spondent in buying the shares had been to ensure the continuance of its own income from sub-
letting the hotel and trading at the store and to secure an increased income therefrom, and that
the respondent had established ‘as a fact’ that there was a direct connection between the interest
paid and the income earned by the respondent.
Section 11 of the Act provides for deductions from the taxpayer’s income . . . Income as so de-
fined means ‘gross income’ less exemptions, and among the exemptions are ‘dividends received
or accrued from any company . . .’ The deductions allowed under s 11 include –
‘Section 11(2)(a): Expenditure and losses actually incurred in the Union in the production of the income;
provided such expenditure and losses are not of a capital nature.’
This and its associated provision s 12(g) were analysed by Watermeyer AJP in Port Elizabeth Electric
98 99
Tramway Co v CIR, the analysis being commented on by Centlivres JA in Sub-Nigel Ltd v CIR. To
________________________

98 1936 CPD 241.

 Deductions: General principles; Assessed losses of prior years 461

be deductible, the expenditure must have been actually incurred in the production of income, it
must not be of a capital nature and it must have been wholly or exclusively laid out for the pur-
pose of trade. It need not, however, have been causally related to the income which is the subject
of the assessment in question.100
It was not disputed on behalf of the Commissioner that, if the respondent had purchased the
land itself in order to raise a revenue by letting the hotel and by trading at the store, interest
payable on the purchase price would have been deductible under s 11(2)(a) . . .
In the present case the respondent did not buy the land but the shares in the owning company
and it was contended on behalf of the Commissioner that this made an important difference in
the legal consequences.
The first argument for the Commissioner, as already foreshadowed, was that, whatever other
advantages, such as control through voting, may flow from the ownership of shares, the only
income that they produce is some sort of dividend. Since dividends are exempted and so do not
fall within the definition of income . . .no expenditure or losses incurred in the acquisition of
shares can, so it was argued, be deducted from income derived from shares for purposes of nor-
mal tax . . .
It is clear that there can be no question of deducting for normal tax interest on the price of
shares bought to obtain dividends, but the only reason is that the latter are already exempt and
lie outside the concept of income as defined. This does not assist the Commissioner when, as in
this case, the income from which the deduction is sought to be made is not the dividend income
of the shareholder but other incomes derived from rent and business profits. The first branch of
the Commissioner’s argument therefore fails.
The other branch of the Commissioner’s argument is that the link between the purchase of the
shares and the production of the respondent’s income was not so close that it would be proper
to regard the interest payments as part of the cost of producing the income. According to the
argument there were two factors which, it was submitted, made the link too indirect or tenuous.
The first was the fact that it was shares and not the land that was bought, and the second was the
contention that the expenditure was not to acquire or make more productive an income-
producing asset but to protect or preserve it.
In relation to the first factor – the share purchase aspect – reliance was placed on Shapiro v CIR.101
In that case shares had been bought by the taxpayer in terms of an agreement whereby he was to
purchase shares in a company from a controlling shareholder and was to become managing
director with a salary, commission and house allowance. To pay for the shares he borrowed
money and he sought to deduct the interest he had to pay from his salary and other income. It
was held that the deduction could not be made under the predecessor of s 11(2)(a). There are
certain passages in the judgment of Matthews J which suggest that because the taxpayer’s income
flowed from his position as managing director, that was sufficient by itself to preclude him from
deducting therefrom interest on money borrowed for the purchase of the shares. On the other
hand it appears that the decision might have been different if the whole purpose of the acquisi-
tion of the shares had been to obtain the emoluments attaching to the position of managing
director.
I do not think that Shapiro’s case assists the Commissioner. In the present case the respondent
alleged and the Special Court found that the object of the purchase was to obtain absolute con-
trol in order to ensure security of tenure, the right to make improvements as the respondent
desired and the other advantages which have been mentioned. The fact that this was to be
achieved by buying the shares does not seem to me to remove the interest payments too far from
the production of the income to permit of their being deducted.
The second factor involves an inquiry into the distinction between expenditure disbursed merely
to protect or preserve a capital asset and expenditure aimed at improving such an asset and
making it more productive. This distinction is no doubt a fine one, since the purpose of preserving
a capital profit bearing asset may, and generally will, be to earn income from it which it could
________________________

99 1948 (4) SA 580 (A) at 588.

100 Sub-Nigel, supra, at 589.
101 1928 NPD 436.
462 Income Tax in South Africa: Cases and Materials

not yield if not preserved. But the distinction was recognised in the Sub-Nigel case, supra, where
Centlivres JA distinguished the Privy Council decision of Ward v Commissioner of Taxes,102 by
stating that in that case –
‘the expenditure was incurred to preserve a capital asset and was therefore expenditure of a capital nature
and not deductible.’
Precisely when expenditure upon a capital asset is itself of a capital nature cannot easily be stated
and need not for present purposes be further examined (cf CIR v Genn & Co (Pty) Ltd).103
In the present case the respondent had a capital asset – the leases – which the acquisition of the
shares would no doubt help to protect and preserve so long as they lasted, while ensuring their
renewal after expiration . . . [T]he respondent’s purpose in buying the shares was to ensure the
continuance of its income from sub-letting and trading and to secure an increased income
therefrom.
That there was a connection between the purchase of the shares and the production of the
respondent’s income seems to be clear. The question whether, having regard to the factors
relied upon by the Commissioner, taken singly or together, the connection was close enough
appears to be essentially a question of degree, in regard to which it is not possible to say that it
would be erroneous in law to hold one opinion rather than the other. The Special Court has
held that the connection is close enough and this is a finding which cannot be held to be one at
which no Court could reasonably arrive.
The appeal is dismissed with costs.
BEYERS JA, MALAN JA, and VAN BLERK JA concurred in the above judgment. VAN WYK AJA
delivered a dissenting judgement.

Notes
There are many purposes for which a taxpayer may purchase shares. His purpose may be
to hold the shares and derive dividend income. In this event, the purchase price of the
shares is not deductible (being expenditure of a capital nature) and the interest is not
deductible, because dividends are exempt income, and expenditure incurred to produce
exempt income is not deductible.
A taxpayer may purchase shares for the purpose of trading in shares, using them as
stock in trade. In this event, the purchase price of the shares is deductible under s 11(a).
And when he sells the shares, the proceeds will be income and taxable as such.
A taxpayer may purchase shares in order for them to produce income (other than div-
idends) indirectly, as in Trust Bank,104 where the taxpayer company purchased shares in a
unit trust management company in order to derive the ‘collateral benefits’ that would
come with the shareholding, namely prestige, and more banking business. In this event,
the shares are of a capital nature, since they were purchased to strengthen the taxpayer’s
income earning structure.
In other words, the purpose of the taxpayer in acquiring shares determines the tax
consequences of the purchase – is the purchase price deductible, is any interest on the
purchase price deductible, and are the proceeds of the sale of the shares revenue or
capital?
In the present case, the taxpayer’s purpose in purchasing the shares in the Stiebel
company was not to derive dividends from them, but in order to gain security of tenure
of the premises that the taxpayer had hitherto been leasing from the Stiebel company,
thereby ensuring a continuing rental income from the parties to whom the premises
were sub-leased and the derivation of income from the trading store on the hotel premises.
________________________

102 1923 AC 145 at 148.

103 1955 (3) SA 293 (A) at 300.
104 SIR v Trust Bank of Africa Ltd 1975 (3) SA 652 (A), 32 SATC 87.
 Deductions: General principles; Assessed losses of prior years 463

It must be remembered that the purchase price of a capital asset (ie an income-
producing asset) is not deductible. Although the purpose of the expenditure is to pro-
duce income, it is expenditure of a capital nature and thus fails to pass the requirements
for deductibility under s 11(a). On the other hand, interest paid on moneys borrowed to
purchase a capital asset is deductible because the interest satisfies the criteria laid down
in s 11(a) – it is incurred in order to produce income and it is not of a capital nature.
(Interest is, by its very nature, not of a capital nature.) Thus, in the present case, the
Commissioner did not dispute that, if the taxpayer company had purchased the land on
which the hotel and trading store had been situated, the interest would have been de-
ductible.
The reason the taxpayer purchased the shares in the Stiebel company, rather than the
land that the company owned, was to avoid the transfer duty that is payable on the pur-
chase of land.
In the present case, the issue was whether the purpose of the taxpayer company in
purchasing the shares of the Stiebel company was to derive dividend income (in which
event, the interest on the purchase price would not have been deductible, because
dividends are exempt from tax, and expenditure incurred to produce exempt income is
not deductible). On the other hand, if the purpose of the taxpayer in purchasing the
shares in the Stiebel company was to get security of tenure over its trading purposes and
to ensure a continuing flow of income by way of rental from the sub-lease and profits
from the trading store, then the interest would be deductible. In the event, the court
held that the taxpayer’s purpose was the latter.

Expenditure incurred for the purpose of preventing the extinction of the income-earning business is
not incurred ‘in the production of income’.

[249]
Ward and Co Ltd and Commissioner of Taxes
1923 AC 145, 39 TLR 90
The taxpayer company carried on business as brewers. A special poll of parliamentary
voters was taken in New Zealand in regard to whether the sale of alcoholic liquor should
be prohibited. The taxpayer company spent £2 123 on canvassing, advertising, printing
etc in order to persuade the public to vote against the proposal, and claimed these
expenses as a tax deduction.
Issue: was the expenditure incurred in the production of income?
Held: in the negative. The expenditure was not incurred for the purpose of producing
income, but for the purpose of preventing the extinction of the business from which the
income was derived.
Viscount Cave LC: [T]he question of law to be determined is whether the expenditure in ques-
tion was or was not ‘exclusively incurred in the production of the assessable income’ derived by
the appellants from their business in the tax-year 1918-19. In considering that question, their
Lordships put aside the circumstance that the expenditure was not of such a nature as to pro-
duce income in the actual tax-year in which it was incurred. In every trade, much of the expendi-
ture in each year – such as expenditure in the purchase of raw material, in the repair of plant or
the advertisement of goods for sale – is designed to produce results wholly or partly in subse-
quent years; but, nevertheless, such expenditure is constantly allowed as a deduction for the year
in which it is incurred. The real question is whether the expenditure in question was . . . exclu-
sively incurred in the production of assessable income; and after fully considering the arguments
adduced, their Lordships are of opinion that this is not made out.
The conclusion of the Court of Appeal upon this point is contained in the following passage in
the judgment of that Court: ‘The question, therefore, is: Was the expenditure under consideration
464 Income Tax in South Africa: Cases and Materials

exclusively incurred in the production of the assessable income, for unless it was so, the Act ex-
pressly prohibits its deduction from such income. This question must, we think, be answered in
the negative. We find it quite impossible to hold that the expenditure was incurred exclusively,
or at all, in the production of the assessable income. It was incurred not for the production of
income, but for the purpose of preventing the extinction of the business from which the income
was derived, which is quite a different thing. It was contended by the Company that it was illogi-
cal that while legitimate expenses incurred in the production of the income are deductible, simi-
lar expenses incurred for the much more important purpose of keeping the profit-making
business alive are not deductible . . .’
Their Lordships agree with this reasoning. The expenditure in question was not necessary for
the production of profit, nor was it in fact incurred for that purpose. It was a voluntary expense
incurred with a view to influencing public opinion against taking a step which would have
depreciated and partly destroyed the profit-bearing thing. The expense may have been wisely
undertaken, and may properly find a place, either in the balance sheet or in the profit-and-loss
account of the appellants; but this is not enough to take it out of the prohibition in s 86,
sub-s 1(a) of the [New Zealand] Act. For that purpose it must have been incurred for the direct
purpose of producing profits. The conclusion may appear to bear hardly upon the appellants;
but, if so, a remedy must be found in an amendment of the law . . .

Notes
Advertising expenses, incurred by a trader to promote the sales of the products of the
business would be deductible in terms of s 11(a), being incurred for the purpose of
producing income. In this case, however, the expenditure was incurred, not in order to
produce income, but to try to prevent the entire business from being outlawed and
thereby extinguished.
Arguably, this case could have been decided – although it was not – on the basis that
the expenditure was of a capital nature. Compare [288] CIR v Hilewitz in which the
taxpayer signed suretyships to prevent the business from being extinguished; losses
incurred as a result of those suretyships were held to be of capital nature.

‘Social responsibility expenditure’ incurred by a company in order to comply with the Sullivan Code,
as required by its American holding company, is deductible if it satisfies the provisions of s 11(a)
and s 23(g).

[250]
Warner Lambert SA (Pty) Ltd v CSARS
2003 (5) SA 344 (SCA)
The taxpayer, a South African subsidiary of an American company, had, in order to
conform to the United States’ Sullivan Code and attendant legislation, implemented a
‘social responsibility program’ that entailed considerable expenditure. The taxpayer
claimed these expenses as a deduction in respect of its 1990 to 1993 tax years in terms of
s 11(a) read with s 23(g) of the Income Tax Act.
The Commissioner disallowed the deduction on the grounds that the expenditure had
not been incurred ‘in the production of income’. The tax court held that, assuming the
expenditure had been incurred in the production of income, it was nonetheless of a
capital nature and therefore not deductible.
The Sullivan Code was devised in the 1970s to govern the conduct of US companies in
apartheid South Africa. In 1986 the Code was bolstered by the Comprehensive Anti-
Apartheid Act, which added statutory compulsion to the Code by compelling US parent
companies to ensure that their South African subsidiaries complied with either the Act
or the Code. The Code provided for racial integration in the workplace, equal and fair
 Deductions: General principles; Assessed losses of prior years 465

employment, equal pay, training programs and affirmative action. (It was not disputed
that these expenses were deductible, and they were treated as such by the Commissioner.)
The expenses that were in dispute in this litigation were those incurred in the further-
ance of the taxpayer’s ‘social responsibility’ program, comprising expenses incurred in
‘working to eliminate laws and customs that impede social, economic and political jus-
tice’. These were the only fiscally troublesome expenses incurred by the taxpayer. The
taxpayer’s involvement in the social responsibility program included participation in
national conventions and peace initiatives, information technology support, the adop-
tion of schools, and support for small businesses.
The taxpayer argued that it had been instructed by its US parent to incur all the ex-
penses required to comply with its obligations under the Code, and that it stood to lose
income if it did not exert itself sufficiently in this regard. If the taxpayer did not comply,
the parent (to save itself from political embarrassment and to protect its own business
interests in the US) might decide either to close down the taxpayer’s business or sell its
concern to someone else, thus depriving the taxpayer of access to raw materials, trading
stock and know-how. The taxpayer argued further that its purpose in incurring the
Sullivan Code expenditure, and not merely the contested social responsibility expendi-
ture, was to insure against the risk of losing its subsidiary status; hence (so it was argued)
the tax treatment of all the types of Suillivan code expenditure ought to be the same.
Issue: was the amount of social responsibility expenditure claimed as a deduction by
the appellant in respect of its 1990 to 1993 years of assessment deductible under s 11(a)
read with s 23(g) of the Income Tax Act?
Held: in the affirmative. The expenditure was bona fide incurred for the performance
of the taxpayers income-producing operation and formed part of cost of performing it,
being analogous to insurance premiums in that it preserved the company from harm
(namely, the risk of losing its subsidiary status and attendant trade advantages) and was
to protect the taxpayer’s earnings. It was of a revenue, not a capital nature. The expendi-
ture thus satisfied the requirements of s 11(a) and s 23(g).
Conradie JA:
[1] Reverend Sullivan was an anti-apartheid activist. He became known for his ‘Sullivan Princi-
ples’. There were seven of them. They were assembled into a code intended to govern the
conduct of their business by American companies trading in apartheid South Africa. One
realises with the bewilderment of hindsight that they were at the time considered by many
South Africans to be revolutionary. They were actually sensible and most American compa-
nies operating in this country adopted them. The appellant was one of these companies. It
joined an association of local signatories of the Sullivan Code in Cape Town in 1978 and
became an enthusiastic participant. Its senior management devoted much time to what
were called ‘social responsibility projects’ that eventually consumed amounts – dictated by
the Sullivan Code – equivalent to 12% of the appellant’s payroll. All in all, the appellant was
a model of compliance. Each year when its performance was assessed in the United States it
attained a mark of one, the highest it could get.
[2] In 1986 the United States Congress passed the Comprehensive Anti-Apartheid Act, a measure
which was, largely, intended to add statutory compulsion to compliance with the Sullivan
Code. American parent companies had to see to it that their South African subsidiaries
complied with the Act or the Code (the choice was that of the US company). If they did not
they were liable to fines in the United States and their directors might even be imprisoned.
[3] The dispute between the parties is whether the amount of social responsibility expenditure
claimed as a deduction by the appellant in respect of its 1990 to 1993 years of assessment is
deductible under s 11(a) read with s 23(g) of the Income Tax Act 58 of 1962 (the Act). The
Commissioner first allowed the deductions but then in revised assessments disallowed them
on the basis that the expenditure had not been incurred in the production of the appel-
lant’s income. The appellant objected to the revised assessments. When its objection was
overruled, it appealed to the Cape Special Income Tax Court, where Davis J, assuming in
466 Income Tax in South Africa: Cases and Materials

favour of the appellant that the expenditure had been incurred in the production of in-
come, found that it had been capital in nature and for that reason dismissed the appeal and
confirmed the assessments.
[4] The Sullivan Code principles provided for the non-segregation of races in the workplace,
equal and fair employment for all employees, equal pay, development of training programs,
increasing the number of disadvantaged persons in management and supervisory positions
and improving the quality of employees’ lives outside the work environment. In large
measure, therefore, the Sullivan Code expenses were clearly deductible in arriving at the
appellant’s taxable income. The social responsibility expenses now claimed by the appellant
as deductions were the expenses incurred in ‘Working to eliminate laws and customs that
impede social, economic, and political justice.’ This was the seventh and last and only fiscal-
ly troublesome principle of the Sullivan Code.
[5] The appellant’s case is that it was instructed by its United States parent, a pharmaceutical
company listed on Wall Street, to incur the expenses that went with the performance of its
Sullivan Code obligations.
Compliance was of such importance to the foreign directors that there was the possibility of
disagreeable consequences for the appellant if it failed sufficiently to exert itself in this
field. To save itself from political embarrassment and to protect its own business in the
United States the American parent might either close down the appellant’s business (as
Kodak did with its South African business) or sell the appellant’s concern to someone else
(as Mobil Oil did). If this had happened and the appellant was no longer a subsidiary of the
United States parent it might not have had access to its raw materials, trading stock, know-
how and technology (which would impede its domestic growth) and it would be hamstrung
in expanding into the rest of Africa (from which the parent company was withdrawing). In
short, the appellant would almost certainly have suffered a loss of income.
[6] In seeking to discharge the onus of proving that its social responsibility expenses were de-
ductible in terms of s 11(a) and s 23(g) of the Act the appellant relied on the evidence of its
financial director. He testified that the appellant’s involvement in social upliftment includ-
ed participation in national conventions, peace initiatives, providing information technolo-
gy support, adopting schools and helping small businesses start-up operations.
[7] Deductible expenditure has certain characteristics: it must be incurred in the production of
income (s 11(a)) and will not be allowed as a deduction against gross income if it is not laid
out or expended for the purposes of trade. Up to and including the 1992 year of assess-
ment such moneys must have been ‘wholly or exclusively laid out or expended for the pur-
poses of trade’ (s 23(g)). From the 1993 year of assessment onwards expenditure was not
permitted as a deduction save ‘to the extent to which such moneys were . . . laid out or ex-
pended for the purposes of trade’.
[8] In Ticktin Timbers CC v CIR 105 Hefer JA called the purpose for which expenditure was in-
curred, ‘the decisive consideration in the application of s 23(g)’. He quoted the following
passage from the judgment of Corbett JA in CIR v Standard Bank of SA Ltd 106 –
‘Generally, in deciding whether money outlaid by a taxpayer constitutes expenditure incurred in
the production of income (in terms of the general deduction formula) important and sometimes
overriding factors are the purpose of the expenditure and what the expenditure actually effects;
and in this regard the closeness of the connection between the expenditure and the income-
earning operations must be assessed.’
[9] As to how close this connection must be, the Court in Port Elizabeth Electric Tramway Co v
107
CIR explained that –
‘. . . income is produced by the performance of a series of acts and attendant upon them are
expenses. Such expenses are deductible expenses provided that they are so closely linked to such
acts as to be regarded as part of the cost of performing them . . . The purpose of the act entailing
expenditure must be looked to. If it is performed for the purpose of earning income, then the
expenditure attendant upon it is deductible.’
________________________

105 1999 (4) SA 939 (SCA).

106 1985 (4) SA 485 (A) at 500H-J.
107 1936 CPD 241, 245.
 Deductions: General principles; Assessed losses of prior years 467

[10] The respondent argues that the kind of Sullivan Code expenditure that the appellant seeks
to deduct served three purposes. One of these was the saving of the parent company from
embarrassment and possible economic reprisals in the United States and elsewhere. There
was also an altruistic purpose. This is shown by the fact that after the repeal of the Compre-
hensive Anti-Apartheid Act the appellant continued to incur the same expenditure, alt-
hough on a smaller scale. The third purpose of the expenditure was to protect the
appellant’s income-earning structure; only the last, according to the respondent’s counsel,
qualified as expenditure laid out for the purposes of trade.
[11] Money spent by a taxpayer in order to advance the interests of the group of companies to
which it belongs is not regarded as expenditure in the production of income. The link be-
tween the expenditure and the production of income is too tenuous. This has been firmly
established in Solaglass Finance Co (Pty) Ltd v CIR.108 Moneys expended by a taxpayer from
motives of pure liberality also fail to qualify as expenditure in the production of income.
This was reconfirmed in CIR v Pick ’n Pay Wholesalers (Pty) Ltd.109 If the Sullivan expenditure
was incurred for either of these purposes, the appeal would fail. If it was partly incurred for
either of these purposes the appeal in respect of the 1990 to 1992 assessments would fail for
lack of proof that the Sullivan Code moneys had been wholly and exclusively expended for
the purposes of trade. In relation to the 1993 year of assessment it would fail for want of
proof of the extent to which the expenditure had been incurred for the purposes of trade.
What is more, if the respondent is correct that the expenditure, although incurred for the
purposes of trade, was of a capital nature, the appeal would fail for that reason as well.
[12] As I have said earlier, it is uncontested that some of the Sullivan Code expenditure – wage
improvements and expenses of that kind – was incurred in the production of income. This
expenditure was incurred with the same motives and produced exactly the same results as
the social responsibility expenditure: it reduced the risk that the appellant might lose its
privileged subsidiary status, it benefited the underprivileged and it pleased the American
parent. If the respondent’s argument is to be accepted it would mean that this admittedly de-
ductible expenditure was also incurred for mixed purposes and should therefore not have
been allowed. For although the doctrine of dominant purpose may swing the verdict one way
or the other in the capital versus revenue contest, it is inapplicable in any contest between
expenditure for trade or for other purposes (Mallalieu v Drummond (Inspector of Taxes).110
[13] It is quite easy to mistake the purpose of an act for its consequences. This may have been
what happened in ITC 1706 111 but it is difficult to tell since the evidence was, of course, dif-
ferent. Botha JA emphasised the point when he said in the Solaglass case, supra:
‘The truth is, in my judgment, that there are no hard and fast rules for deciding whether a
taxpayer’s expenditure falls within or outside the ambit of the section [s 23(g)]; it is not possible
to devise any precise universal test for determining whether expenditure comprises moneys ‘‘ex-
clusively laid or expended for the purposes of trade’’. In general, one can say no more than that
the issue is to be resolved by examining the particular facts of each individual case.’
[14] The consequences of an act often proclaim its purpose. After all, a person is presumed to
have intended the natural consequences of his acts. Nevertheless, a court must look careful-
ly at the evidence. If there is credible evidence about a taxpayer’s purpose it is not open to
the Court to turn what is in reality a consequence into a purpose and ascribe that to the
taxpayer. ‘In a tax case’, says Smalberger JA in CIR v Pick ’n Pay Employee Share Purchase
Trust 112 ‘one is not concerned with what possibilities, apart from his actual purpose, the
taxpayer foresaw and with which he reconciled himself. One is solely concerned with his ob-
ject, his aim, his actual purpose.’ As Lord Brightman explains in a passage from Mallalieu’s
case supra (at 1100a):
‘An expenditure may be made exclusively to serve the purposes of the business, but it may have a
private advantage.’

________________________

108 1991 (2) SA 257 (A).

109 1987 (3) SA 453 (A).
110 [1983] 2 All ER 1095 (HL) at 1099j).
111 63 SATC 334.
112 1992 (4) SA 39 (A) at 58F-H.
468 Income Tax in South Africa: Cases and Materials

[15] The evidence for the appellant is to the effect that the purpose of the Sullivan Code ex-
penditure – all the Sullivan Code expenditure, not merely the social responsibility expendi-
ture – was to insure against the risk of losing its treasured subsidiary status. If, therefore, the
purpose of the admittedly deductible expenditure and that of the contested expenditure
was the same, their tax treatment should also be the same. Both were expended in the pro-
duction of income or neither was.
[16] It is true that the link between the appellant’s trade and the social responsibility expendi-
ture is not as close and obvious in the second category as in the first, but that does not
mean that the connection is too remote. To qualify as moneys expended in the course of
trade, an outlay does not itself have to produce a profit.
‘It is true, as I have already indicated, that the absence of a profit does not necessarily exclude a
transaction from being part of the taxpayer’s trade; and correspondingly moneys laid out in a non-
profitable transaction may nevertheless be wholly or exclusively expended for the purposes of
trade within the terms of s 23(g). Such moneys may well be disbursed on grounds of commercial
expediency or in order indirectly to facilitate the carrying on of the taxpayer’s trade. . . .’
113
(Per Corbett JA in De Beers Holdings (Pty) Ltd v CIR. A loss of the appellant’s subsidiary
status might have directly brought about the loss of all kinds of trade advantages. It was
unthinkable that the appellant should not comply with the Sullivan Code at all. It was not
certain what would become of it if it complied but failed to do so adequately; but the appel-
lant was not obliged, and if the truth be told would not have been permitted, to take the risk
of finding out. The Sullivan Code expenses were bona fide incurred for the performance of
the appellant’s income producing operation and formed part of the cost of performing it.
The social responsibility expenditure was therefore incurred for the purposes of trade and
for no other.)
[17] The social responsibility expenses incurred by the appellant were seen by the Court a quo as
a capital expenditure. Its counsel submitted, correctly, that there was no question here of
the creation or improvement of a capital asset in the hands of the appellant. That is not
conclusive, for as Ogilvie-Thompson JA pointed out in SIR v Cadac Engineering Works (Pty)
Ltd.114
‘[T]he mere circumstance that a payment has neither created a new asset nor made any addition
to an existing asset is not necessarily conclusive in favour of such payment being a revenue ex-
pense.’
I agree that it may not be conclusive, but it is a consideration of considerable importance in
assessing, on the one hand, the ‘closeness of the connection between the expenditure and
the income-earning operations’ (per Schreiner JA in CIR v Genn & Co (Pty) Ltd 115 and, on
the other hand, whether there is ‘. . . a relation between expenditure and capital close
enough to draw the expenditure into the ambit of capital’ (per Steyn CJ in Smith v SIR).116
Where no new asset (for the enduring benefit of the trading operation) has been created
any questioned expenditure naturally tends to assume more of a revenue character.
[18] The appellant’s income earning structure had been erected long ago. It was now a question
of protecting its earnings. Periodic payments were required to preserve it from harm, or at
least to avert the risk of harm. I regard these payments as similar to insurance premiums. If
they are anything like that, they were payments of a revenue nature. There is support for
this approach in England. In Morgan (Inspector of Taxes) v Tate & Lyle Ltd 117 it was held that
expenditure incurred in a propaganda campaign against nationalising the sugar industry
was revenue in nature. In Lawson (Inspector of Taxes) v Johnson Matthey plc118 a payment by the
appellant to avert a threat to its business due to the collapse of a banking subsidiary was
held to be an expense of a revenue nature.
[19] . . .
________________________

113 1986 (1) SA 8 (A) at 36I-J.

114 1965 (2) SA 511 (A) at 522H-523A.
115 1955 (3) SA 293 (A) at 299G.
116 1968 (2) SA 480 (A) at 488C-D.
117 [1954] 2 All ER 413 (HL).
118 [1992] 2 All ER 647 (HL).
 Deductions: General principles; Assessed losses of prior years 469

[20] The appeal succeeds . . . The Commissioner is to issue revised assessments in respect of the
appellant’s 1990 to 1993 assessments allowing the expenditure in question as a deduction.’
HOWIE P, SCHUTZ JA, LEWIS JA and MLAMBO AJA concurred.

Notes
The tax-deductibility of the expenditure incurred by the taxpayer to achieve the objects
of the Sullivan Code by way of providing for integration in the workplace, equal and fair
employment, equal pay, training programs and affirmative action were not in dispute.
SARS conceded that these aspects of the expenditure were deductible.
The only ‘fiscally troublesome’ expenses, which SARS contended were not deductible,
were those involved in ‘working to eliminate laws and customs that impede social, eco-
nomic and political justice’.
This raised two major issues: was that expenditure incurred ‘in the production of in-
come’ and was it ‘of a capital nature’? (These two tests are imposed by s 11(a).) An
adverse finding on either of these two issues would have rendered the expenditure non-
deductible.
There was also a further issue – was the expenditure incurred ‘for the purposes of
trade’. (This test is imposed by s 23(g).)
In the result, the court decided all these three issues in favour of the taxpayer. The
court’s reasons in arriving at this conclusion can be summarised as follows:
Was the expenditure incurred ‘in the production of income’?
If the expenditure had been purely idealistic or philanthropic, it would have failed this
test. (Pick ’n Pay Wholesalers (Pty) Ltd.119) If it had been incurred to advance the interests of
other companies in the group, it would also fail this test (Solaglass 120).
The New Zealand case of Ward 121 (cited in counsel’s heads of argument but not re-
ferred to in the judgment) had some analogies to the present matter. In Ward it was held
that that advertising expenditure which was incurred to try to prevent the company’s
brewing business from being outlawed and thus completely extinguished, was not in-
curred ‘in the production of income’ in that it was not incurred to produce income, but
to prevent the destruction of the income-earning structure itself. This case had some
similarities to the present case, in that if the taxpayer had not incurred the Sullivan
expenditure, the American holding company might, perhaps, have closed the taxpayer
company down completely. (Such circumstances also raise the issue of whether the ex-
penditure is of a capital nature. Compare Hilewitz122 where the taxpayer signed a surety-
ship to ensure the survival of the company from which he derived his income; it was held
that the losses which resulted from the suretyship were of a capital nature.)
The court in the present case held that the expenditure in question had indeed been
incurred ‘in the production of income’ in that it had been incurred ‘to insure against
the risk of losing [the taxpayer company’s] treasured subsidiary status’. The court said
that the taxpayer did not have to show that the expenditure produced identifiable in-
come, and held that ‘the Sullivan Code expenses were bona fide incurred for the per-
formance of the appellant’s income producing operation and formed part of the cost of
performing it’. This finding had the effect of satisfying the requirements in s 11(a) as to
the taxpayer’s ‘purpose’ and as to the required ‘nexus’ between the expenditure and the
income-earning operations.
________________________

119 1987 (3) SA 453 (A).

120 1991 (2) SA 257 (A).
121 Ward & Co Ltd and COT 1923 AC 145, 39 TLR 90.
122 CIR v Hilewitz (1998) 60 SATC 86 (T).
470 Income Tax in South Africa: Cases and Materials

Was the expenditure ‘of a capital nature’?

Usually, expenditure which is of a capital nature produces some identifiable asset of
long-term advantage to the taxpayer’s business, for example, the construction of a build-
ing. But this is not always so. In Cadac Engineering123 and in African Oxygen,124 expenditure
that improved the taxpayer’s competitive position in the market, but produced no identi-
fiable asset, was held to be of a capital nature.
In the present case, the court said the fact that the expenditure produced no identifi-
able asset was not conclusive, but was ‘a consideration of considerable importance’ in
determining whether it was of a capital nature.
The court said that the taxpayer’s income earning structure had been erected long
ago. The periodic payments that it would make under the Sullivan code were required
‘to preserve it from harm, or at least to avert the risk of harm’ and were analogous to the
payment of insurance premiums.
Was the expenditure incurred ‘for the purposes of trade’? (section 23(g))
The court said that section 23(g) would be satisfied where money was disbursed ‘on
grounds of commercial expediency or in order indirectly to facilitate the carrying on of
the taxpayer’s trade’. The court said that, in the present matter, a loss of the appellant’s
subsidiary status might have directly brought about the loss of all kinds of trade ad-
vantages, and the social responsibility expenditure was incurred for the purposes of trade
and for no other.

3 The deductibility of allegedly excessive or exorbitant

expenditure

If expenditure incurred by a taxpayer satisfies the criteria set out in s 11(a) of the Income Tax Act,
and if it is not so devoid of commercial rationality that some motive other than the production of
income must have induced the expenditure, then the expenditure is deductible and it is immaterial
that it was not strictly necessary or was not as effective as it could have been.

[251]
ITC 1847
(2010) 73 SATC 210 (Gauteng Tax Court)
The appellant taxpayer, a subsidiary company, had paid marketing and management fees
to its holding company and claimed a s 11(a) deduction for this expenditure. SARS
disallowed the claim for deduction on the grounds that these fees were ‘inflated and
excessive’’ in the circumstances. SARS contended further that the management fees
constituted a payment to the taxpayer’s holding company, rather than deductible ex-
penditure. The holding company had an assessed loss and would not pay income tax on
those receipts.
Issue: did the marketing and management fees paid by the taxpayer to its holding
company qualify in terms of s 11(a) as deductible expenditure?
Held: in the affirmative. The marketing fees were not so devoid of commercial rational-
ity that some motive other than the production of income induced them, nor on the
evidence were those fees ‘excessive’ in the generally accepted sense of this term. It was
not for the court (or the Commissioner) to say, with the benefit of hindsight, that busi-
ness expenditure should be disallowed on the basis that it was not strictly ‘necessary’ or
________________________

123 SIR v Cadac Engineering Works (Pty) Ltd 1965 (2) SA 511 (A).
124 1963 (1) SA 681 (A), 25 SATC 67.
 Deductions: General principles; Assessed losses of prior years 471

that the expenditure was not as effective as it could have been. If the purpose of the
expenditure was to produce income, in the course of trade, and if the expenditure was
not of a capital nature, then that was sufficient to qualify the expenditure as deductible.
Willis J:
[16] Mr C, an expert geologist, employed by a company other than either the appellant or D
Limited testified that the marketing fees of the appellant were reasonable by prevailing stand-
ards. The respondent’s sole witness in the case was Dr F, an economist. She testified on the mar-
keting aspect of the case. She gave an interesting macroeconomic overview of world sales of
fluorspar [the material sold by the taxpayer in this case]. Dr F conceded that ‘marketing was not
her field’ and that she was ‘not an expert in marketing’. She conceded that the appellant’s
claims with regard to its marketing strategy ‘would have to be empirically tested’. In this regard,
the appellant relied mainly on the evidence of Mr A.
[17] With the possible exception of the proverbial ‘hot cakes’, there is almost no product in the
world that sells by itself. Even with hot cakes, it may be a good marketing strategy to position
one’s bakery in such a place and design the layout so that the delectable aromas waft past the
nostrils of passers by, enticing them to buy. Marketing entails a careful strategy on price. In the
case of fluorspar, there is what economists call ‘derived demand’.125 Even in such a market, buy-
ers must know that one is a seller. One has to compete on quality. Buyers need to know that the
seller is reliable. All other things being equal, people tend to do business with those whom they
like and trust. Money has to be spent on building relationships with purchasers and potential
purchasers. Mr A testified that at the time of D Limited making the acquisition in the appellant,
the appellant was a ‘somewhat tired operation’. It was overly dependent on only two customers
and it seemed wise to try to broaden this base. Although the price of fluorspar fluctuated within
a narrow margin, the appellant was selling in the lower range of that band and it was decided to
try to move prices into the upper portion of that range. An increase in price of US$10 per 10 000
tons of fluorspar would translate into millions of rands of additional profit. The evidence was
that the appellant did ultimately succeed in securing certain large sales at higher prices and that
it managed to penetrate the European market. The purpose of the expenditure was to generate
additional income and render the appellant’s position in the market more secure. These are
legitimate purposes for claiming this expense of marketing fees. . . . The fact that the appellant
appointed sub-agents in Europe to market on the appellant’s behalf does not detract from the
fact that D Limited would have had to motivate these sub-agents, keep them informed and liaise
with them regularly. Similar considerations apply in respect of certain expenses paid by the ap-
pellant to a certain Mr G, a marketing agent based in Australia: the employment of Mr G did not
render the marketing services of D Limited nugatory. D Limited were paid what works out to less
than 3% of the appellant’s turnover. The sub-agents were paid about 2,5%. Both Mr A and Mr C
said that these figures compared well with international norms. It cannot be said that the mar-
keting fees were so devoid of commercial rationality that some motive other than the production
of income induced them. The marketing fees were not excessive in the generally accepted sense
of such term in such matters.126 . . . [I]t is not for the court (or the Commissioner) to say, with
the benefit of hindsight, that business expenditure should be disallowed on the basis that it was
not strictly ‘necessary’, or that it was not as effective as it could have been. If the purpose of the
expenditure was to produce income, in the course of trade, and the expenditure was not of a
capital nature, then that is sufficient.

Notes
As this decision makes clear, if expenditure satisfies the statutory criteria for deductibil-
ity, then it is deductible and SARS has no overriding discretionary power (and nor does
the court) to refuse to allow such expenditure to be deducted merely on the ground that
________________________

125 Demand that does not arise from retail consumers buying the product in markets like shops. A world-wide
aversion to using aerosol sprays containing CFCs, for example, will, however, affect the demand for fluor-
spar.
126 Useful guidance on this point can be found in Case No. 9610 1998 (5) JTLR 132. See also: Sub-Nigel Ltd v
CIR 1948 (4) SA 580 (A) at 592, 15 SATC 381; De Beers Holdings (Pty) Ltd v CIR 1986 (1) SA 8 (A) at 30 and
36–7, 47 SATC 229; and Port Elizabeth Electric Tramway Co Ltd v CIR 1936 CPD 241 at 245, 8 SATC 13 at 16–17.
472 Income Tax in South Africa: Cases and Materials

it was ‘excessive’ or exorbitant’. It is for the taxpayer to decide how to manage his busi-
ness; if, for example, he chooses to rent business premises in an expensive area, SARS
has no power to deny him a deduction of the rent on the grounds that he could have
rented more cheaply elsewhere.

4 Apportionment of lump-sum expenditure incurred partly to

produce assessable income and partly to produce exempt
income

Where a lump sum amount of expenditure is incurred, part which qualifies as deductible in terms of
the Income Tax Act and part of which does not, then in principle that lump sum must be appor-
tioned into a deductible and a non-deductible component; but there is no general rule as to how such
apportionment should be made except that the method of apportionment should be fair and reasona-
ble in all the circumstances of the particular case.

[252]
CSARS v Mobile Telephone Networks Holdings (Pty) Ltd
[2014] ZASCA 4
The taxpayer, Mobile Telephone Network Holdings (Pty) Ltd (Holdings), (referred to in
the judgment as ‘Holdings’) was the holding company of numerous subsidiaries and was
party to various joint ventures. In its turn, Holdings was a wholly owned subsidiary of the
MTN Group Limited whose collective business was the operation of mobile telecommu-
nication networks and the provision of related services to customers in various African
countries.
Holdings’ primary income was derived from dividends paid to it by its subsidiaries, but
it also loaned funds to its subsidiaries, primarily on an interest-free basis. Holdings also
borrowed funds and loaned those funds to group companies at a higher interest rate.
Holdings thus had two sources of income – dividend income (which was exempt from
tax) and interest income (which was taxable).
Holdings employed auditors to perform a statutory audit of its financial statements for
each of the 2001, 2002, 2003 and 2004 tax years and outlaid audit fees of R365 505,
R647 770, R427 871 and R233 786 in these respective years. In addition, in the 2004 tax
year the taxpayer paid R878 142 to KPMG (‘the KPMG fee’) for what was described in
evidence as ‘Hyperion’ computer system. In its income tax returns for those tax years,
Holdings claimed as deductions all of the audit fees and the KPMG fee.
SARS disallowed the KPMG fee in its entirety and apportioned the annual audit fees by
permitting a deduction of between two and six per cent of those fees. The apportion-
ment by SARS was in each instance based on the ratio of Holdings’ interest income as
against its total revenue (that is to say its dividend income and its interest income).
On appeal, the Tax Court upheld SARS’s disallowance of the KPMG fee on the
grounds that it was expenditure of a capital nature, and allowed a deduction of 50 per
cent of the audit fees.
On appeal to the Gauteng High Court, Holdings claimed a full deduction of the audit
fees and a deduction of 94 per cent of the audit fees on a time-apportionment basis. The
High Court allowed the KPMG fee to be deducted in full and allowed 94 per cent of the
audit fee as a deduction.
The decision of the High Court was taken on appeal to the Supreme Court of Appeal.
Issue: was the audit fee and the KPMG fee deductible in terms of s 11(a), either wholly
or partially?
 Deductions: General principles; Assessed losses of prior years 473

Held: the audit fee must be apportioned and only ten per cent thereof allowed as a
deduction because the apportionment had to be heavily weighted in favour of disallow-
ing the deduction on account of the predominant role of the production of tax-exempt
dividend income in Holdings’ business activities as opposed to the company’s far more
limited operations that earned taxable income in the form of interest.
Held further: as to the KPMG ‘Hyperion’ fee, the taxpayer had failed to lay evidence
before the court regarding the implementation and working of the Hyperion computer
software program to which this fee related in order to establish the deductibility of this
amount; given the failure of the taxpayer to discharge the onus of proof in this regard,
no part of this fee was deductible.
Ponnan JA: (SHONGWE and WALLIS JJA and VAN ZYL and LEGODI AJJA concurring):
[7] Before this court, the thrust of the argument advanced on behalf of the Commissioner was
that in terms of s 11(a) read with s 23(f) of the Income Tax Act 58 of 1962 (the Act):
(a) the audit fees are deductible only to the limited extent originally allowed by the Commis-
sioner (or to such other extent as this court may allow); and
(b) no deduction in respect of the KPMG fee is permissible, alternatively, the KPMG fee is sub-
ject to an apportionment on the same or a similar basis to the audit fees.
[8] Taxable income is the basis upon which normal tax is levied. It is arrived at by first deter-
mining the taxpayer’s gross income and then deducting therefrom any amounts exempt from
normal tax in order to arrive at the taxpayer’s income. The taxpayer’s taxable income is then
determined by deducting from the income the various amounts which the Act allows by way of
deduction, including those covered by s 11(a). Section 23 prescribes what deductions may not be
made in the determination of taxable income. Subsections (f) and (g) of s 23 represent, what has
been described as the ‘negative counterpart’ of s 11(a) and, in determining whether a particu-
lar amount is deductible, it is generally appropriate to consider whether or not such deduction is
permitted by s 11(a) and whether or not it is prohibited by s 23(f) and/or (g). (See CIR v Nemo-
jim (Pty) Ltd 1983 (4) SA 935 (A) at 946H-947C.)
[9] The general deduction formula laid down in s 11(a) of the Act permits the deduction from
the taxpayer’s income of ‘expenditure and losses actually incurred in the production of income,
provided such expenditure and losses are not of a capital nature’, whilst ss 23(f) and (g) of the
Act prohibit a deduction in respect of –
‘(f) any expenses incurred in respect of any amounts received or accrued which do not constitute income
as defined in section one;
(g) any moneys, claimed as a deduction from income derived from trade, to the extent to which such
moneys were not laid out or expended for the purposes of trade.’
Section 1 of the Act defines ‘income’ as: ‘the amount remaining of the gross income of any per-
son for any year or period of assessment after deducting therefrom any amounts exempt from
normal tax under Part 1 of Chapter II’.
[10] It is well settled that ‘generally, in order to determine in a particular case whether moneys
outlaid by the taxpayer constitute “expenditure incurred in the production of the income”, im-
portant, sometimes overriding, factors are the purpose of the expenditure and what the ex-
penditure actually effects’ (per Corbett JA in CIR v Standard Bank of SA Ltd 1985 (4) SA 485 (A)
at 498F-G). And, in this connection the court has to assess the closeness of the connection be-
tween the expenditure and the income earning operations (Nemojim at 947G-H).
[11] In Joffe & Co Ltd v CIR 1946 AD 157, Watermeyer CJ held (at 163) that:
‘All expenditure, therefore, necessarily attached to the performance of the operations which constitute
the carrying on of the income-earning trade, would be deductible and also all expenditure which, though
not attached to the trading operations of necessity, is yet bona fide incurred for the purpose of carrying
them on, provided such payments are wholly and exclusively made for that purpose and are not expendi-
ture of a capital nature.’
It was not disputed by the Commissioner that the business of the operating companies within the
group could only have been conducted in the corporate form adopted by the group or that con-
solidation (and the preparation of consolidated financial statements for the group) and audit
planning activities would have been necessary irrespective of whether Holdings lent money at
474 Income Tax in South Africa: Cases and Materials

interest or not. Nor was it in dispute that Holdings was statutorily obliged127 to appoint an audi-
tor and to have its financial records audited. In those circumstances, the fees for a statutorily
prescribed procedure such as an audit had to have been incurred by Holdings. Accordingly, it
has to be accepted that the audit fee expenditure was a part of Holdings’ general overhead ex-
penses enabling it to carry out all of its activities, irrespective of whether they involved the in-
vestment in subsidiaries, the lending of money interest-free to subsidiaries or the lending of
money at interest. It follows that the Tax Court’s conclusion that ‘[t]he auditing of financial
records is clearly a function which is “necessarily attached” to the performance of [Hold-
ings’] income-earning operations’, cannot be faulted.
[12] Where – as here – expenditure is laid out for a dual or mixed purpose the courts in South
Africa and in other countries, have, in principle, approved of an apportionment of such ex-
penditure (SIR v Guardian Assurance Holdings (SA) Ltd 1976 (4) SA 522 (A) at 533E-H). Thus in
Nemojim, Corbett JA stated:
‘As pointed out in the Rand Selections case supra at 131E-G, the Income Tax Act makes no provision for ap-
portionment. Nevertheless, apart from the Rand Selections case, it is a device which has previously been re-
sorted to where expenditure in a globular sum has been incurred by a taxpayer for two purposes, one of
which qualifies for deduction and one of which does not . . . It is a practical solution to what otherwise
could be an intractable problem and in a situation where the only other answers, viz disallowance of the
whole amount of expenditure or allowance of the whole thereof, would produce inequity or anomaly one
way or the other. In making such an apportionment the Court considers what would be fair and reasona-
ble in all the circumstances of the case.’
[13] Over time, the courts have applied various formulae to achieve a fair apportionment.
In Nemojim (at 958D-F), Corbett JA applied the following formula to determine the extent of
deductible expenses:
D
‘A = (B + C) ×
D+E
where A = deductible expenses
B = general expenses relating to share-dealing
C = total cost of acquisition of shares in companies subjected to dividend stripping in tax year
D = total proceeds of the sale of such shares
E = total dividends received in respect of such shares.’
And, in CIR v Rand Selections Corporation Ltd 1956 (3) SA 124 (A), Centlivres CJ (who delivered
the majority judgment) stated:
‘. . . but, in my opinion, it was not legally competent for him to allow as a deduction from the “income” an
amount which is arbitrary. In my opinion the obvious method of apportioning the expenditure is to adopt
the following formula (X being the expenditure incurred, Y the amount of “income” and Z the amount of
the “dividend”):
Y
X multiplied by
Y plus Z . . . .’
[14] Gildenhuys J held:
‘[21] In all the above cases, the apportionment had an arithmetic basis, either through the use of a for-
mula, or by allocating specific components of expenditure to deductible and non-deductible categories.
Circumstances may occur, however, where it is not possible to devise a fair and reasonable formula, and
also not possible to break down the expenditure into deductible and non-deductible components. In a
case where the apportionment of expenditure between revenue and capital was at issue, Tuck v CIR 1988
(3) SA 819 (A), Corbett CJ said at 834J-835B:
“The problem in this case is to establish an acceptable basis of apportionment. The appellant has all
along suggested apportionment on a 50/50 basis; and this was Mr Welsh’s suggestion to us. Having re-
gard to the inherent nature of the receipt and its origin in the plan, it is not possible to find an arith-
metical basis for appointment (cf CIR v Rand Selections Corporation Ltd 1956 (3) SA 124 (A) at 131;
the Nemojim case supra at 958) but I do not think this should constitute an insuperable obstacle.” ’
The learned Judge accordingly concluded:
‘[26] Since neither the appellant nor the respondent suggested an acceptable basis of appointment, I am
free to devise a basis which would in my view be fair. All in all, I am of the view that a 50/50 apportion-
ment of the audit fees would be just and equitable. It will recognise not only the greater importance of the

________________________

127 See, for eg, s 269 read with ss 282, 300, 300A and 301 of the Companies Act 61 of 1973.
 Deductions: General principles; Assessed losses of prior years 475

audit for the dividend earning operations, but also the longer time spent by the auditors on the interest
earning operations. In the result, the appellant would be entitled to claim 50% of the audit fees as a de-
duction from “income” in respect of each of the four years of assessment.’
[15] Apportionment is essentially a question of fact depending upon the particular circum-
stances of each case (Local Investment Co v Commissioner of Taxes (SR) 22 SATC 4). As Beadle J put
it in Local Investment Co (at 11):
‘It does not seem possible to me to lay down any general rules as to how the apportionment should be
made, other than saying that the apportionment must be fair and reasonable, having regard to all the circum-
stances of the case. For example, in one case an apportionment based on the proportion which the different
types of income bear to the total income might be proper, as was done in the Rand Selections Corporation’s
case, supra. In another case, however, such an apportionment might be grossly unfair; for example, in the
case where the bulk of the expenditure was clearly devoted exclusively to operations intended to earn in-
come, but which unfortunately in fact earned very little income, with the result that in the particular year
of assessment the company earned very little “income”, but from operations which incurred little expense
earned relatively large non-taxable amounts. In such a case to apportion the bulk of the expenses to the
non-taxable amounts would be unfair. In another case a fair method of apportionment might be to take
the proportion which the capital invested in the operations earning the non-taxable amount bears to the
total capital invested, as was done in ITC 832 of 1956 supra.’
[17] An audit is directed towards signing off an audit opinion. And, as Carel Gericke, the gen-
eral manager: group tax within the MTN group, testified, an auditor has to undertake a wide
range of general tasks which do not relate to specific income items. Holdings’ contention was
that if an apportionment were to be made, it should reflect the relative time spent or work done
by the auditors on auditing Holdings’ interest and dividend income. But as it was put in ITC
1017 (1963) 25 SATC 337 (F) at 337 ‘[i]t is no good saying how little time and effort is devoted
to the property company unless one can establish how much is devoted to the other ventures, for
any such apportionment can only be on a comparative basis’.
[18] In assessing Holdings, the Commissioner apportioned the audit fees on the basis of the
ratio between the taxable interest income and the exempt dividend income (which was the vast
majority of its revenue). Although some interest-bearing loans were made, by far the greater part
of the loans made by Holdings appears to have been interest-free. The interest-earning opera-
tions of Holdings, which related primarily to supporting the employee incentive scheme, were
relatively small in comparison to the activity of holding shares and earning dividends and the
related activity of advancing the businesses of subsidiaries by large interest free loans. Indeed, on
a proper conspectus of all of the evidence, Holdings’ value overwhelmingly lay in its principal
business as a holding company of extremely valuable subsidiaries. Accordingly, the lending of
moneys at interest in the context of its share incentive scheme was relatively modest. In any event
it appears that the time spent specifically on dividend and interest entries between them may
well have made up a relatively small component of the overall audit time. Moreover, the audit
function involved the auditing of Holdings’ affairs as a whole, the major part of which con-
cerned the consolidation of the subsidiaries’ results into Holdings’ results. It follows that any
apportionment must be heavily weighted in favour of the disallowance of the deduction given
the predominant role played by Holdings’ equity and dividend operations as opposed to its far
more limited income-earning operations. It may as well be artificial to differentiate between each
of the relevant tax years as the Commissioner did, inasmuch as the audit function would essen-
tially have been the same for each of those years notwithstanding the proportion of Holdings’
interest revenue as against its total revenue. It follows that whilst I agree with the Tax Court that
in this case to invoke the arithmetical formulae laid down in cases such as Rand Selections Corpora-
tion and Nemojim may well lead to anomalous results, on the facts here present a 50/50 appor-
tionment of the audit fees was far too generous to the taxpayer. In all the circumstances I
consider that it would be fair and reasonable that only ten per cent of the audit fees claimed by
Holdings for each of the tax years in question should be allowed.
[19] Turning to the KPMG fee: In its Rule 11 statement, Holdings alleged that the KPMG fee
was incurred in respect of the ‘implementation, adjustment, fine tuning and user operation of
the [Hyperion] system’. The Tax Court took the view that Holdings should be held to that de-
scription. Ms Philisiwe Sibiya, the MTN group financial manager, who had joined the group after
the Hyperion system had been acquired and obviously bore no personal knowledge about the
matter, admitted as much during cross examination . . .
476 Income Tax in South Africa: Cases and Materials

[20] There was, it must be added, no explanation from Holdings for its failure to call as witness-
es persons at Holdings or KPMG with personal knowledge of the implementation and workings
of the Hyperion system. Accordingly, given the inadequacy of the evidence adduced by Hold-
ings, it was well-nigh impossible to determine whether the KPMG fee fell legitimately to be de-
ducted by Holdings. It follows that the Commissioner cannot be faulted for having disallowed
that fee in its entirety. In the result the contrary conclusion reached by the full court to that of
the Tax Court that the deduction of the KPMG fee must be allowed in full, falls to be set aside.
[21] In the result: . . . The order of the Tax Court that “50% of the audit fees incurred for the
2001, 2002, 2003 and 2004 tax years is deductible from “income” (as defined) for those tax
years” is amended by the deletion of “50%” and the substitution therefor of “10%”.’

Notes
The deductibility or otherwise of the expenditure on audit fees and in respect of a com-
puter system incurred by the taxpayer in this case was determined in terms of s 11(a) of
the Income Tax Act, read with section 23. Section 11(a) provides for what expenditure
qualifies for deduction, whilst section 23 prescribes what may not be deducted, and
s 23(f ) and (g) have been described as the negative counterpart to s 11(a).
Thus, the so-called general deduction formula laid down in s 11(a) of the Act permits the
deduction from the taxpayer’s income of –
‘expenditure and losses actually incurred in the production of income, provided such expendi-
ture and losses are not of a capital nature’,
whilst section 23(f) of the Act prohibits a deduction in respect of –
‘any expenses incurred in respect of any amounts received or accrued which do not constitute
income as defined in section one;’
The well-established principles of deductibility in terms of these provisions are difficult
to apply where a lump sum has been outlaid, part of which qualifies for deduction and
part of which does not, because part was incurred to produce taxable income and part to
produce income that is exempt from tax.
In this case, a globular audit fee incurred by Holding was part of the cost of producing
the taxpayer’s tax-exempt dividends and its taxable interest income.
How then, was that globular amount to be apportioned into a deductible amount (that
produced the taxable income) and a non-deductible amount (that produced exempt
income)?
The starting point (see para [12]) is that where expenditure is laid out for a dual or
mixed purpose, the South African courts have, in principle, approved (despite the si-
lence of the Income Tax Act in this regard) an apportionment of that expenditure. In
other words, there must in principle be an apportionment, and the only issue is the basis
on which that apportionment must be made.
As regards the audit fee, SARS did not dispute that the taxpayer, being a public com-
pany, was obliged in terms of the Companies Act to have its affairs audited – hence this
was an unavoidable expense.
But on what rational basis could part of the audit fee be attributed to the production
of Holdings’ taxable interest income (and qualify for deduction) and part to the produc-
tion of its exempt dividend income (and be disqualified from deduction)?
In the judgment in Local Investment Co v COT, cited in para [15] of the judgment, Bea-
dle J said that it is not possible ‘to lay down any general rules as to how apportionment
should be made, other than saying that ‘the apportionment must be fair and reasonable,
having regard to all the circumstances of the case’.
One possibility mooted by the court was to apportion the audit fee in the same pro-
portion as Holding’s (relatively large) exempt dividend income bore to its (relatively
 Deductions: General principles; Assessed losses of prior years 477

small) taxable interest income. (This was the methodology adopted by SARS in issuing
the assessment.) Another possibility was to apportion the audit fee on the basis of the
relative amount of time spent by the auditors in auditing the company’s exempt dividend
income and its taxable interest income, respectively.
It needs to be borne in mind that in a group of companies, such as the one here
in issue, it is the subsidiary companies that actively carry on the group’s business. The
group holding company – the taxpayer in this case – essentially just oversees and controls
the activities of its subsidiaries. This is why, from the point of view of the taxpayer in
this case – the holding company – its income was not trading income, but consisted
instead, in the main, of dividends received from the subsidiaries whose shares it held and
interest from the loans it had advanced to those subsidiaries, some of such loans being
interest-free.
An overarching difficulty in apportioning the audit fee into a deductible and a non-
deductible component was that (as the judgment notes in para [17]) ‘an auditor has to
undertake a wide range of general tasks which do not relate to specific income items’.
This seems to mean (although the court did not explicitly say so) that, in so far as the
audit fee related to ‘a wide range of general tasks’, it would be deductible as an ordinary
s 11(a) deduction as legally obligatory non-capital (in that it produced no identifiable
asset) expenditure which the judgment describes (see para [11] as ‘general overhead
expenses enabling it to carry out all of its activities’.
A witness for Holdings suggested (see para [17]) that the apportionment of the audit
fee should be done on the basis of the proportionate amount of time spent by the audi-
tors in auditing Holdings’ (relatively small) interest income which was taxable and its
(relatively large) dividend income which was tax-exempt.
In the result, the court took the view (see para [18]) that the apportionment had to be
‘heavily weighted’ in favour of disallowing the deduction of the audit fee by reason of
‘the predominant role played by Holdings’ equity and dividend operations as opposed to
its far more limited income-earning operations’– in other words, by reason of the fact
that Holdings activities were predominantly aimed at producing (tax-exempt) dividends
rather than (taxable) interest income’.
In effect, the court held that on this broad perspective that took cognisance of the
main thrust of the taxpayer’s operations should be the basis of the apportionment. The
court thus declined to base the apportionment on the two other narrow perspectives that
had been put forward, firstly, the relative amount of time spent by the auditors on each
category of income and secondly the relative amount of the taxpayers (exempt) dividend
income and (taxable) interest income.
This judgment cannot be regarded as laying down that the method of apportionment
that was held to be applicable in the circumstances of this case is a general or even a
default method of apportionment. In every case, it will be necessary to determine the
method of apportionment that is ‘fair and reasonable’ in all the circumstances.
This judgment dealt with the principle of apportionment that was most appropriate to
the audit fee levied by the accounting firm, KPMG.
As to the fee paid to KPMG for the ‘implementation, adjustment, fine tuning and user
operation of the [Hyperion computer] system’ (which was apparently a computer soft-
ware program) the court held, in effect, that the taxpayer had failed to adduce sufficient
evidence to enable the court to determine whether all or part of that fee satisfied the
statutory criteria for deductibility; consequently, the claim for deduction of this fee had
to be rejected in its entirety.
478 Income Tax in South Africa: Cases and Materials

§5 The deductibility of interest in terms of s 11(a)

In order to qualify for deduction, expenditure on interest must satisfy the requirements
of s 11(a). Usually, the issue will turn on whether the interest was incurred ‘in the pro-
duction of income’ and that issue will turn on the purpose for which the money was
borrowed.
128
In case 11691 SARS contended in its heads of argument that the interest in question
was not deductible in terms of s 11(a) because (inter alia) it was of a capital nature. At the
hearing, however, SARS was unable to muster any argument or advance any authority for
that proposition.

[253]
RC Williams, “Can expenditure on interest be ‘of a capital nature’ and on that ground be non-
deductible for income tax purposes?” (1997) South African Law Journal 641 at 643
If the argument that interest incurred in financing the acquisition or construction of a
capital asset is of a capital nature were to gain acceptance by the courts, the implications
for taxpayers nationwide would be little short of cataclysmic. Almost every capital project
– the erection and expansion of factories, the construction of office blocks, hotels and
shopping complexes, the acquisition of plant and machinery – is financed wholly or
largely with borrowed funds. If the interest paid by the developers or entrepreneurs were
of a capital nature and consequently not tax deductible, many or even most of such
capital projects would be stillborn … Looking at the issue in broad perspective it is (I
suggest) difficult to see how the payment of interest can ever ‘improve [or] augment the
capital assets’ of the borrower any more than the payment of rent by a lessee can aug-
ment or improve the leased premises. Interest is, after all, a periodic charge for the use
of money in the same way as rent is the periodic charge for the use of property.
The deductibility or otherwise, in terms of s 11(a), of interest payable on borrowed money, turns
primarily on the purpose for which the money was borrowed. That is the ‘dominant’ or ‘vital’ en-
quiry, although the ultimate user of the borrowed money may sometimes be a relevant factor.

[254]
CIR v Giuseppe Brollo Properties (Pty) Ltd
1994 (2) SA 147 (A)
Nicholas AJA: The general deduction formula laid down in s 11(a) of the Income Tax Act 58
of 1962 permits the deduction from the taxpayer’s income of ‘expenditure and losses actually
incurred . . . in the production of the income, provided such expenditure and losses are not of a
capital nature’.
It is well-settled that –
‘generally, in order to determine in a particular case whether moneys outlaid by the taxpayer constitute
“expenditure incurred in the production of the income”, important, sometimes overriding, factors are the
purpose I of the expenditure and what the expenditure actually effects’.
(Per Corbett JA in CIR v Standard Bank of SA Ltd.129)
In a case concerning the deductibility or otherwise of interest payable on money borrowed, the
enquiry relates primarily to the purpose for which the money was borrowed. That is often the
‘dominant’ or ‘vital’ enquiry, although the ultimate user of the borrowed money may sometimes
be a relevant factor. Where a taxpayer’s purpose in borrowing money upon which it pays interest
is to obtain the means of earning income, the interest paid on the money so borrowed is prima
facie an expenditure incurred in the production of income. See CIR v Allied Building Society.130
________________________

128 Johannesburg Tax Court, 24 April 2007, not reported.

129 1985 (4) SA 485 (A) at 498F-G.
130 1963 (4) SA 1 (A) at 13C-G.
 Deductions: General principles; Assessed losses of prior years 479

In this judgment approving reference was made to what was said in Farmer v Scottish North
American Trust 131 in relation to a company which had borrowed money for use in its investment
business:
‘The interest is, in truth, money paid for the use or hire of an instrument of their trade, as much as is
the rent paid for their office or the hire paid for a typewriting machine. It is an outgoing by means of
which the company procures the use of the thing by which it makes a profit, and, like any similar outgoing,
should be deducted from the receipts to ascertain the taxable profits and gains which the company earns.’
If, on the other hand, the purpose of the borrowing was for some other purpose than ob-
taining the means of earning income (for example, to pay a dividend), the interest is not
deductible. The following passage from an unreported judgment was quoted with approval in
ITC 678:132
‘Now what was the purpose of the expenditure in the present case, what did it do here? It enabled the
appellant company to distribute its dividend. The distribution of a dividend is the distribution of its profits
or of its accumulated profits. So this expenditure cannot be said to have produced the income of the
company – that had already been previously earned. It simply enabled the company to distribute its prof-
its, and that is the purpose of this expenditure.’
The present case is not one in which money was borrowed to be used by the taxpayer for the
production of income. The taxpayer’s capacity to produce income was not increased by the
transaction. On the contrary, the only result of the transaction was to burden the taxpayer with a
liability to pay interest, with a consequent reduction in its net income.
It was submitted on behalf of the taxpayer that the original purpose of borrowing money
does not forever govern the deductibility, at the instance of the borrower, of the interest paid
by him to the lender on the loan debt. Regard must be had to the purpose of the actual expend-
iture, as and when it is incurred, month by month; and if the interest on a loan debt is paid
in the course of the normal income-earning operations of the borrower and for the purpose of
earning his income, it is deductible, whatever the original purpose of the borrowing may have
been. The following cases were cited in support of this submission: Producer v COT;133 Financier
v Commissioner of Taxes;134 Income Tax Case 953;135 Income Tax Case 1171.136 The question in those
cases related to the diversion of money borrowed for one purpose (income producing operatio)
to another. They are not relevant to the present case, in which the taxpayer did not receive any
money as a result of the transaction in issue, but incurred an indebtedness with a liability for
interest attached to it.
CORBETT CJ, HEFER JA, NIENABER JA and HARMS AJA concurred.

Interest paid on a loan is deductible if the requirements imposed by s 11(a) and s 23(g) are fulfilled.
These tests are not fulfilled and the interest paid by a company or CC is not deductible if the loan
was incurred for the purpose of enabling the company or CC to pay a dividend.

[255]
Ticktin Timbers CC v CIR
[1999] 4 All SA 192 (SCA), 61 SATC 399
The taxpayer, Ticktin Timbers CC, distributed profits to its sole member (Dr Ticktin) by
way of a ‘dividend’,137 and that member simultaneously lent the same amount, at interest,
to the close corporation. The dividend was not actually paid to the member, but was
credited to the member’s loan account in the books of the close corporation.

________________________

131 [1912] AC 118 at 127.

132 (1949) 16 SATC 348 at 349.
133 1948 (4) SA 230 (SR).
134 1950 (3) SA 293 (SR).
135 (1961) 24 SATC 552 at 554.
136 (1972) 34 SATC 80 at 81-82.
137 Strictly speaking, the distribution of its profits by a close corporation is not called a ‘dividend’, but that
expression will be used in what follows for brevity and convenience.
480 Income Tax in South Africa: Cases and Materials

The close corporation contended that these funds, lent to it by its sole member, had
been used by it in its business, and that the interest on the loan, which it had paid to that
member, was thus expenditure incurred ‘in the production of income’ and hence
deductible in terms of s 11(a) read together with s 23(g).
Issue: in the circumstances of this case, did the payment of interest by the close cor-
poration to its sole member fulfil the requirements for deductibility laid down in s 11(a)
read with s 23(g) of the Income Tax Act?
Held: the said expenditure did not satisfy those requirements, and the interest was thus
not deductible. The purpose of the arrangement was not to produce income for the CC
– hence it was not incurred ‘in the production of income’. The CC had incurred the
interest-bearing debt for the purpose of making a distribution to its member.
138
Hefer JA: This appeal is against the judgment in CIR v Ticktin Timbers CC in which the full
court of the Cape Provincial Division upheld the Commissioner’s refusal to allow the appellant,
a close corporation, to deduct interest on capital borrowed from its only member from its in-
come for the purpose of determining its taxable income during the 1985 to 1989 years of assess-
ment. What has to be decided is whether the full court’s finding that the interest did not
constitute expenditure incurred in the production of the corporation’s income, as envisaged in
s 11(a) of the Income Tax Act 58 of 1962, is correct.
The general deduction formula of the Act . . . has received the attention of the courts on many
occasions and . . . its ambit is well defined. For present purposes it suffices to record the following:
(a) Section 11(a) which allows the deduction of non-capital ‘expenditure . . .actually incurred
. . . in the production of the income’ is subject to s 23(g) which (before its amendment dur-
ing 1992) prohibited the deduction of moneys ‘not wholly or exclusively laid out or ex-
pended for the purposes of trade’.
The combined effect of the two sections is that –
‘[i]f expenditure is incurred ‘in the production of income’ and ‘wholly and exclusively for the purpose of
139
trade’ it is deductible, otherwise not.’ (Port Elizabeth Electric Tramway Co Ltd v CIR).
The enquiry must accordingly proceed by examining, on the facts of each case, firstly, whether
the expenditure in question can be classified as expenditure actually incurred in the production
of income and, secondly, whether its deduction is prohibited by s 23(g) (CIR v Nemojim).140
(b) The purpose for which the expenditure was incurred is the decisive consideration in the
application of s 23(g). As far as s 11(a) is concerned, Corbett JA said in CIR v Standard Bank
of SA Ltd:141]
‘Generally, in deciding whether money outlaid by a taxpayer constitutes expenditure incurred in
the production of income . . . important and sometimes overriding factors are the purpose of the
expenditure and what the expenditure actually effects; and in this regard the closeness of the
connection between the expenditure and the income-earning operations must be assessed.’
(c) There can be no objection in principle to the deduction of interest on loans in suitable
cases. Loan capital is the life blood of many businesses . . .
The sole issue [in the present case] is the purpose for which the loan was made . . .
Dr Ticktin [said that] as sole member of the corporation, he was entitled to whatever dividends
he wished to declare; and that all the credits were passed in respect of dividends which he had
declared but retained in the business as an interest-bearing loan in order to finance its day-to-day
operations.
It is quite clear that it was of Dr Ticktin’s own doing that the appellant was in effect compelled to
exist on borrowed capital. There was no obvious need for the diversion of money which had
accrued to it and could have been used to finance its trade. The question is – why did Dr Ticktin
deprive the corporation of the benefit of using its own money and instead saddle it with the
apparently unnecessary burden of paying interest?
________________________

138 1997 (3) SA 625 (C).

139 1936 CPD 241 at 245.
140 1983 (4) SA 935 (A) at 947A.
141 1985 (4) SA 485 (A) at 500H-J.
 Deductions: General principles; Assessed losses of prior years 481

[The court then quoted from the testimony of Dr Ticktin to the effect that, in order to acquire
shares in a company, which was later converted to the CC in question, he had borrowed money
from his family trust, on which he had to pay interest. And that he was going to get, from the CC,
the funds to pay this interest to the trust.]
These extracts from the record . . . reveal all that we need to know. It is plain that the whole
scheme of diverting the corporation’s funds and making them available again in the form of an
interest-bearing loan was devised and agreed upon when Dr Ticktin bought the shares [in the
company which was later converted to the CC]. Its obvious aim was to ensure that he would be
able to pay the interest on the purchase price (and possibly even the purchase price itself).
. . . The liability for the interest was accordingly not incurred in the production of [the CC’s]
income. But, even if it was, the loan plainly served a dual purpose, one of which had no bearing
on the appellant’s trade. The deduction of the interest was thus prohibited by s 23(g) and the
Commissioner rightly refused to allow it.
There is another way of looking at the matter which leads to the same result. It is trite that inter-
est paid on a loan which was raised in order to enable a dividend to be paid is not expenditure
incurred in the production of income and is therefore not deductible . . .
It is quite clear that the relevant transactions, namely, the making of the distribution on the one
hand, and the making of the loan, on the other, were not intended to be separate and uncon-
nected transactions. They were plainly interdependent and neither was intended to exist without
the other. It is this linkage which, to my mind, is fatal for appellant’s case for it shows that the
true reason why appellant had to borrow back at interest from Dr Ticktin money which it had
had in its own coffers . . . was because it wanted to make a distribution to Dr Ticktin . . . The
interest was therefore not deductible . . .
In the present case the purpose of the loan was to enable a distribution to be made to Dr Tick-
tin. Without the loan there would have been no distribution; without the distribution there
would have been no loan. The appeal is accordingly dismissed with costs.
GROSSKOPF JA, MARAIS JA, ZULMAN JA and MADLANGA AJA concurred.

Notes
This decision does not hold that a company or close corporation can never deduct
interest on money that it borrows, nor does it hold that a company or close corporation
can never deduct the interest on loans from its own members.
The court said that, to determine the deductibility of interest paid by a company or
close corporation, it is necessary to examine, firstly, whether the expenditure was actually
incurred in the production of income and, secondly, whether its deduction is prohibited
by s 23(g). The purpose for which the expenditure was incurred is the decisive considera-
tion in the application of s 23(g).
The court said that there is no objection in principle to the deduction of interest on
loans in suitable cases, as loan capital is the life blood of many businesses.
The court said further that the court a quo was correct in its view that the loan in issue
was not needed for the close corporation’s income-producing activities and that the real
intention was to increase its sole member’s income and not that of the corporation and
the liability for the interest was accordingly not incurred in the production of the latter’s
income.
The court said that the loan in question plainly served a dual purpose, one of which
(to provide the funds for a distribution to its member) had no bearing on appellant’s
trade; hence the deduction of the interest was, in any event, prohibited by s 23(g). (At
the time such a dual purpose had the consequence that none of the expenditure was
deductible in terms of this provision; later s 23(g) was amended to allow for an appor-
tionment, in which part of the expenditure could be deductible.)
On the facts of this case, the fatal element in the claim for a deduction was that the mak-
ing of the distribution and the making of the loan were not separate and unconnected,
482 Income Tax in South Africa: Cases and Materials

but were interdependent. Neither would have occurred without the other. The purpose
of the loan was to enable a distribution to be made to Dr Ticktin.
Hence, the interest paid to Dr Ticktin was not deductible for the close corporation,
since it failed to satisfy the requirements of s 11(a) and s 23(g).

Interest paid by a company to its shareholders on dividends declared and retained by the company in
the shareholders’ loan accounts is deductible, if this was done to increase the company’s competitive-
ness and for it to have funds available for trading purposes.

[256]
CSARS v Scribante Construction (Pty) Ltd
2002 (4) SA 835 (SCA)
The taxpayer company, whose business was civil engineering and construction had sur-
plus funds and declared a dividend of some R6.5 million. Of this sum, R3.2 million was
not paid out, but was credited to the shareholders’ loan accounts on the understanding
that no interest would be paid. The balance of R3.3 million was similarly credited, but on
the basis that it would bear interest at an agreed rate. The latter amount was surplus to
the company’s immediate operational requirements, which was why it was prepared to
pay interest on that amount but not beyond it. If the shareholders had been fully paid
out, the company would nonetheless have been solvent, with enough cash to meet its
day-to-day requirements.
The company’s ability to reflect a substantial cash reserve in its financial statements
was of material assistance in readily getting contract guarantees for construction work
that it wished to undertake. The company earned interest at a higher rate than the
interest it had agreed to pay the shareholders on their loan account.
Issue: was the interest paid by the company expenditure incurred ‘in the production of
income’ as contemplated in s 11(a) and was it expended ‘for the purpose of trade as
contemplated in s 23(g)?
Held: in the affirmative. The purpose of the expenditure and what it effected were the
overriding factors in determining whether the moneys outlaid were expenditure in-
curred ‘in the production of income’. The availability to the respondent of the funds had
substantially increased its competitiveness and, temporarily, its income in the form of
interest retained. These two considerations provided a sufficiently close link between the
expenditure and the income-earning operations, having regard to the purpose of the
expenditure and what it had actually effected to satisfy the requirements of s 11(a).
Section 23(g) was satisfied because the only purpose of the payment of interest had been
to secure the benefit of available funds for use in its trading activities.
Heher AJA: The respondent is a civil engineering construction company the activities of which
are mainly road building and earthmoving. It has been a family concern for more than 50 years.
Its shareholders are three family trusts. They have developed a number of practices designed to
suit both their own interests and those of the company. One such is to leave dividends ‘banked’
in the company (which then credits their loan accounts with an agreed rate of interest) until
more advantageous investment opportunities arise.
During 1990 the company declared dividends of R6 573 076. Of this amount R3 199 834 was
allocated to the shareholders’ loan accounts on the understanding that no interest would be
paid. The balance of R3 373 242 was likewise credited but on the basis that it would bear interest
at an agreed rate. No money was moved or changed hands. The arrangements were effected
solely by book entries. In fact, the cash funds of the company which were available for the pur-
pose of the distribution remained in the interest-bearing call accounts held by the company.
In its 1991, 1992 and 1993 returns for income tax the company sought to deduct the interest
which it had credited to its shareholders’ loan accounts in respect of the dividends as expendi-
ture incurred in the production of income allowed by s 11(a) of the Income Tax Act 58 of 1962.
The appellant disallowed the deductions. In amplification, he informed the taxpayer that –
 Deductions: General principles; Assessed losses of prior years 483

‘[t]he distribution of previously produced income in the form of dividends can in no way be seen to pro-
duce income or increase the income-producing capacity of an operation. In the case of Scribante Con-
struction (Pty) Ltd it is clear that the interest was incurred as a result of the dividend declaration and
consequently is not productive.’
When the company declared the dividend, the money held in the call accounts was surplus to its
immediate operational requirements to the extent of R3 373 242, which is why it was prepared to
pay interest on that amount but not beyond it . . . If the shareholders had been paid out instead
of lending the money to the company or had withdrawn all the interest-bearing loans, the com-
pany would have been in a solvent condition with sufficient available cash to meet its day-to-day
requirements. An important aspect of the company’s business involved the furnishing of con-
tract guarantees (surety bonds) for construction work which it was to undertake. The ability of
the company to reflect a substantial cash reserve in its financial statements was of material assis-
tance in readily obtaining the issue of guarantees from financial institutions, thereby sharpening
its competitive edge when tendering for contracts and increasing its income potential . . .
The issues argued before us were whether the interest paid by the company to the shareholders
for the years in question was expenditure incurred in the production of income as contemplated
by s 11(a) of the Act and whether the interest was laid out or expended by the company for the
purposes of trade within the meaning of s 23(g).
The legal principles are well-established.
‘In regard to the general deduction formula, it is settled law that generally, in order to determine in a par-
ticular case whether moneys outlaid by the taxpayer constitute ‘‘expenditure incurred in the production
of income’’, important, sometimes overriding, factors are the purpose of the expenditure and what the
expenditure actually effects. And in this connection the Court has to assess the closeness of the connection
between the expenditure and the income-earning operations . . .
CIR v Standard Bank of SA Ltd.142 As Hefer JA pointed out in Ticktin Timbers CC v CIR:143
‘There can be no objection in principle to the deduction of interest on loans in suitable cases. Loan capi-
tal is the lifeblood of many businesses but the mere frequency of its occurrence does not bring about that
this type of expenditure requires different treatment.’ . . .
Counsel for the appellant submitted that, properly analysed, the loan to the company was merely
the means of financing the dividend. He argued that there was never any intention of paying the
dividend out to the shareholders. I do not agree. I have already referred to the uncontested
practice of the shareholders in using the company as a banker. In that context the crediting of
the loan accounts constituted an actual payment as if the dividends had been deposited into an
account held by a shareholder at a banking institution . . . Of these considerations the existence
of the surplus is the decisive factor in the present context. It serves to distinguish the authorities
relied on by counsel for the appellant in which, in all the cases, the taxpayer was unable to pay a
dividend from its own funds: Giuseppe Brollo Properties at 150I, 154H; Ticktin Timbers at 943D-E,
944I-945C; CIR v Elma Investments CC.144 The evidence was that the cash generated in the course
of the company’s business would have been sufficient for its operating requirements even if the
dividends had not been lent to it. The argument that the company could not actually afford to
divest itself of the dividends that it declared and therefore they were effectively retained by it was
therefore misplaced.
A company is not to be criticised for declaring and distributing dividends simply because it
might otherwise put the funds to use profitably. The declaration of a dividend is a commercial
decision regulated by the terms of the company’s statutes and the rules which have been devel-
oped in practice: see the authorities referred to in CIR v Dirmeik.145 I find nothing in the evidence
to suggest that the declaration and distribution concerned in this case were motivated by any-
thing but bona fide commercial considerations.
The same can be said of the crediting of the loan accounts. The shareholders were under no
apparent compulsion, commercial or otherwise, in agreeing to lend the money to the company.
Each remained free to withdraw his loan at the discretion of the directors . . .
There is no doubt that the interest paid by the company enabled it to secure (even if only tem-
porarily) the shareholders’ funds which could otherwise have been moved elsewhere. Equally it
________________________

142 1985 (4) SA 485 (A) at 498F-G.

143 1999 (4) SA 939 (SCA) at 942I.
144 (1996) 58 SATC 295 at 297 in fin.
145 1996 (2) SA 736 (C) at 740C-I.
484 Income Tax in South Africa: Cases and Materials

is certain that the availability to the company of the funds substantially increased its competitive-
ness and, temporarily, its income in the form of the interest which it retained. Those two consid-
erations simply stated provide the sufficiently close link between the expenditure and the
income-earning operations having regard to the purpose of the expenditure and what it actually
effects. CIR v Genn & Co (Pty) Ltd.146 The fact that the company could have operated quite ad-
equately without the funds is not the only pertinent factor. It was enough that they served for the
more efficient performance of its operations: Port Elizabeth Electric Tramway Co v CIR.147 The in-
terest paid to the shareholders on their loan accounts was plainly an actual expense which ena-
bled the company to produce income both in the form of its allocation of the interest earned
and through the commercial advantages which possession of the loan funds generated. Sec-
tion 11(a) was thereby satisfied.
[11] Seen from the perspective of the company, the only purpose of paying interest on the loan
accounts was to secure for the company the benefit of the continued availability of the funds for
use in its trading activities. In addition, borrowing money and re-lending it at a higher rate of
interest, thereby making a profit, constitutes the carrying on of a trade: (Burgess v CIR).148 That is
analogous to the way in which the company managed the loan funds, at least during 1991 and
1992. It follows that the deductions which the company claimed were not struck by s 23(g).
HOWIE JA and SCHUTZ JA concurred.

Notes
If a company has distributable profits, it is a commercial decision, to be made by its
directors and its shareholders whether to declare dividends. It seems that, in this case,
SARS believed that the company had no intention of actually paying a dividend and that
paying the shareholders interest on a dividend declared, but not actually paid and mere-
ly credited to the shareholders’ loan accounts, was a mere subterfuge.
But there was nothing in the company’s financial statements to support this suspicion.
Once the declaration of a dividend was shown to be a genuine commercial decision by
the company and not a sham or simulated transaction, it is submitted that there was no
basis on which SARS could impugn the taxpayer’s bona fide decision that it made good
business sense to retain the funds in the company rather than pay them out. Having
financial statements that showed healthy cash reserves made the company more competi-
tive when it tendered for contracts, presumably because it made the company look
financially healthy and as having the resources to carry out any contracts awarded to it.
Interest is not deductible in terms of s 11(a) if the loan was incurred for the purpose of paying a
dividend. Where the taxpayer company has funds with which to pay a dividend, and then takes out
a loan, the criterion for the deductibility of the interest remains whether the purpose of the loan was to
pay the dividend.
While rent is usually deductible in terms of s 11(a), it will not be deductible if such expenditure was
of a capital nature, in other words if the purpose and effect of the expenditure was to secure long-term
benefits for the taxpayer’s business and to strengthen the taxpayer’s income earning-structure.

[257]
CSARS v BP South Africa (Pty) Ltd
2006 (5) SA 559 (SCA)
The taxpayer, BP South Africa (Pty) Ltd (‘BPSA’), was a wholly-owned subsidiary of its
UK parent company. That parent company insisted that BPSA pay quarterly dividends. In
the 1993 tax year, BPSA had made sufficient profits to pay a large dividend, but wanted
________________________

146 1955 (3) SA 293 (A) at 299G.

147 1936 CPD 241 at 246.
148 1993 (4) SA 161 (A).
 Deductions: General principles; Assessed losses of prior years 485

to retain these funds so as to finance the company’s capital expansion programme in

South Africa and, inter alia, expand its refinery.
However, the UK parent company wanted to get the money out of South Africa, and
insisted that a dividend be paid. In the end, an agreement was reached – BPSA would
distribute its profits as a dividend, and the parent company would provide BPSA with a
substantial interest-bearing loan. The difference between these two amounts (less tax)
was then remitted to the UK parent company.
In effect, the payment of the dividend by BPSA to its UK parent company, and the
making of the loan by the parent company to BPSA took place simultaneously, with the
one amount being set off against the other, and the difference (less tax) being distribut-
ed to the UK parent company.
In its assessment of the taxpayer’s income tax liability for the 1993 tax year, SARS disal-
lowed, as a deduction from the taxpayer’s income,
(a) the interest payable on the loan made to the taxpayer by its UK parent company on
the grounds that the interest on that loan had not been incurred ‘in the production
of income’ but to finance the payment of a dividend; and
(b) SARS also disallowed, as a deduction, the lump-sum rental paid by the taxpayer in
respect of various filling station sites (being a payment of rental in advance for 20
years) on the grounds that this expenditure was of a capital nature.
The taxpayer denied that the borrowed money had been used to finance the payment of
a dividend and averred that it had been utilised as working capital. The taxpayer con-
tended that the lump-sum payment in advance in respect of rental constituted expendi-
ture of a revenue nature.
Held: in respect of the interest on the loan, that in determining whether expenditure
was incurred in the production of income as contemplated in s 11(a) of the Act, the
purpose of the expenditure and what the expenditure actually effected were important,
if not overriding, factors. Where a loan was procured as a means of earning income, it
was expenditure incurred in the production of income. But where a loan was procured,
not as a means of producing income, but for some other purposes, such as paying a
dividend, it was not expenditure incurred in the production of income, and therefore
would not satisfy the requirements of s 11(a).
Held further: on the evidence, the loan had not been taken out to enable the taxpayer
to pay a dividend, but in order to provide the taxpayer with the liquid funds required for
pursuing its income-earning activities; consequently, the interest on the loan was deduct-
ible in terms of s 11(a) of the Income Tax Act as expenditure incurred in the production
of income.
Held further: in respect of the lump sum prepaid rental, that while rental was generally
expenditure not of a capital nature, this was not always the case. The true nature of the
transaction had to be enquired into in order to determine whether a particular rental
expense was capital or as revenue expenditure. In this regard, the purpose of the taxpay-
er in incurring the expenditure was an important factor; if the expenditure was incurred
for the purpose of acquiring a capital asset for the business, it was capital expenditure.
Held: on the evidence, that by paying lump sums in respect of pre-paid rental, the tax-
payer had secured petrol filling station sites for a period of 20 years and had thus ac-
quired assets which were intended to endure for 20 years, and which were going to
produce income for 20 years without any further expenditure in respect of acquisition
costs.
Held further: that a test for determining whether expenditure was of a capital or a rev-
enue nature is to ask whether the expenditure was more closely related to the income-
producing operations of the taxpayer (in which event it would be revenue expenditure)
486 Income Tax in South Africa: Cases and Materials

or to the income-earning structure of the taxpayer (in which event it would be capital
expenditure). A further relevant question was whether it was expenditure incurred to
‘carry on’ a business (revenue expenditure) or whether it was incurred to ‘establish’ a
business (capital expenditure). Money spent in creating an income-producing concern
was capital expenditure. In the present case, the taxpayer’s purpose was to establish a
base for its income-producing operations for the next 20 years. In these circumstances,
the lump sum expenditure was more closely related to the income-earning structure of
the taxpayer than to its income-producing operations. The lump-sum expenditure was
incurred, not to carry on the business of the taxpayer, but to establish the business, and
was therefore of a capital nature.
Held further: that since the lump-sum rental paid in advance was of a capital nature, it
was not deductible in terms of s 11 (a) but (by agreement between the parties) it was
deductible as a lease premium in terms of s 11(f) )
Streicher JA:
[1] This is an appeal by the Commissioner of the South African Revenue Service (the Commis-
sioner) against a judgment in the Cape Tax Court (the Tax Court) upholding an appeal by BP
Southern Africa (Pty) Ltd (BPSA) against the Commissioner’s income tax assessment for the
1993 year of assessment. In terms of the assessment, the Commissioner disallowed the deduction
from income of interest in the amount of R81 755 944 payable by BPSA in respect of a loan by its
only shareholder, British Petroleum Company plc (BP plc), and rental expenditure incurred by
BPSA in respect of filling station sites of R13 483 420 (less R31 008 and R71 464).
The Tax Court held that these expenditures constituted expenditures incurred in the produc-
tion of income and that they were to be treated as expenses deductible from BPSA’s income for
the 1993 year of assessment.
Deduction of interest
[2] BPSA markets petroleum products in South Africa. Some of the petrol that it markets is
refined by South African Petroleum Refineries, a joint venture by BPSA and Shell. BP plc, the
holding company of BPSA, is a company incorporated outside the Republic. It required that
dividends of profits available for distribution be declared quarterly. As at 25 March 1990 BPSA
held distributable profits amounting to R682 499 575 which it would have liked to retain. BP plc,
on the other hand, considered its investment in South Africa risky; wanted to take the money
out, and insisted that a dividend be declared.
Eventually, in terms of an agreement reached with the management of BPSA, a general meeting
of the members of BPSA on 6 August 1990 resolved that the amount of R682 499 575 be de-
clared as a dividend and that a loan of R348 374 594 granted by BP plc be accepted by BPSA. In
terms of the loan granted by BP plc, interest at an agreed rate was payable on the capital amount
outstanding from time to time. At the time, BPSA had the necessary cash resources to pay the
dividend in full but, as a result of the loan, only the difference between the amount of the divi-
dend and the loan (after deduction of the non-resident shareholders’ tax, being an amount of
R300 000 000) was remitted to BP plc on 20 August 1990.
[3] Mr McClelland, the financial director of BPSA, who negotiated the loan with BP plc, was the
only witness who testified at the hearing of the appeal in the Tax Court. He conceded that BPSA
would have been better off had the dividend not been declared, in that the declaration of the
dividend brought about a liability to pay interest on the amount of the loan. The payment of the
dividend also brought about a lowering of the local borrowing ceiling of BPSA imposed by the
South African Reserve Bank. For this reason, a dividend would not have been declared had it not
been for the insistence of BP plc. The loan, together with the partial restoration of the local
borrowing ceiling brought about by such loan, was required to fund various capital expenditure
programmes which were being contemplated by BPSA at the time. These included the expan-
sion of the refining capacity of South African Petroleum Refineries; maintaining other parts of
the refinery; the building of new service stations; re-branding them in due course; and replacing
delivery vehicles. The major item was the expansion of the refinery. It would have been seriously
disadvantageous to BPSA not to have expanded the refining capacity of the refinery. However, at
the end of 1990, BPSA, notwithstanding payment of part of the dividend, still had R427 million
 Deductions: General principles; Assessed losses of prior years 487

in cash, which was more than was required to pay the balance of the dividend in full. It would
therefore have been possible to run the business of BPSA until the end of 1990 but, at some
stage during 1991, the company would have experienced serious financial difficulties.
[4] In the event, essentially all expenditure in respect of the refinery was financed by way of
hire-purchase contracts and long-term leases and at least a substantial part of the loan was used
as working capital. According to McClelland, the money, while it was in the bank, helped BPSA
to overcome shortfalls in working capital.
[5] The Commissioner disallowed the deduction of the interest on the loan on the basis that it
had not been incurred in the production of BPSA’s income as required by s 11(a) of the Income
Tax Act 58 of 1962 (‘the Act’). The Tax Court overruled the Commissioner’s assessment and
held that the purpose of BPSA, insofar as the loan was concerned, was to continue its income-
producing activities; and that the interest paid on the loan was an expense incurred in order to
produce income within the meaning of s 11(a).
[6] Section 11(a) provides that there shall be allowed as deductions from income, for the pur-
pose of determining the taxable income derived by a person from the carrying on of any trade,
‘expenditure and losses actually incurred in the production of the income, provided such ex-
penditure and losses are not of a capital nature’. In order to determine whether expenditure has
been incurred in the production of income ‘important, sometimes overriding, factors are the
purpose of the expenditure and what the expenditure actually effects’. (Per Corbett JA in CIR v
149 150
Nemojim (Pty) Ltd In CIR v Giuseppe Brollo Properties (Pty) Ltd Nicholas AJA said –
‘[T]he enquiry relates primarily to the purpose for which the money was borrowed. That is often the
“dominant” or “vital” enquiry, although the ultimate user of the borrowed money may sometimes be a rel-
evant factor. Where a taxpayer’s purpose in borrowing money upon which it pays interest is to obtain the
means of earning income, the interest paid on the money so borrowed is prima facie an expenditure in-
curred in the production of income. See CIR v Allied Building Society.151 ‘If, on the other hand, the purpose
of the borrowing was for some other purpose than obtaining the means of earning income (for example,
to pay a dividend), the interest is not deductible.’
152
[7] In Ticktin Timbers CC v CIR certain trading reserves and income were credited to the loan
account of Ticktin Timbers’ only member, Dr Ticktin, who had bought the shares in a company
which he had then converted into a close corporation, Ticktin Timbers CC. Dr Ticktin contend-
ed that ‘he was entitled to whatever dividends he wished to declare; and that all the credits were
passed in respect of dividends which he had declared but retained in the business as an interest-
bearing loan in order to finance its day-to-day operations’.
Interest was credited annually on the accumulated balance in the loan account. This Court had
to decide whether the interest credited to the loan account qualified as expenditure actually
incurred in the production of income. The issue was, therefore, the purpose for which the loan
was made.
It was held that a scheme had been devised with the obvious aim of ensuring that Dr Ticktin
would be able to pay the interest on the purchase price in respect of the shares he had bought
and possibly the purchase price itself. Hefer JA said –
‘I agree with the Court a quo that the loan was not needed for the appellant’s income-producing activities
and that the intention was to increase Dr Ticktin’s income, not that of the appellant.’
[8] Counsel for the appellant contend that ‘the principle which emerges from Ticktin is that,
where the loan giving rise to the relevant liability for interest is incurred pursuant to a scheme
devised to benefit the shareholder company and which results, not in additional income for the
taxpayer, but in an additional liability, then it cannot be said that the interest is incurred in the
production of the taxpayer’s income, for the purposes of s 11(a). They contend that the evidence
and documents clearly established that the scheme upon which BPSA embarked, whereby it paid
a dividend and, at the same time, borrowed an equivalent amount from BP plc, was not con-
ceived in the interest of BPSA but was to serve the purposes of BP plc and, in fact, created addi-
tional expenditure for BPSA in the form of interest on the loan and not additional income.

________________________

149 1983 (4) SA 935 (A) 947F-H.

150 1994 (2) SA 147 (A) at 152I-153D.
151 1963 (4) SA 1 (A) at 13C-G.
152 1999 (4) SA 939 (SCA)
488 Income Tax in South Africa: Cases and Materials

[9] The fallacy in the argument is that a comparison is made between the position of BPSA
having declared the dividend and borrowed the money and the position in which BPSA would
have been, had the dividend not been declared. In the circumstances of this case, the position of
BPSA having declared a dividend and borrowed the money should be compared with the posi-
tion that BPSA would have been in had the dividend been declared and had there not been a
loan. In terms of the articles of association of BPSA, dividends are declared by the company in
general meeting. The policy of BPSA, insisted upon by BP plc, was that distributable profits be
distributed quarterly. When the dividend in issue was declared, there were distributable profits
available for distribution and there was cash on hand to pay the dividend. However, the man-
agement of BPSA realised that cash would, in a few months’ time, be required to fund capital
expenditure programmes.
It was because of this expected future requirement that McClelland negotiated the loan with BP
plc. He testified:
‘[T]here was a very sound and sensible policy on the part of the shareholders, which I couldn’t gainsay as
the local Finance Director, that, if there was money which could be taken out of South Africa, let’s take it
out sooner rather than later and then bring it back when needed, so the shareholder’s interest would have
been best served by taking all the money and then bringing it back when needed. I didn’t like that because
I had no guarantee that, when I needed the money, I couldn’t sign deals to expand or the company
couldn’t sign deals to expand the refineries without knowing that the finance was going to be there.’
[10] In these circumstances, it would be illogical to regard the fact that the loan was linked to
the declaration of a dividend as an arrangement or scheme conceived in the interest of BP plc. It
was, in fact, an arrangement conceived and concluded in the interest of BPSA which, insofar as
the dividend component is concerned, benefited BP plc and, insofar as the loan component is
concerned, benefited BPSA. The loan, whether looked at in isolation or in combination with the
declaration of a dividend, was, therefore, seen from BPSA’s vantage point, a transaction con-
cluded in the interest of BPSA.
[11] The fact that the loan agreement was concluded in the interest of BPSA does not, however,
answer the critical question whether the money was borrowed in order to pay the dividend or
whether it was borrowed in order to produce income. In Ticktin, Hefer JA said in an alternative
153
approach, upon which the Commissioner also relied –
‘A company or corporation is not obliged to pay a dividend or make a distribution respectively, irrespec-
tive of the financial circumstance in which it finds itself. If, after doing so, it will have the resources to ena-
ble it to continue its income-earning activities without having to borrow simultaneously an equivalent
amount, no problem arises. When it will not, but nonetheless pays a dividend or makes a distribution and
simultaneously raises a loan in exactly the same amount, it becomes a question whether or not the purpose
of the loan was to enable a dividend to be paid or the distribution to be made or to provide the entity with
liquid funds required to enable it to pursue its income-earning activities.’
154
Heher JA, in CSARS v Scribante Construction (Pty) Ltd in respect of the same issue but different
facts, regarded surplus cash as the decisive factor.
[12] In the present case the evidence of McClelland was that if the dividend had been paid in
full, BPSA would have been able to continue with its normal business activities including its capi-
tal expenditures until the end of 1990 but would by the end of 1991 have had to find R440m.
BPSA did not, therefore, have simultaneously to borrow an amount to replace the amount of the
dividend or any part thereof. That, according to the above-quoted passage from Ticktin, should
be the end of the enquiry. But it seems to me to be nevertheless conceivable that a company may
be borrowing money to fund a dividend notwithstanding the fact that it has resources available
to enable it to continue its income-earning activities. I shall therefore proceed on the basis that it
nevertheless has to be determined whether the purpose of the loan was to enable the dividend
to be paid or whether the purpose was to provide BPSA with the liquid funds required to enable
it to pursue its income-earning activities.
[13] After having concluded that, on the facts of Ticktin, the two transactions were interdepend-
155
ent and that neither was intended to exist without the other, Hefer JA said –

________________________

153 At 944H-J.
154 2002 (4) SA 835 (SCA) at 841H.
155 At 945C.
 Deductions: General principles; Assessed losses of prior years 489

‘It is this linkage which, to my mind, is fatal for appellant’s case for it shows that the true reason why appel-
lant had to borrow back at interest from Dr Ticktin money which it had had in its own coffers and was un-
der no obligation to part with was because it wanted to make a distribution to Dr Ticktin.’
[14] Here, it cannot be said that, without the loan, there would have been no dividend. BP plc
insisted on the dividend being declared and there was cash available to pay that dividend. There
was, therefore, no need to borrow money to pay that dividend. It was clear that cash would, in
the future, be needed to carry on with the business of BPSA, unless the business was to be run
down, but that cash could have been raised at a later date by increasing the issued share capital
of BPSA or by a loan at that stage. In the circumstances, there is no reason not to accept the
evidence of McClelland that the money was borrowed to ensure that it would be available when
the need arose and not to pay the dividend.
[15] It follows that the Tax Court correctly held that the purpose of BPSA, insofar as the loan is
concerned, was to continue its income-producing activities and that the interest paid on the loan
was an expense incurred in order to produce income within the meaning of s 11(a). In so far as
the interest of R81 755 944 includes interest on interest, the Commissioner agreed that, should
it be held that the loan was an expense incurred in order to produce income within the meaning
of s 11(a), the interest on interest was likewise incurred for that purpose. The appeal in respect
of the interest on the loan should therefore be dismissed.
Pre-paid rental
[16] BPSA, like other oil companies in South Africa, is not allowed to operate service stations. It
sells its products to independent dealers who, in turn, sell to the public. BPSA, therefore, has an
indirect interest in the sale of its petrol to the public and an interest in securing sites from which
its petrol can be sold. This is done by either acquiring such sites and leasing them to dealers or
by leasing sites from the owners thereof in terms of long-term head leases and sub-letting them
to dealers. The sub-tenants may be the owners themselves. We are concerned with the head leas-
es which, in most cases, were for periods of some 20 years. Each of the head leases provides for
the payment of rental by way of a lump sum in advance. These lump sum payments put the own-
er in a position to build a service station where no service station was in existence on the site, or
to improve an existing service station in accordance with the requirements of BPSA. The head
leases also provide for the registration of servitudes over the leased properties as security for the
repayment of pre-paid rental in the event of the termination of the lease by BPSA. In terms of
the servitudes, the lessor and any other occupiers of the properties are precluded from selling
any petrol or petroleum products from the properties other than those supplied by BPSA, from
time to time. McClelland testified that BPSA was not in the business of hiring or letting property
for the purpose of making a profit. He agreed with the proposition that BPSA’s ‘purpose was to
create a set-up which would enable retailers to purchase petrol from BP which they would, in
turn, retail to the public’.
[17] The Commissioner contends that these lump sum rental payments, R13 483 420 (less
R31 008 and R71 464) in total, were of a capital nature and therefore not deductible from in-
come in terms of s 11(a). The Tax Court held that the expenditures were deductible. It reasoned
that, if BPSA had operated its own service stations on the leased properties, the rental payable
would have been deductible as the premises would have been occupied by BPSA for the purposes
of its trade. Due to the prohibition against BPSA’s owning service stations, it had no choice other
than to sublet the premises to independent operators. It considered the rentals paid by BPSA to
have been expenditures which were ‘an essential part of the business of (BPSA); it was the only way
in which it could sell its products and the expenditure incurred thereby was deductible’.
[18] Counsel for BPSA contend that the reasoning of the Tax Court is correct. Their submission
is that there is no material difference between a lease in terms of which rental is paid by way of a
lump sum ‘up front’ and a lease in terms of which periodic rental payments are made.
156
[19] In Turnbull v CIR Centlivres CJ said that rent is an expenditure incurred in the produc-
tion of income and that it is of a non-capital nature and therefore deductible for the purpose of
determining taxable income. In general, that is so, but it would 157
not always be the case. In this
regard Wilcox J said in Federal Commissioner of Taxation v Creer –
________________________

156 1953 (2) SA 573 (A) at 579A-B.

157 (1986) 65 ALR 485 (FC) at 493D.
490 Income Tax in South Africa: Cases and Materials

‘Ordinarily, of course, rental payments, made to obtain the right to occupy premises used for the purpose
of earning assessable income, are deductible. But ordinarily such payments are recurrent; and ordinarily
they bear a relationship to the income expected to be earned by virtue of that occupation during the rele-
vant accounting period. Where those features are absent, it is better to set aside nomenclature and to ex-
amine the substance of the transaction and – where relevant – the purpose for which it was undertaken.’
158
[20] In Regent Oil Co Ltd v Strick (Inspector of Taxes) the House of Lords was dealing with four
contracts in terms of which garage owners were tied by way of a lease and a sublease to sell an oil
company’s petrol. The consideration for the lease was an agreed lump sum payment plus a nom-
inal rent of one pound per annum. In two of the four cases, the lump sums were expressly stated
to be premiums, while, in the other two, they were not. It was held that the lump sum payments
were of a capital nature. It is true that some of the law lords drew a distinction between rent and
a premium. Their view was that rent is paid for the use of property and is a revenue expenditure,
whereas a premium is a capital expenditure as it is a payment for the acquisition of an asset,
being the right to use the property for the purpose of carrying on a trade. However, whether a
payment is made for the use of property or whether it is made for the right to use property, the
payment is a rental payment. In this regard, I agree with the following statement by Lord Reid in
159
Regent –
‘It was argued that a rent and a premium paid under a lease are paid for different things - that the premi-
um is paid for the right but that the rent is for the use of the subjects during the year. I must confess that I
have been unable to understand that argument. Payment of a premium gives just as much right to use the
subjects as payment of a rent and an obligation to pay rent gives just as much right to the whole term of
years as payment of a premium.’
[21] It is not the legal categorisation of a payment which determines whether it is of a revenue
160 161
or a capital nature. See Hallstroms Proprietary Ltd v Federal Commissioner of Taxation.
The mere fact that a payment constitutes a payment of rental does, therefore, not qualify it as a
revenue expenditure. As in the case of every other expenditure, ‘the true nature of each transac-
tion must be enquired into in order to determine whether the expenditure attached to it is capi-
162
tal or revenue expenditure’. (Per Watermeyer CJ in New State Areas Ltd v CIR. ) Again, the
purpose of the expenditure is an important factor in determining the true nature of a transac-
tion. If the expenditure is incurred for the purpose of acquiring a capital asset for the business,
163
it is capital expenditure.
[22] In the present case the purpose of the lump sum payments ‘up front’ was to secure sites
from which BPSA’s petrol could be sold. The registration of the servitudes referred to above
ensured that the sites would be used for this purpose, even after termination of the leases by
BPSA, for as long as prepaid rental remained in the hands of the lessor. The expenditures were,
therefore, intended to secure sites from which BPSA’s petrol could be sold even in situations
where there was no lease. By paying the lump sums BPSA secured these sites for a period of
some 20 years, that is, it acquired assets which were intended to endure for 20 years and which
were going to produce income for 20 years without any further expenditure required in respect
of the acquisition of the assets.
[23] A test that has been adopted to assist in the determination whether expenditure is of a
capital or revenue nature is to ask whether the expenditure is more akin to the income-
producing operations of the taxpayer or whether it is more akin to the income-earning structure
of the taxpayer, or to ask, ‘Is it expenditure required to carry on a business or is it required to
164
establish a business?’

________________________

158 [1965] 3 All ER 174 (HL).

159 At 180I-181A.
160 Hallstroms Proprietary Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648.
161 (1946) 72 CLR 634 at 648.
162 1946 AD 610 at 627.
163 New State Areas Ltd, supra at 627.
164 New State Areas Ltd v CIR SIR v Cadac Engineering Works (Pty) Ltd Hallstroms Proprietary Ltd v Federal Commis-
sioner of Taxation Regent Oil Co Ltd v Strick (Inspector of Taxes); Regent Oil Co Ltd v IRC
 Deductions: General principles; Assessed losses of prior years 491

Money spent in creating an income-producing concern is capital expenditure; it is invested to

165
yield future profit.
In this case the purpose of BPSA was to establish a base for its income-producing operations for
the next 20 years. In the circumstances the lump sum expenditures are more closely related to
the income-earning structure of BPSA than its income-producing operations. They were in-
curred not to carry on the business of BPSA but to establish it. Through the payment of a lump
166
sum, BPSA acquired an asset which, in the words of Lord Wilberforce in Regent –
‘was a source or foundation for the earning of profits, through orders for petrol . . . : It can fairly be de-
scribed as a piece of fixed capital which is to be used in order to dispose of circulating capital.’
[24] To allow these lump sum payments as a debit against income would distort the profit for
the particular year, in that the profit for that year would be unduly diminished and it is only after
20 years that
167
a fair result
168
would be reached. This is a consideration that weighed with Lord Reid
in Regent. He said –
‘recurrence as against a payment once and for all has (ever since Vallambrosa Rubber Co Ltd v Farmer (Survey-
or of Taxes) [1910] 5 TC 529 (1910 SC 519)) been accepted as one of the criteria in a question of capital or
income' and added that he 'would have great difficulty in regarding a payment to cover twenty years as an-
ything other than a capital outlay’.
169
Lord Wilberforce said –
‘No rule can be laid down as to a minimum period of endurance for a capital asset or a maximum permis-
sible period for an item of stock or circulating capital, though obviously the more closely the period of en-
durance is related to an accounting period the easier it is to argue for a revenue character, but no doubt
there is a penumbra the width of which may vary according to the nature of the trade.’
[25] In the light of the nature of the payments, being lump sums, the nature of the advantage
obtained, being security that BPSA’s products would be sold from the leased premises, and the
substantial periods involved, I am of the view that the expenditures were of a capital nature. My
reasons are essentially the same as the reasons advanced by Lord Wilberforce in Regent for con-
cluding that the lump sum payments dealt with in Regent were capital and not revenue payments.
In one of the other speeches in Regent, Lord Morris of Borth-y-Gest expressed agreement with
the conclusion of Lord Denning MR in the Court of Appeal, which conclusion is particularly
170
apposite to this case and reads –
‘The company makes a payment once and for all. In return, they get an advantage which is of enduring
benefit to the company. It brings in revenue to the company week after week, and month after month,
from the petrol they supply to the retailer. I have no doubt this advantage is a capital asset and the pay-
ment for it is capital expenditure.’
[26] The parties agreed that, should it be held that the lump sum payments constituted ex-
penditure of a capital nature, s 11(f) would be applicable.
[Editor’s note:
At the time, section 11(f) provided as follows:
‘For the purpose of determining the taxable income derived by any person from carrying on any trade,
there shall be allowed as deductions from the income of such person so derived –
(f) an allowance in respect of any premium or consideration in the nature of a premium paid by a
taxpayer for –
(i) the right of use or occupation of land or buildings used or occupied for the production of
income or from which income is derived; or
(aa) the allowance under sub-para (i), (ii), (ii) bis or (iii) shall not exceed for any one year
such portion of the amount of the premium or consideration so paid as is equal to the
said amount divided by the number of years for which the taxpayer is entitled to use or
occupation, or one twenty-fifth of the said amount, whichever is the greater.’
It follows that the appeal should be dismissed in respect of the deduction of interest on the loan
by BP plc but that it should succeed in respect of the prepaid rental to the extent that BPSA is

________________________

165 CIR v George Forest Timber Co Ltd 1924 AD 516 at 526.

166 At 202G.
167 Regent Oil Co Ltd v Strick (Inspector of Taxes); Regent Oil Co Ltd v IRC
168 Ibid 181B-F; see also 200A per Lord Pierce.
169 Ibid 204H-I.
170 Ibid at 188B-C.
492 Income Tax in South Africa: Cases and Materials

not entitled to a deduction in terms of s 11(a) but is entitled to a deduction in terms of s 11 (f) .
…
[27] The following order is made: …
1. The appeal in respect of the interest … on the loan by British Petroleum Company plc to the
respondent is dismissed.
2. The appeal in respect of rental payments in an amount of R13 483 420 (less R31 008 and
R71 464) is upheld.
3. Paragraph 2 of the order by the Cape Tax Court is replaced with the following order: ‘The
respondent is directed to apply the provisions of s11(f) of the Income Tax Act 58 of 1962 in
respect of the rental expenditure of R13 483 420 (less R31 008 and R71 464).’
HOWIE P, NUGENT JA, CLOETE JA and HEHER JA concurred.

Notes
The taxpayer, BPSA, was a wholly-owned subsidiary of its UK parent company. This was
significant in determining the purpose of the loan.

Was the interest on the loan from the UK parent company deductible?
The salient facts were that BPSA’s parent company insisted that BPSA pay quarterly
dividends. (Such dividends would of course be received by the UK parent company,
being the sole shareholder.) BPSA had made sufficient profits (R682 499 575) to pay a
large dividend, but would have preferred to retain these funds to finance the company’s
capital expansion programme in South Africa and, inter alia, expand its refinery.
However, the UK parent company wanted to get the money out of South Africa, and
insisted that a dividend be paid. In terms of BPSA’s articles of association, dividends were
declared by the general meeting, so the UK parent company (as sole shareholder in
BPSA) had the power to compel BPSA to pay a dividend.
In the end, an agreement was reached – BPSA would pay all its distributable profits as
a dividend, and the parent company would advance BPSA, as an interest-bearing loan,
the sum of R348 374 594. These two amounts were then set off against each other, and
the difference (less tax) was remitted to the UK parent company.
In the result, a large part of the loan from the UK parent was used by BPSA as working
capital.
The crucial point was that, when BPSA declared the dividend it had distributable prof-
its available; in other words, it had cash on hand with which to pay the dividend. Howev-
er, the company’s management knew that, if the dividend was paid, the company would
need to borrow money a short time later to fund its capital expenditure programmes,
and it was for this reason that it negotiated a loan from its UK parent.
The court pointed out that, on these facts, ‘it cannot be said that, without the loan,
there would have been no dividend. … There was, therefore, no need to borrow money
to pay that dividend’.
The court held that the situation was distinguishable from the facts in Ticktin Timbers
where funds loaned to the company were not needed for its income-producing activities.
In [256] Scribante Construction the availability of surplus cash with which to pay the
dividend in question was regarded as the decisive factor in determining whether a loan
had been taken out for the purpose of paying the dividend.
It is implicit in the present judgment that, where a company has made a profit which is
available for distribution as a dividend, but the company also wants to incur capital
expenditure to strengthen its business, there is no principle of tax law that it will not be
entitled to deduct the interest on the loan if it uses its available profits to pay a dividend
 Deductions: General principles; Assessed losses of prior years 493

and then borrows the requisite funds to finance its capital expenditure. If the company
adopts this course of action, it does not necessarily follow that the purpose of borrowing
the money was to pay the dividend, since the company could have paid the dividend
without taking out the loan.
However, Streicher JA refrained from laying down a hard and fast rule in this regard,
and cautioned that, even in such circumstances –
‘it seems to me to be nevertheless conceivable that a company may be borrowing money to fund a divi-
dend notwithstanding the fact that it has resources available to enable it to continue its income-earning
activities. I shall therefore proceed on the basis that it nevertheless has to be determined whether the pur-
pose of the loan was to enable the dividend to be paid or whether the purpose was to provide BPSA with
the liquid funds required to enable it to pursue its income-earning activities’
Streicher JA is here making the point that, in every case, the critical question of fact is
whether the purpose of the borrowing was to fund the payment of a dividend.
Was the pre-paid rent deductible?
Usually, the payment of rent by a taxpayer in the course of a trade or scheme of profit-
making is deductible in terms of s 11(a). But there is no principle of tax law which de-
crees that rent is always so deductible.
In order to qualify for deduction in terms of s 11(a), the rent must, in the circum-
stances of each particular case, satisfy the requirements of that provision. Inter alia, the
expenditure must not be of a capital nature.
Usually, rent is not expenditure of a capital nature because it does not (to use the
words of Lord Cave in British Insulated & Helsby Cables v Atherton) create ‘an asset or
advantage for the enduring benefit’ of the taxpayer’s trade; it is merely a periodic charge
for the use of the leased property.
Or, to express the criterion in the language used in [277] New State Areas Ltd v
171
CIR, the payment of rent is usually part of the cost of performing income-earning
operations rather than a cost of creating an income-producing structure.
However, it is always possible that, in particular circumstances, the payment of rent
may be more closely related to creating an income-earning structure than to the cost of
operating that structure, and this was held to be so in the present case.
It was held that, in the present case, three factors characterised the pre-payment of the
rent as being expenditure of a capital nature, namely the lump-sum nature of the pay-
ments, the advantage that the taxpayer obtained from the payments, (namely security
that its products would be sold from the leased premises) and the substantial period for
which these advantages were obtained.
Thus, the decision in the present case does not hold that a lump-sum pre-payment of
rent is always expenditure of a capital nature.
As the decision in New State Areas made clear, the purpose of the taxpayer is an im-
portant factor in determining whether expenditure is of a capital or of a revenue nature.
In the present case, the ‘purpose and effect’ of these lump-sum pre-payments of rent
was to obtain long-term advantages which would strengthen the income-earning struc-
ture of BPSA’s business. In other words, in the particular circumstances of this case, the
pre-payment of the rent secured ‘an enduring benefit’ that went beyond a mere extend-
ed right to use the premises.

§6 Prohibited deductions
The following types of expenditure are either not deductible in terms of s 11(a), or are
deductible subject to qualifications, or are not deductible at all in determining the
taxpayer’s taxable income.
________________________

171 1946 AD 610, 14 SATC 155.

494 Income Tax in South Africa: Cases and Materials

§6.1 Expenditure and losses of a capital nature:

Expenditure and losses of a capital nature are not deductible under s 11(a). The Act is
silent on the distinction between income and capital, and the relevant principles have
been laid down by the courts.
For significant judgments on expenditure and losses ‘of a capital nature’, see chapter
INSERT.
When reading cases such as [283] Stellenbosch Farmers’ Winery, [284] African Oxygen
and [285] Cadac Engineering, it should be remembered that a deduction for legal costs is
now available under s 11(c) whose requirements are more easily satisfied than those of
s 11(a). However, expenditure on legal costs which is ‘of a capital nature’ is not deductible
under s 11(c). Hence the principles laid down in cases decided under s 11(a) in regard to
what constitutes capital expenditure are relevant to the deductibility of legal costs in terms
of s 11(c).

§6.2 Section 23(a): ‘the cost incurred in the maintenance of any taxpayer,
his family or establishment’
[258]
L v Commissioner of Taxes
(1992) 54 SATC 91 (ZHC)
The taxpayer was a partner in a firm of legal practitioners in Zimbabwe. Her work in-
volved a lot of reading and paper work. She developed cataracts in her eyes which made
it difficult for her to read. Her vision deteriorated and by 1987 she was virtually blind in
one eye and had limited vision in the other. This slowed her work rate, made her lose
self-confidence, and caused embarrassment with clients. She decided to undergo surgery
in South Africa. After the operation she was able to resume legal practice. In connection
with the operation, she incurred expenditure of $4 200 on air tickets, accommodation,
the hire of a car, medical treatment and hospital and drug charges. She claimed these
expenses as a deduction for income tax purposes.
Issue: did the expenditure in question qualify for deduction under the Zimbabwean
Income Tax Act?
Held: in the negative. The expenditure could not be regarded as so closely connected
with the performance of the taxpayer’s legal practice as to be part of the cost of perform-
ing it. The expenditure on medical operations could not be regarded as capital expendi-
ture. The expenditure was domestic or private expenditure and as such was prohibited as
a deduction in terms of the Act.
Smith J: The respondent’s case was that, even were it not for the appellant’s professional need
for the sense of sight, she would in any even have incurred expense in having it restored . . .
...
Para (a) of s 15(2) [of the Zimbabwean Income Tax Act] allows as a deduction –
‘(a) expenditure and losses to the extent to which they are incurred for the purposes of trade or in the
production of the income except to the extent to which they are expenditure or losses of a capital nature.’
Section 16 provides for cases in which no deduction shall be made. The relevant paras in
subs (1) are as follows –
‘(a) the cost incurred by any taxpayer in the maintenance of himself, his family or establishment;
(b) domestic or private expenses of the taxpayer.’
Mr de Bourbon pointed out that Chapter 181 does not contain a provision similar to that in
the Income Tax Acts of South Africa (s 23(g) and England which prohibits as a deduction any
moneys which are not wholly or exclusively laid out or expended for the purposes of trade . . .
Mr de Bourbon said that there could be little doubt that the applicant needed her eyesight in
 Deductions: General principles; Assessed losses of prior years 495

order to be able to practise as a legal practitioner. Without being able to read she would not be
able to work effectively and therefore her ability to earn an income would be impaired. Any
expenditure she incurred to improve her situation in that regard would be deductible. He
argued that the appellant would not have incurred the expenditure in question but for the need
to carry on the practice of a legal practitioner. Even though it was a one-off payment, it enabled
her to continue as a legal practitioner and was not a capital payment. Mr Gillespie argued that the
expenditure in question was not deductible because it was not so closely connected to the
professional practice of the appellant that it may be regarded as the cost of performing it – Port
Elizabeth Electric Tramway Co v CIR 172 where Watermeyer AJP said –
‘. . . all expenses attached to the performance of a business operation bona fide performed for the pur-
pose of earning income are deductible whether such expenses are necessary for its performance or at-
tached to it by chance or are bona fide incurred for the more efficient performance of such operation
provided they are so closely connected with it that they may be regarded as part of the cost of performing
it.’
...
In my opinion the expenditure in question cannot be said to be so closely connected with
the performance of the appellant’s legal practice as to be regarded as part of the cost of per-
forming it. Undoubtedly the expenditure was necessary to enable the appellant to be able to
carry on her legal practice but it does not automatically follow that it can be regarded as part of
the cost of performing it. There are many things people do to maintain their health and which
could therefore be regarded as being necessary for the more efficient performance of their
business or income-earning operations. However expenditure on such things cannot, in my view,
be regarded as part of the cost of performing such operations. In my opinion, expenditure on
medical operations to the body of a taxpayer is more analogous to expenditure on the taxpayer’s
‘machinery for producing income’ than on his ‘income producing operations.’ Accordingly
expenditure on maintaining or improving one’s health is, I feel, not a deduction provided for
in s 15(2)(a) of Chapter 181. It is too remote from the income-producing operations of the ap-
pellant.
In the light of my conclusions set out above, it is not necessary to investigate whether or not the
expenditure in question was of a capital nature . . .
Even if I am wrong in my conclusions concerning s 15(2)(a) of Chapter 181, I consider that
paras (a) and (b) of s 16(1) of Chapter 181 prohibit a deduction of the expenditure in question
as being incurred by the appellant in the maintenance of herself or as being a domestic or pri-
vate expense. In Norman v Golder (Inspector of Taxes)173 Lord Greene MR said -
‘It is quite impossible to argue that a doctor’s bills represent money wholly and exclusively laid out for the
purposes of the trade, profession, employment or vocation of the patient. True it is that if you do not get
yourself well and so incur expenses to doctors you cannot carry on your trade or profession, and if you do
not carry on your trade or profession you will not earn an income, and if you do not earn an income the
Revenue will not get any tax. The same thing applies to the food you eat and the clothes you wear. But ex-
penses of that kind are not wholly and exclusively laid out for the purposes of the trade, profession or vo-
cation. They are paid out in part for the advantage and benefit of the taxpayer as a living human being.
Para (b) of the rule equally would exclude doctor’s bills, because they are, in my opinion, expenses of
maintenance of the party, his family, or a sum expended for a domestic or private purpose, distinct from
the purpose of the trade or profession.’
The above quoted extract was cited with approval in Murgatroyd v Evans-Jackson,174 Prince v Mapp 175
and Mallalieu v Drummond.176 In Murgatroyd’s case, supra, where a trade mark agent claimed that
charges for treatment in a private nursing home were deductible Plowman J held that he could
not draw any distinction between the case before him and Norman’s case, supra . . . . In Prince’s
case supra, the taxpayer was a draughtsman who played a guitar part-time, partly as a hobby and
partly as a profession. He severed a tendon in his little finger which impaired his dexterity with
________________________

172 1936 CPD 241 at 246.

173 [1945] 1 All ER 352 (CA) at 354.
174 [1967] 1 All ER 881 (Ch).
175 1970 1 All ER 519 (Ch).
176 [1983] 2 All ER 1095 (HL).
496 Income Tax in South Africa: Cases and Materials

the guitar and so he underwent a tendon-grafting operation. He claimed the expenditure on the
operation as a deduction Pennycuick J said177 –
‘I do not see how the expense of this operation could on any ordinary use of the words be treated as an
expense of maintaining the taxpayer, his family or establishment. On the other hand, the second limb of
para (b) is more or less automatically satisfied where para (a) is satisfied, that is to say: a sum which is ex-
pended in part for the purpose of a trade and in part for the purposes of a hobby is a sum expended for
some other domestic or private purpose distinct from the purposes of the profession.’
He emphasized that he based his conclusion on the finding that the expense was incurred to ena-
ble the taxpayer to continue to practise his hobby of playing the guitar as well as to exploit his skill
professionally by playing it. If the finding had been that the taxpayer would not have undergone
the operation had he not wished to continue to play the guitar professionally, then he might well
have come to a different conclusion. In ITC 833178 Herbstein J was of the view that the words
‘domestic or private expenses’ were used in their ordinary natural signification and not in any
technical sense, and that one could do no better than to adopt what was said in Case 50179 –
‘The words “private or domestic” appearing in s 51 we take to be used in their ordinary natural signi-
fication and not in any technical sense. Without attempting an exhaustive definition of either variety
of expenditure, losses or outgoings of a private nature we take to mean here losses or outgoings relating
solely to the person incurring them as an individual member of society where that society is the society
of human beings, eg travelling expenses, incurred by a person to and from his place of employment (see
particularly 12 CTBR Case 34(3). Losses or outgoings of a domestic nature we take to mean here losses
or outgoings which relate solely to the house, home, or family organisation, of the person incurring
them, eg expenses paid by a person to a domestic to enable the former to carry on his or her own employ-
ment.’
In the case before him Herbstein J held that the cost of wages of a domestic servant employed to
enable the taxpayer’s wife to take employment was expenditure of a domestic nature and so
inadmissible as a deduction. He held that the expenditure was laid out ‘at any rate in part, for
the advantage or benefit of the taxpayer as a living human being . . . It was laid out for the pur-
poses of comfortable living.’ . . .
...
In CIR v Hickson 180 Beyers JA said –
‘“Domestic and private expenses” are, I should say, without attempting an exhaustive definition, expenses
pertaining to the household, and to the taxpayer’s private life as opposed to his life as a trader.’
This statement was quoted with approval by Whitaker QC in ITC 1132.181
It appears to me that in all the cases I have referred to, medical expenses incurred to main-
tain the health or well-being of the taxpayer are regarded as ‘domestic and private expenses’
...
In the light of the above, I have no hesitation in holding that the expenditure incurred by the
appellant in connection with the operation to restore the sight in her right eye was a private
expense, notwithstanding that blindness would prevent her earning an assessable income, and
was therefore a prohibited deduction in terms of s 16(1)(b) of Chapter 181.
The appeal is dismissed.

§6.3 Section 23(b): ‘domestic or private expenses’

‘domestic or private expenses, including the rent of or cost of repairs of or expenses in connec-
tion with any premises not occupied for the purposes of trade or of any dwelling house or
domestic premises except in respect of such part as may be occupied for the purposes of trade’
[subject to the proviso’s which follow these words].

________________________

177 At 526.
178 21 SATC 324.
179 (1955) 5 Commonwealth Taxation Board of Review Decisions (New Series) 329 at 331-332.
180 1960 (1) SA 746 (A) at 750-751, 23 SATC 243 at 249.
181 31 SATC 155 at 159.
 Deductions: General principles; Assessed losses of prior years 497

[259]
CIR v Hickson
1960 (1) SA 746 (A), 23 SATC 243
Beyers JA: The respondent sustained a spinal injury in 1937 and in 1952 an unsuccessful attempt
was made to remedy his condition by surgery. Since that date he has moved about with consider-
able difficulty.
In 1955 the Company decided that the respondent, who by virtue of being the agent in charge of
selling its products, was the director most fully conversant with its selling organisation, should
visit the United States and England for a series of meetings with its overseas agents.
Prior to accepting this assignment the respondent consulted his medical adviser, who advised
him that it would be possible for him to make the journey only if he had someone to assist him
to get around. At the time he was using two sticks to assist him in walking, and he could not
stand for any length of time: it was therefore essential for someone to accompany him. He
accordingly decided that his wife should accompany him, since this would be less expensive than
engaging a trained nurse for the purpose.
In August 1955 the respondent and his wife proceeded by air to the United States, via Amster-
dam. After twelve days, spent in New York seeing the Company’s agents, they returned to the
Union via London, where the respondent also wished to see agents of the Company. During the
stay in New York the respondent’s wife was engaged for most of the time in looking after him. In
London, where she had relations living, she enjoyed some leisure.
The Company paid the respondent’s travelling expenses. He received no special fee for his ser-
vices abroad. He did not ask the Company to pay his wife’s expenses, nor did he charge any por-
tion thereof to the partnership, as he did not think that the Company or the partnership should
be put to extra expense because of his own physical disability. He therefore paid his wife’s ex-
penses out of his own pocket, amounting to £609 10s in all – £532 6s 4d, for the air trip, and 77
3s 8d for hotel expenses in New York . . .
The tonnage of wattle extract sold by the Company in the United States increased considerably
after the respondent’s visit to New York. One of his objects in making the visit was to endeavour
to increase such sales. In consequence of this there was an increase in the partnership’s income
by way of commission from the Company . . .
The sections of the Act which bear most directly on the point are ss 11((2)(a) and 12(g). As far
as material they provide:
‘The deductions allowed shall be
(a) expenditure . . . actually incurred in the Union in the production of income . . .’ – s 11(2)(a):
‘No deduction shall in any case be made in respect of the following matters -
(g) any moneys . . . which are not wholly or exclusively laid out or extended for the purposes of trade’ –
s 12(g).
It is, I think, correct to read the two sub-sections together (cf Sub-Nigel Ltd v CIR 182 as was suggest-
ed by Watermeyer J in Port Elizabeth Electric Tramway Co v CIR 183 . . .
The same case makes it clear that it is not incumbent upon the taxpayer to prove that the ex-
penses were necessarily incurred: it is sufficient if they are incurred bona fide, provided always
that they are incurred in the production of income. Mr Ettlinger, who appeared on behalf of
the Commissioner, fairly conceded that the expenses with which we are here concerned, were
incurred bona fide. What he challenges is the Special Court’s finding that they were incurred in
the production of income. He submitted, moreover, that the deduction claimed was specifically
prohibited under s 12(a), as representing ‘the cost incurred in the maintenance of the taxpay-
er’, and under s 12(b), as representing ‘domestic or private expenses’ . . .
Nor do I consider that the expenses claimed by the respondent are of the kind contemplated and
prohibited by sub-sections (a) and (b) of s 12 of the Act. I take ‘maintenance of the taxpayer, his
________________________

182 1948 (4) SA 580 (A) at 588.

183 1936 CPD 241.
498 Income Tax in South Africa: Cases and Materials

family or establishment’ to mean feeding and clothing himself and his family providing them
with the necessities of life, and comforts, and, as it were, maintaining a certain standard of living,
and keeping up his establishment. ‘Domestic and private expenses’ are, I should say without
attempting an exhaustive definition, expenses pertaining to the household, and to the taxpayer’s
private life as opposed to his life as a trader. House rent and the cost of repairing the house are
specifically mentioned. Other costs which come to mind are servants’ wages, the cost of board
and lodging, the cost of running a motor-car for private use, holiday expenses, and so forth . . .
The crucial question would therefore seem to revolve around s 11(2)(a) and be whether the
respondent incurred the expenses, which he claims to deduct, in the production of his income.
...
Mr Ettlinger has said that a case of this kind is largely a matter of impression. I agree that this is so.
My view of the circumstances of the case is that the respondent could not have made the trip to
New York without making use of his wife’s services, just as he could not have made it without mak-
ing use of some form of conveyance. If he is entitled to deduct the expenses of the latter, he is
similarly entitled to deduct the expenses of the former. While his wife no doubt catered for his
comforts in New York, this was purely incidental: he could not have got to the scene of the business
operation and would not have been in a position to spend twelve days there, if it had not been for
her assistance.
The facts with which we are confronted in this appeal are undoubtedly of an exceptional nature.
The expenses incurred by the respondent might suggest extravagance on his part, and it may be
argued that he should have exercised greater economy, and chosen a less expensive form of
assistance. As to whether there was a duty on him to do so I express no opinion – cf the remarks
of Watermeyer J in the Port Elizabeth Tramways case.184 . . .
The Special Court has found that ‘on the facts the appellant’s wife’s services were necessary to
enable him to carry out his duties’. This finding has not been challenged on the ground that
there is no evidence to support it, or that it is one which could not reasonably have been
reached by the Special Court.
In the circumstances I consider that the expense of having his wife to accompany him was an
expense incurred by the respondent in the production of his income, and that it was wholly and
exclusively laid our for the purpose of trade.
The appeal is therefore dismissed with costs.
SCHREINER JA, MALAN JA, VAN BLERK JA and VAN WYK AJA concurred.

Notes
This judgment emphasises the fundamental principle that the taxpayer does not have to
prove that the expenditure was necessarily incurred, merely that it was bona fide incurred in
the production of income. On the facts, the deductibility of the expenditure in issue turned
on the closeness of the connection between the particular expenditure and the earning of
income by the taxpayer; was this expenditure so closely connected that it ought to be
regarded as part of the cost of performing the income-earning operations? This was the
criterion laid down in [240] Port Elizabeth Electric Tramway and [284] African Oxygen.

A salaried taxpayer, in that capacity, carries on a trade.

[260]
KBI v Van der Walt
1986 (4) SA 303 (T)
The taxpayer was a lecturer in law and philosophy at Potchefstroom University. During the
tax year ended 29 February 1984, he received a salary of R18 490,17 from the University,
________________________

184 At 244.
 Deductions: General principles; Assessed losses of prior years 499

together with further earnings of R110. In his income tax return, he claimed the follow-
ing deductions:
Home study (studeerkamer) expenses R1 803,19
Journals and stationery R1 059,06
Photocopies R500,00
Issue: whether, on the facts, the above expenditure was deductible in terms of s 11(a)
read with s 23(b) and s 23(g).
Held: in the affirmative. The taxpayer’s occupation as a salaried lecturer constituted a
‘trade’. On the facts, the expenditure in question was deductible in terms of s 11(a) and
was not a prohibited deduction under s 23(b). [See the notes below regarding the subse-
quent statutory amendments which now bar the deductibility of such expenditure where
the taxpayer’s income is a fixed salary or wage.]
Eloff AJP: [translated] The taxpayer was the only witness in the court a quo. His testimony was
not challenged in any respect by the representative of the Commissioner and was completely
accepted by the Special Court.
The statutory provisions that are, in the main, in issue in this appeal are s 11(a) and s 23(g) . . .
It needs to be placed on record that the finding of the court a quo that the taxpayer, in exercis-
ing his profession as a lecturer, falls within the definition of ‘trade’ in s 1 of the Act was not chal-
lenged in this court. I share the view of Melamet J, supported by the decision of Miller J in ITC
185
1158, that the taxpayer must be regarded as someone who exercises a trade.

Notes
This decision held that the taxpayer – a salaried university lecturer – was entitled to
deduct, in terms of s 11(a) and s 23(g), the expenses that he had incurred in connection
with the maintenance of the home office that he maintained in his private residence in
order to fulfil his employment duties more efficiently, even though he was not contrac-
tually obliged to maintain such a home office.
Since this decision, amendments to s 23(b) and s 23(m) have had the effect of abolish-
ing the deductibility of home office expenses for taxpayers whose income consists mainly
of a fixed salary or wage, as opposed to income in the form of a commission or perfor-
mance-based remuneration. Only the types of expenditure listed in s 23(m)(i)–(iv)
remain deductible for taxpayers on a fixed salary or wage.
Since the decision in KBI v van der Walt, s 23(b)(a) now tightly defines the require-
ments that domestic premises must satisfy in order for the taxpayer to be entitled to
claim expenditure in relation to such premises as a deduction. These requirements will
thus apply to employees whose remuneration is mainly commission-based or perfor-
mance-based and to self-employed taxpayers who maintain an office or workshop that is
part of their residence.
Section 23(b)(b)(i) read with s 23(m) now bars any deduction at all in relation to the
expenses of maintaining such premises for taxpayers whose income is a fixed wage or
salary.

§6.4 Section 23(f): ‘any expenses incurred in respect of any amounts received
or accrued which do not constitute income as defined in section one’
Expenditure incurred by a share trader for the dual purpose of gaining tax-exempt dividends and to
gain income on their re-sale is deductible in part.

________________________

185 33 SATC 177 at 179.

500 Income Tax in South Africa: Cases and Materials

[261]
CIR v Nemojim (Pty) Ltd
1983 (4) SA 935 (A), 45 SATC 241
The taxpayer, a private company, (‘Nemojim’) was a dealer in shares. The company
carried out a series of dividend-stripping operations, in which it purchased all the shares
of dormant companies which had large reserves of profits available for distribution as a
dividend; it then caused the company to distribute all its accumulated profits by way of a
dividend (all of which accrued to Nemojim), and then sold the shares. The dividends
were exempt from tax in Nemojim’s hands in terms of s 10(1)(k). Nemojim included the
proceeds of the sale of the shares in its gross income, and claimed a deduction for the
purchase price of the shares.
Issue: was Nemojim entitled to deduct the full purchase price of the shares, or was part
thereof not deductible by reason of s 23(f), on the grounds that it was expended, not in
the in the production of income, but in the production of dividends which are not
‘income’ because they are exempt under s 10(1)(k)?
Held: Nemojim had purchased the shares for a dual purpose, namely (1) to gain ex-
empt income in the form of dividends and (2) to gain income by selling the shares after
receiving the dividend. Therefore, in terms of s 23(f) only a proportion of the cost of the
shares was an allowable deduction.
Corbett JA: In the present case it is common cause that Nemojim was carrying on, within the Re-
public, the trade of dealing in shares; and that the expenditure in issue, viz the amounts paid by
Nemojim in the acquisition of the shares in which it dealt, was not of a capital nature. Accordingly,
the questions at issue are whether or not, in terms of s 11(a), such expenditure was incurred in the
production of the ‘income’ derived by Nemojim from this trade; and whether or not the expendi-
ture constituted expenses incurred in respect of amounts received or accrued which did not consti-
tute ‘income’ as defined (s 23(f)). Similar considerations govern the answers to both of these
questions.
It is correct, as argued by appellant’s counsel, that in order to determine in a particular case
whether moneys outlaid by the taxpayer constitute expenditure incurred in the production of
the income, important, sometimes overriding, factors are the purpose of the expenditure and
what the expenditure actually effects. See in this regard Port Elizabeth Electric Tramway Co v CIR;186
New State Areas Ltd v CIR;187 Sub-Nigel Ltd v CIR;188 CIR v Genn (Pty) Ltd;189 CIR v Allied Building
Society.190
As it was put by Schreiner JA in Genn’s case, supra:191
‘In deciding how the expenditure should properly be regarded the Court clearly has to assess the closeness
of the connection between the expenditure and the income-earning operations, having regard both to the
purpose of the expenditure and to what it actually effects.’ . . .
Adopting the approach in the present case, I am of the view that the expenditure incurred by
Nemojim in the acquisition of the shares in question had, in all but three instances, a dual pur-
pose, viz the receipt of moneys on resale (which would constitute income in Nemojim’s hand)
and the receipt of a dividend after the declaration thereof (which would constitute exempt in-
come in Nemojim’s hands); and that the expenditure actually effected this dual purpose. The
three instances where this was not the cases . . . represent a minimal proportion of Nemojim’s
business . . . and I propose to ignore them . . .
As pointed out in the Rand Selections case,192 supra, the Income Tax Act makes no provision for
apportionment. Nevertheless, apart from the Rand Selections case, it is a device which has previously
________________________

186 1936 CPD 241 at 245.

187 1946 AD 610 at 627.
188 1948 (4) SA 580 (A) at 592.
189 1955 (3) SA 293 (A) at 299D-G.
190 1963 (4) SA 1 (A) at 13D-G.
191 At 299G.
 Deductions: General principles; Assessed losses of prior years 501

been resorted to where expenditure in a globular sum has been incurred by a taxpayer for two
purposes, one of which qualifies for deduction and one of which does not (see eg Schonegevel v
CIR;193 ITC 832;194 SIR v Guardian Assurance Holdings (SA) Ltd;195 Borstlap v SBI.196) It is a practical
solution to what otherwise could be an intractable problem and in a situation where the only
other answers, viz disallowance of the whole amount of expenditure or allowance of the whole
thereof, would produce inequity or anomaly one way or the other. In making such an appor-
tionment the Court considers what would be fair and reasonable in all the circumstances of the
case197 (see Borstlap’s case).198
I revert to the facts of the present appeal. My earlier analysis thereof shows that Nemojim laid
out the moneys expended on the acquisitions of the shares in the various dormant companies in
question with a dual purpose. The one purpose was to receive dividends from the companies
and these dividends were exempt income in Nemojim’s hands. The other purpose was to receive
the proceeds of the shares on resale and these proceeds were income in Nemojim’s hands.
Nemojim seeks to deduct from its income the whole of this expenditure. It can only do so if the
expenditure passes the dual test of qualifying for deduction in terms of s 11(a) and, at the same
time, of not being excluded by s 23(f). In my opinion, the expenditure does not wholly pass
either test. Because one of the purposes of the expenditure was to earn exempt income in the
form of dividends and this purpose was in fact achieved, the expenditure was not wholly in-
curred in the production of the income and was partly an expense incurred in respect of an
amount received which did not constitute income. And to my mind it is no answer to say that the
expenditure produced income and this was indeed one of its purposes.
This case seems to me to be closely analogous to the Rand Selections case, supra . . . In the Rand
Selections case the Court refused a deduction of the total amount, but made an apportionment.
In my view that is what ought to be done in this case.
It was submitted by counsel for Nemojim that, when a taxpayer purchases shares to secure a
dividend due to be distributed, the taxpayer is not purchasing the dividend: he is purchasing the
shares. Consequently the cost price of the shares must be attributed to the shares and not to any
dividend which might accrue to the purchaser subsequent to the purchase of the shares. In sup-
port of these propositions, counsel referred to the cases of CIR v King;199 the Scottish case of CIR
v Forrest 200 and the Rhodesian case of Umtali Finance (Pty) Ltd v COT.201 These latter two cases were
also relied upon in the court a quo. . . .
Forrest’s case, supra, was an appeal heard by the Scottish Court of Session. The taxpayer (re-
spondent) had purchased certain shares . . . for a sum exceeding their par value by £50. In terms
of the contract of purchase, it was stated that the £50 was paid ‘to cover the portion of the divi-
dend accrued to date’. Some six months later the company declared and paid a dividend . . .
The Lord Justice-Clerk, Lord Alness stated:202
‘To say that the respondent purchased the dividend upon the shares is, I think, inaccurate. He bought the
shares with their potentialities, whatever they were. There was then no dividend in existence. He paid a
certain and arbitrary price for these shares, and that is the whole transaction.’ . . .
In the present case the point at issue is not so much whether Nemojim, when it purchased the
shares in the dormant companies, can in law be said to have purchased the dividends which were
subsequently declared in respect of the shares, but rather whether, having regard to all the
circumstances, the connection between the expenditure incurred in the purchase of the shares
and the receipt of the dividends was sufficiently close to justify the conclusions that the expend-
iture was incurred partly in the production of the dividends (see s 11(a) and/or that the ex-
penditure constituted partly expenses incurred in respect of the dividends (see s 23(f)). While
the factor that Nemojim cannot in law be said to have purchased the dividends may be relevant
________________________

192 At 131E-G.
193 1937 CPD 258.
194 21 SATC 320.
195 1976 (4) SA 522 (A).
196 1981 (4) SA 836 (A).
197 See Borstlap’s case, supra at 849G.
198 At 849G.
199 1947 (2) SA 196 (A).
200 8 TC 704.
201 1962 (3) SA 281 (FC).
202 At 708.
502 Income Tax in South Africa: Cases and Materials

to this issue, it is, in my view, by no means decisive thereof. On the contrary, as I have indicated,
I consider that, because the expenditure in the purchase of the shares was incurred by Nemojim
with the firm purpose of stripping the companies concerned of their distributable reserves by
ways of a dividend declaration, because the transactions involved the purchase of all the shares
in the companies concerned and thus put it within Nemojim’s power to effect in each case a
swift declaration of a dividend, and because this purpose was in fact carried out, the necessary
connections between the expenditure and the receipt of the dividends existed in this case. In my
opinion it would be wholly unrealistic to regard the purchase price of the shares as having been
expended solely in the production of the income consisting of the proceeds resulting from the
resale of the shares203 (cf Rand Selections case).204 . . .
. . . Counsel for Nemojim argued that if this Court were to accede to appellant’s plea for appor-
tionment, it would mean that a similar apportionment would have to be made in the case of
every ‘ordinary’ share-dealing company (ie one that merely bought and sold shares and did not
indulge in dividend-stripping). I am by no means convinced that this would necessarily follow. It
seems to me that there are vital differences between the case of a taxpaying company which buys
all the shares in a dormant company with a view to dividend stripping and one which buys shares
in companies (not necessarily controlling interests) in order to make a profit on their resale and
incidentally also receives whatever dividends may be declared on the shares while it holds them.
But the position of such an ‘ordinary’ share-dealing company does not arise for decision in this
case and I refrain from expressing any definite view in regard thereto. . . .
For these reasons, I am of the opinion that the court a quo came to an incorrect conclusion in
regard to the manner in which Nemojim should be taxed in regard to its dividend stripping
operations. Contrary to the court a quo, I hold that in a case such as this, expenditure incurred
in the acquisition of shares relating to companies where dividend stripping occurred should be
apportioned in accordance with a formula . . . The formula to be applied, which is an adaptation
of the one expounded in the Rand Selections case, supra, is the following.
A = (B + C) × (D divided by D + E)
where
A = deductible expenses
B = general expenses relating to share dealing
C = total cost of acquisition of shares in companies subjected to dividend stripping in tax year
D = total proceeds of the sale of such shares
E = total dividends received in respect of such shares.
...
TRENGROVE JA, HOEXTER JA, BOTHA JA and NICHOLAS JA concurred.

Notes
The first issue was whether the taxpayer had purchased the shares in question with a dual
purpose, one being to gain the dividends, and the other to gain income by selling the
shares. This was a question of fact, and the court held that on the evidence the taxpayer
had indeed purchased the shares with a dual purpose. The taxpayer’s second argument205
was on a point of law, based on the decision in Forrest, where a Scottish court had held
that when a person purchases shares which are pregnant with dividend, no part of his
expenditure can be said to be the purchase price of the dividend; what he is purchasing
are the shares with all their potentialities. Hence, argued the taxpayer, the full purchase
price of the shares ought, in the case of a share-dealer, to be deductible. The court did
not disagree with this general proposition, but said206 that it was not decisive. The court
said that the point at issue was not the narrow question whether the expenditure was the
________________________

203 Cf Rand Selections, at 131D.

204 At 131D.
205 At 952.
206 At 953.
 Deductions: General principles; Assessed losses of prior years 503

purchase price of the shares, but the broader question of whether the connection be-
tween the purchase of the shares and the later receipt of dividends was sufficiently close
to justify the conclusion that the expenditure was incurred partly in the production of
the dividends. (This was the test laid down in Genn – the court must ‘assess the closeness
of the connection between the expenditure and the taxpayer’s income-earning oper-
ations’.) The court held that the connection was sufficiently close to warrant the conclu-
sion that the expenditure was partly incurred in the production of dividends. The court
then affirmed207 that, although the Act did not expressly allow for apportionment, the
solution laid down in Rand Selections was ‘a practical solution to what otherwise could be
an intractable problem’ and that the court would make a ‘fair and reasonable appor-
tionment’ of the purchase price of the shares, as to what proportion was deductible. In
Rand Selections the court had laid down a formula which allowed the taxpayer to deduct
the same proportion of his total expenditure as the proportion which his total income
bore to his income plus dividends. In Nemojim the court retained this same basic formula,
with a slight adaptation.

[262]
Mallalieu v Drummond
[1983] 2 All ER 1095 (HL)
A lady barrister claimed a deduction in respect of the clothes which she wore under her
gown during court appearances. The deductibility of the expenditure turned on whether
it was barred from deduction by virtue of s 130 of the relevant United Kingdom legis-
lation, namely the Income and Corporation Taxes Act 1970, which laid down that:
‘no sum shall be deducted in respect of (a) any disbursements or expenses, not being money wholly and
exclusively laid out or expended for the purposes of the trade, profession or vocation, (b) any disburse-
ments or expenses of maintenance of the parties, their families or establishments, or any sums expended
for any other domestic or private purposes distinct from the purposes of the trade, profession or vocation
. . .’
Issue: whether the expenditure in question had been wholly and exclusively expended
for the purposes of the taxpayer’s profession.
Held: that the expenditure had been made not only for professional purposes but also
for personal purposes, namely so that she could be warmly and decently clothed; there-
fore the expenditure had a dual purpose and was disqualified from deduction.
Lord Brightman: The effect of para (a) is to exclude, as a deduction, the money spent by the tax-
payer unless she can establish that such money was spent exclusively for the purposes of her profes-
sion. The words in the paragraph ‘expended for the purposes of the trade, profession or vocation’
mean in my opinion ‘expended to serve the purposes of the trade, profession or vocation’, or, as
elaborated by Lord Davey in Strong & Co of Romsey Ltd v Woodifield,208 ‘for the purpose of enabling a
person to carry on and earn profits in the trade . . .’ The particular words emphasised do not refer
to ‘the purposes’ of the taxpayer as some of the cases appear to suggest. They refer to ‘the purpos-
es’ of the business which is a different concept although the ‘purpose’ (ie the intentions or objects)
of the taxpayer are fundamental to the application of the paragraph.
The effect of the word ‘exclusive’ is to preclude a deduction if it appears that the expenditure
was not only to serve the purposes of the trade, profession or vocation of the taxpayer but also to
serve some other purposes. Such other purposes, if found to exist, will usually be the private
purposes of the taxpayer: see for example Prince v Mapp.209
To ascertain whether the money was expended to serve the purposes of the taxpayer’s business,
it is necessary to discover the taxpayer’s ‘object’ in making the expenditure: see Morgan v Tate &
210
Lyle Ltd. As the taxpayer’s ‘object’ in making the expenditure has to be found, it inevitably
________________________

207 At 951.
208 [1906] AC 448 at 453, [1904-1907] All ER Rep 953 at 956.
209 [1970] 1 All ER 519, [1970] 1 WLR 260.
210 [1954] 2 All ER 413 at 416, 423, [1955] AC 21 at 37, 47.
504 Income Tax in South Africa: Cases and Materials

follows that . . . the General Commissioners need to look into the taxpayer’s mind at the mo-
ment when the expenditure is made. After events are irrelevant to the application of s 130 ex-
cept as a reflection of the taxpayer’s state of mind at the time of the expenditure.
If it appears that the object of the taxpayer at the time of the expenditure was to serve two pur-
poses, the purposes of his business and other purposes, it is immaterial to the application of
s 130(a) that the business purposes are the predominant purposes intended to be served.
The object of the taxpayer in making the expenditure must be distinguished from the effect of
the expenditure. An expenditure may be made exclusively to serve the purposes of the business,
but it may have a private advantage. The existence of that private advantage does not necessarily
preclude the exclusivity of the business purposes.211 For example a medical consultant has a
friend in the South of France who is also his patient. He flies to the South of France for a week,
staying in the home of his friend and attending professionally on him. He seeks to recover the
cost of his air fare. The question of fact will be whether the journey was undertaken solely to
serve the purposes of the medical practice. This will be judged in the light of the taxpayer’s ob-
ject in making the journey. The question will be answered by considering whether the stay in the
South of France was a reason, however subordinate, for undertaking the journey, or was not a
reason but only the effect. If a week’s stay on the Riviera was not an object of the consultant, if
the consultant’s only object was to attend on his patient, his stay on the Riviera was an unavoida-
ble effect of the expenditure on the journey and the expenditure lies outside the prohibition in
s 130.

Notes
In its earlier form, s 23(g) prohibited the deduction of expenditure which was not laid
out ‘wholly or exclusively’ for the purposes of trade. This was an all-or-nothing criterion;
if the expenditure was not laid out ‘wholly and exclusively’ for purposes of trade, then no
part of the expenditure was deductible.
In its present form, the subsection prohibits the deduction of expenditure ‘to the extent
to which such moneys were not laid out or expended for the purposes of trade’. Hence,
expenditure which is incurred partly for purposes of trade and partly for non-trading
purposes can be apportioned, and part allowed as a deduction.
It is therefore still necessary to determine whether expenditure was laid out entirely
for the purposes of trade and, if not, to determine an apportionment. Dicta in Mallalieu v
Drummond are instructive in highlighting the distinction between the situation where the
taxpayer incurs expenditure for two purposes, one business and one private, and the
situation where the taxpayer incurs expenditure solely for a business ‘purpose’, but
which has the incidental ‘effect’ of some private pleasure or advantage. This distinction is
important to s 11(a) and to s 23(g). In determining whether expenditure is deductible,
the purpose of the taxpayer in incurring it must be established. If the taxpayer incurred
expenditure partly for revenue purposes and partly for capital purposes (but wholly for
trading purposes) there can be an apportionment under s 11(a) – see [289] Guardian
Assurance Holdings. If the taxpayer has incurred expenditure for two purposes, one of
them a ‘trading’ purpose and the other not (eg where it was incurred partly for private
purposes) then it seems that an apportionment will be made either under s 11(a) or
under 23(g). If the term ‘purpose’ means something different in these two provisions,
then it is possible that their respective applications will lead to different results.
In COT v BSA Co Investments Ltd 212 it was held that the word ‘purposes’ in (the Rhode-
sian counterpart of) s 23(g) means the use to which the property will be put, and does
not mean the motive of the taxpayer in purchasing the property.

________________________

211 The latter two sentences were quoted with approval in: CIR v Pick ’n Pay Wholesalers (Pty) Ltd 1987 (3) SA
453 (A).
212 1966 (1) SA 530 (SRAD).
 Deductions: General principles; Assessed losses of prior years 505

[263]
Solaglass Finance Co (Pty) Ltd v CIR
1991 (2) SA 257 (A), 53 SATC 1
The taxpayer company was a wholly-owned subsidiary of Plate Glass Shaterprufe Indus-
tries Ltd. The taxpayer secured and arranged the funds required by all companies in the
Plate Glass group. Subsidiary companies which required loans would apply to the taxpay-
er which would lend them the necessary money, on which interest was payable, generally
at one per cent higher than the taxpayer itself paid for moneys borrowed by it from the
holding company or from commercial banks. The taxpayer also made loans to staff
members and discounted bills for customers of trading companies in the group.
In respect of the 1978 and 1979 tax years, the taxpayer sought to deduct the amount of
some R4.5 million in respect of an irrecoverable loan to a company in the Plate Glass
group and R55 000 in respect of bad debts relating to moneys owed by customers of the
group and employees or ex-employees of the group.
Issue: whether the moneys claimed as a deduction satisfied the tests for deductibility in
s 11(a) and s 23(g).
Held: the losses in question satisfied the requirements of s 11(a); but they failed to
meet the requirements of s 23(g) because the moneys had been laid out for a dual pur-
pose, namely to make a profit for the taxpayer and also to further the interests of the
Plate Glass group of companies; consequently, the losses were not deductible.
Friedman AJA: Appellant relies, as the basis for its claim to be entitled to these deductions from
its taxable income, on s 11(a) of the Act . . .
It is common cause that this section must be read with its counterpart, s 23(g), which provides
that:
‘No deductions shall in any case be made in respect of the following matters, namely –
(g) any moneys claimed as a deduction from income derived from trade, which are not wholly or exclu-
sively laid out or expended for the purposes of trade;’
Section 11(a) provides positively for what may, and s 23 negatively for what may not, be deduct-
ed in the determination of a taxpayer’s taxable income; a deduction claimed must satisfy both
sections. See CIR v Nemojim (Pty) Ltd.213
Dealing first with s 11(a), what appellant has to establish is that (1) it was carrying on a trade; (2)
the losses claimed were incurred in the production of income; (3) they are not of a capital na-
ture. The act contains in s 1 a very wide definition of ‘trade’ and there can be no doubt that the
business which appellant was conducting falls within that definition. The second requirement
also presents no difficulty: appellant’s income consisted exclusively of interest earned on moneys
lent by it in the course of its activities, and the losses were clearly incurred in the production of
such income. The third requirement involves a consideration of the question whether the losses
are of a capital or revenue nature.
The distinction between losses of a capital and those of a revenue nature, has been formulated
in various ways . . .
...
As what appellant lost was the capital which it advanced to the various debtors and which has be-
come irrecoverable, it is necessary to decide whether the capital thus lost was fixed or floating
(sometimes called circulating) capital. If it was fixed capital, the loss was of a capital nature; if it was
floating, the loss was of a revenue nature. See Stone v SIR.214
The distinction between fixed and floating or circulating capital was explained by Innes CJ in
215
CIR v George Forest Timber Co Ltd as follows:
‘Capital, it should be remembered, may be either fixed or floating. I take the substantial difference to be
that floating capital is consumed or disappears in the very process of production, while fixed capital does
not; though it produces fresh wealth, it remains intact.’
________________________

213 1983 (4) SA 935 (A) at 946-947, 45 SATC 241 at 254-255.

214 1974 (3) SA 584 (A) at 595A-B, 36 SATC 117 at 129-130.
215 1924 AD 516 at 524, 11 SATC 20 at 23.
506 Income Tax in South Africa: Cases and Materials

See also the New State Areas case, supra 216 . . .

In Stone’s case, supra, Corbett AJA, with reference to the distinction drawn in the New State Areas case
and the George Forest Timber Company case between fixed and floating capital, said the following:217
‘Applying the distinction, thus described, to the ordinary case of a loan of money, there is no doubt, in my
opinion, that the capital lent constitutes fixed capital. Such capital is not consumed in the very process of in-
come production: it does not disappear to be replaced by something which when received by the taxpayer
forms part of his income. It is true that the lender does not retain ownership in the actual money which pass-
es but, in an economic and accounting sense, it remains his capital and upon the termination of the loan (all
being well) it returns to him intact. In the process, wealth may be produced for the lender but this takes the
form of a consideration, usually in the form of interest, paid by the borrower for the use of the capital; it does
not consist of the augmented proceeds of the capital, which itself has disappeared in the process.’
The position is, however, different when a loan is made in the course of his business by a money-
lender or banker. There have been several cases in our courts where it has been held that if a
taxpayer can show that he has been carrying on the business of banking or money-lending, losses
incurred by him as a result of loans made by him in the course of such business becoming irre-
coverable, constitute losses of a non-capital nature and are accordingly deductible.
Whether or not a taxpayer can be said to be carrying on the business of a money-lender or bank-
er is in each case a question of fact to be decided in the light of the circumstances of the particu-
lar case. The following are guidelines which have been laid down for the determination of the
question whether a taxpayer can be said to be carrying on such a business:
1. There must be an intention to lend to all and sundry provided they are, from his point of
view, eligible. See SIR v Crane.218
2. The lending must be done on a system or plan which discloses a degree of continuity in lay-
ing out and getting back the capital for further use and which involves a frequent turnover of
the capital. See ITC 1138,219 ITC 812,220 ITC 933,221 and Crane’s case, supra.222
3. The obtaining of security is a usual, though not essential, feature of a loan made in the
course of a money-lending business. See ITC 999223 ITC 1003224 ITC 1138.225
4. The fact that money has on several occasions been lent at remunerative rates of interest, is
not enough to show that the business of money-lending is being carried on; there must be a
226
certain degree of continuity and system about the transactions. See ITC 812.
5. The proportion of the income from loans to the total income: the smallness of the propor-
tions cannot, however, be decisive if the other essential elements of a money-lending busi-
ness exist. See ITC 1138,227 ITC 979.228
229
In Stone’s case, supra, Corbett AJA referred to these and other cases and went on to state:
‘The rationale of these decisions appears to be that the capital used by a money-lender to make loans con-
stitutes his circulating capital and that consequently losses of such capital are on revenue account. I shall
accept, for the purposes of this case, that these decisions are correct, provided that the business is purely
that of money-lender and the loans are not made in order to acquire an asset or advantage calculated to
promote the interests and profits of some other business conducted by the taxpayer (cf Atlantic Refining
230
Company of Africa (Pty) Ltd v Commissioner for Inland Revenue). There is, however, in my view, no warrant
for extending this principle to loans by persons who are not conducting a money-lending business.’ . . .

________________________

216 (1946) 14 SATC 155 at 163-164.

217 (1974) 36 SATC at 130.
218 1977 (4) SA 761 (T) at 768D-E, 39 SATC 191 at 198.
219 32 SATC 3 at 6.
220 20 SATC 469 at 473.
221 24 SATC 347 at 348.
222 39 SATC 191 at 198.
223 25 SATC 183 at 186.
224 25 SATC 237 at 239.
225 32 SATC 3 at 6.
226 20 SATC 469.
227 32 SATC 3 at 6.
228 25 SATC 44 at 46.
229 (1974) 36 SATC at 130
230 1957 (2) SA 330 (A), 21 SATC 203.
 Deductions: General principles; Assessed losses of prior years 507

Appellant’s counsel argued, on the strength inter alia of the authorities referred to in Stone’s
case, that the appellant was conducting 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 appellant’s taxable income
in terms of s 11(a) of the Act. Respondent’s counsel, on the other hand, contended that appel-
lant was not conducting the business of a banker or money-lender; it was, he argued, merely
carrying on an administrative business and its income was derived from the managerial functions
it performed in the course thereof. Counsel argued that what distinguished appellant from a
money-lending company, were the following:
1. Appellant’s dominant motive was to assist the Group.
2. Appellant had no system of structuring its business to ensure that it made a profit.
3. Security was not taken on loans.
4. Loans were not made to all and sundry, but only to ‘an elitist element’.
5. Financial considerations were not taken into account in deciding whether to make a loan; it
was the Group interests which were decisive, the intention being to provide a support system
for appellant’s associated companies in the Group.
There is no gainsaying the fact that appellant does not fall within the ambit of all the guidelines
referred to above. It does not, for example, lend to all and sundry; it does not seek to obtain
security for the loans which it advances; its business is not structured to maximise profits. On the
other hand, appellant’s sole business consists of borrowing moneys and utilising the moneys so
acquired for making loans, albeit only to companies in the Group, to staff members and custom-
ers of trading companies in the Group. This business was moreover conducted on an extensive
scale . . .
The fact that appellant’s monthly turnover was, according to Mr Scott, of the order of R30 mil-
lion, involving a large number of transactions, provides a further illustration of the extent of the
borrowing and lending in which the appellant was involved.
I do not agree with the submission made by respondent’s counsel that financial considerations
were not taken into account in deciding whether to make a loan . . . All the subsidiaries paid
interest on their loans, but the interest rates varied from company to company . . .
Subject to the self-imposed constraints under which appellant operated within the Group con-
text, appellant’s business could be described as one consisting entirely of the borrowing of mon-
ey and the lending of that money at a profit. Because of these constraints, there are features of
appellant’s business which are not normally found in an ordinary commercial money-lending
business. Non constat, however, that the business conducted by appellant is not that of money-
lending. To my mind, that is exactly what appellant is doing. In the circumstances the capital
utilised by appellant for this purpose is, in my judgment, not fixed, but circulating capital.
It is obtained for one purpose and one purpose only, namely that of parting with it temporarily
in the form of loans, in the expectation of receiving it back with an increment in the form of
interest. The capital which appellant lost as a result of being unable to recover the loans, was
therefore of a revenue nature. The losses in question were accordingly deductible in terms of
s 11(a).
It remains to be considered whether the losses are disqualified from deduction by reason of the
provisions of s 23(g) . . . Two questions arise, namely (a) were those moneys ‘laid out’ or ‘expen-
ded’ within the meaning of s 23(g)? and if so, (b) were they wholly or exclusively laid out for the
purposes of trade?
When money which is advanced by way of a loan, becomes irrecoverable, the taxpayer incurs a
‘loss’. It was argued on behalf of appellant that the word ‘loss’ does not necessarily mean the
same as ‘expenditure’ (the word used in s 11(a)) and that s 23(g) does not apply to a loss caused
to a taxpayer as a result of his becoming unable to recover a loan made by him, which loss would
otherwise be deductible in terms of s 11(a). In view of the conclusion I have reached on the
second question I find it unnecessary to decide whether or not it can be said that the moneys in
question were ‘laid out’ or ‘expended’ within the meaning of s 23(g) of the Act. I shall assume
that they were. The next question then is whether the moneys were so laid out or expended
‘wholly or exclusively for the purposes of trade’. This involves a consideration of what is meant
by these words.
508 Income Tax in South Africa: Cases and Materials

There is a similarly worded provision in the English tax Legislation . . .

The English Court of Appeal had occasion to consider the meaning of the words ‘wholly and
exclusively laid out or expended for the purposes of trade . . .’ in Bentleys, Stokes and Lowless v
Beeson (HM Inspector of Taxes).231 The issue in the Bentleys case was whether the taxpayers, who
were members of a firm of solicitors, were entitled to a deduction in respect of expenses in-
curred in entertaining clients. The clients were entertained to lunch, during which business
interviews were conducted. The clients were charged fees for the legal advice given, but the
lunches were charged by the taxpayers as an expense against the firm’s income. Romer LJ, in
delivering the judgment of the court, said the following:232
‘. . . The sole question is whether the expenditure in question was “exclusively” laid out for business pur-
poses, that is: What was the motive or object in the mind of the two individuals responsible for the activi-
ties in question? It is well established that the question is one of fact: and again, therefore, the problem
seems simple enough. The difficulty however arises, as we think, from the nature of the activity in ques-
tion. Entertaining involves inevitably the characteristic of hospitality, giving to charity or subscribing to a
staff pension fund involves inevitably the object of benefaction . . . But the question in all such cases is: was
the entertaining, the charitable subscription, the guarantee, undertaken solely for the purposes of busi-
ness, that is, solely with the object of promoting the business or its profit-earning capacity?
It is as we said, a question of fact. And it is quite clear that the purpose must be the sole purpose. The par-
agraph says so in clear terms. If the activity be undertaken with the object both of promoting business and
also with some other purpose, for example, with the object of indulging an independent wish of enter-
taining a friend or stranger or of supporting a charitable or benevolent object, then the paragraph is not
satisfied though in the mind of the actor the business motive may predominate. For the statue so pre-
scribes. Per contra, if in truth the sole object is business promotion, the expenditure is not disqualified be-
cause the nature of the activity necessarily involves some other result, or the attainment or furtherance of
some other objective, since the latter result or objective is necessarily inherent in the act.’
On the facts of that case, the Court of Appeal held that the expenses in question were deducti-
ble; the element of hospitality involved did not, so it was held, constitute a dual purpose with the
professional purpose involved.
The words ‘wholly and exclusively laid out or expended for the purposes of trade . . .’ were sub-
sequently considered by the House of Lords in Mallalieu v Drummond (Inspector of Taxes).233 The
taxpayer was a female barrister who claimed, as a deduction, the expenditure incurred by her on
the replacement, cleaning and laundering of certain items of clothing which she wore in court
...
To ascertain whether the money was expended to serve the taxpayer’s business, it was necessary,
according to Lord Brightman, ‘to discover the taxpayer’s “object” in making the expenditure’ by
looking into the taxpayer’s mind at the moment when the expenditure was made . . . Lord
Brightman continued as follows:234
‘If it appears that the object of the taxpayer at the time of the expenditure was to serve two purposes, the
purposes of his business and other purposes, it is immaterial to the application of s 130(a) that the busi-
ness purposes are the predominant purposes intended to be served.
The object of the taxpayer in making the expenditure must be distinguished from the effect of the ex-
penditure. An expenditure may be made exclusively to serve the purposes of the business, but it may have
a private advantage. The existence of that private advantage does not necessarily preclude the exclusivity
of the business purposes’.
The appeal was therefore, said Lord Brightman235 ‘basically concerned with the distinction be-
tween object and effect’. The taxpayer in Mallalieu’s case was held to have two objects, namely to
serve the purposes of her profession and to serve her own purposes and the deduction was
therefore not allowed.
In CIR v Pick ’n Pay Wholesalers (Pty) Ltd 236 this court adopted the analysis of Romer LJ in the Bent-
leys case, and referred also the distinction between the object of expenditure and its effect as
________________________

231 [1952] 33 TC 491; [1952] 2 All ER 82 (CA).

232 At 503-504 (33 TC), [1952] 2 All ER at 84G-85B.
233 [1983] 2 All ER 1095.
234 At 1099j-1100a.
235 At 1100d.
236 1987 (3) SA 453 (A), 49 SATC 132.
 Deductions: General principles; Assessed losses of prior years 509

outlined in Lord Brightman’s speech in Mallalieu’s case. Applying the principles thus enunciat-
ed, this court held that the taxpayer who had made a large charitable donation which it sought
to deduct from its income as an ‘advertising’ expense, had not shown that, in making the dona-
tion, it did not have a dual purpose, namely a philanthropic as well as a business purpose; the
deduction was therefore disqualified by the provisions of s 23(g).
In the present case the business of the appellant was, in a general sense, that of banker or finan-
cier to the Group. In the course of that business, it borrowed and lent out moneys in accordance
with the financial requirements of the members of the Group, its business activities subsequently
being expanded to encompass loans to employees of the Group and the discounting of bills for
customers of the trading companies in the Group . . .
It is by no means uncommon, in a large group of companies, for the business of the group to be
rationalised in such a way that the activities of each subsidiary are structured with the interests of
the group in mind. If the sole object of an expenditure by a subsidiary is the promotion of its
business, the expenditure would not, as Romer LJ pointed out in the Bentleys case, be ‘disquali-
fied because the nature of the activity necessarily involves some other result, or the attainment or
furtherance of some other objective’ which is ‘necessarily inherent in the act’.
The losses which form the subject matter of the present appeal, all arose out of expenditure
incurred by appellant for the purposes of its trade as a money-lender. The fact that the loans
were made necessarily resulted in an advantage to the Group. That result did not, however, con-
stitute a ‘purpose’ different from that of promoting the business which appellant was itself con-
ducting. That being so, the losses in question were not, in my judgment, disqualified as deductions
by reason of s 23(g).
...
I would uphold the appeal with costs . . .
E M GROSSKOPF JA concurred in the judgment of FRIEDMAN AJA.
Botha JA: Section 23(g) does not refer in terms to ‘losses’ as does s 11(a). Counsel for the appel-
lant based an argument on the difference in this respect between the two sections. He said that it
showed that the Legislature did not intend s 23(g) to apply to the deduction of ‘losses’ at all; and
since the appellant was clearly claiming a deduction of ‘losses’, and nothing else, its claim could
not be barred by s 23(g). I do not agree. It seems to me that the argument does violence to the
plain meaning and effect of the language used in s 23(g), particularly when it is contrasted with
the wording of s 11(a) and especially when it is considered in the context of the other para-
graphs of s 23 . . .
So, in the case of a loan which has become irrecoverable, the amount of what is sought to be
deducted, important considerations are that it is not the ‘expenditure’ incurred in advancing
the loan which is sought to be deducted, but the loss of the loan capital by reason of its having
become irrecoverable; . . . Section 11(a) provides positively for what may be deducted, and
s 23(g) negatively for what may not, but there is no direct correlation between the one and the
other . . . The enquiries under the two sections are notionally and logically discrete . . . Section
11(a) is concerned with the deduction of ‘expenditure’ qua expenditure and the deduction of
‘losses’ qua losses, while s 23(g) focuses on the deduction of ‘money’s qua moneys. And ‘moneys
laid out or expended’ do not become the less because they are lost. . . .
. . . In consequence, for the deductions claimed by the appellant to pass the test of s 23(g), it
must be shown that the amounts of the loans made by the appellant were wholly and exclusively
laid out or expended for the purposes of trade.
I proceed, then, to consider whether that has been established . . .
. . . [T]he distinction between ‘motive’ and ‘purpose’ in this context seems to me to be a nebu-
lous one: it may sometimes be found to be helpful, but at other times it may be conducive more
to confusion than to clarity. Again, the distinction between ‘object’ and ‘effect’ seems to me to
be incapable of exact definition, and hence of little real use as a general test. And the same ap-
plies to the suggested distinction, urged upon us by counsel for the appellant, between ‘subjec-
tive intention’ and ‘objective purpose’. The truth is, in my judgment, that there are no hard and
fast rules for deciding whether a taxpayer’s expenditure falls within or outside the ambit of the
section; it is not possible to devise any precise universal test for determining whether expenditure
510 Income Tax in South Africa: Cases and Materials

comprises moneys ‘exclusively laid out or expended for the purposes of trade’. In general, one
can say no more than that the issue is to be resolved by examining the particular facts of each
individual case. . . .
In my opinion the evidence speaks for itself and in so speaking it proclaims that the appellant’s
trading activities were geared to the achievement of a dual purpose: furthering the interest of
the Group’s subsidiaries and thus of the Group itself; and making a profit for the appellant. . . .
In dealing with s 11(a) my Brother Friedman says in his judgment: ‘Subject to the self-imposed
constraints under which appellant operated within the Group context, appellant’s business could
be described as one consisting entirely of the borrowing of money and the lending of that money
at a profit’. With respect, I am in full accord with this description of the appellant’s business, but, in
my view, when it comes to applying the test of s 23(g), one must be on one’s guard not to beg the
question by simply elevating the words ‘at a profit’ to the status of ‘purpose’ and relegating the
‘self-imposed restraints’ to the status of ‘result’. In the context of s 23(g) I would say that the appel-
lant’s business consists entirely of the borrowing and the lending of money; that is its nature. What
calls for determination then, is the relationship of that business vis-à-vis the promotion of the
Group interests, on the one hand, and the making of a profit, on the other. On the evidence, I am
unable to discern any qualitative difference between the one relationship and the other. The evi-
dence shows plainly, in my opinion, that the appellant’s business is wholly structured and conduct-
ed with a view to achieving both the promotion of the Group interests and the making of a profit.
If the former is a ‘result’, so is the latter; and if the latter is a ‘purpose’, so is the former. In incur-
ring expenditure by making loans the appellant pursues both aims simultaneously; the advantages
accruing therefrom enure to the benefit of both Group and the appellant; and in both instances
they are ‘necessarily inherent in the act’, irrespective of whether they are viewed as being ‘objec-
tives’ or ‘results’. It is true that a profit is to be made always, and to that limited extent it may be
said that the Group interests are subservient to the appellant’s own interest. But that is neither here
nor there. It does not render the promotion of the Group interests the less a ‘purpose’ of the ap-
pellant’s business. The concept of a ‘dominant purpose’ has no role to play here.
Counsel for the appellant stressed that it is an everyday occurrence for the affairs of a subsidiary
company within a group of companies to be so arranged as to serve the interest of the group. That
is so, of course. But I do not see how it can avail the appellant. In every case where that occurs, and
the question arises whether a particular item of expenditure is hit by s 23(g), the answer will have
to be found by analysing the particular facts of the case. Inter alia one would have to examine the
nature of the activities carried don, the nature of the expenditure, and the closeness (or remoteness)
of the connection between the expenditure and the benefit derived therefrom by the Group. For
example: in the present case the appellant presumably incurs ordinary day-to-day expenses in the
running of its business, such as paying salaries to its employees, perhaps paying rental for the prem-
ises occupied by it, and so forth. There is no doubt that the deduction of such expenses from the
appellant’s income is not precluded by s 23(g). The reason for this is that the connection between
such expenditure and the benefit to the Group flowing form the appellant’s activities is too remote
for the latter to qualify as a ‘purpose’ in terms of the section. But the appellant’s expenditure in the
form of loans advanced to subsidiaries in the Group stands on quite a different footing. Such ex-
penditure is part and parcel, the essential substance, in fact, of the very activities which were de-
signed and carried out in order to benefit the Group, through the subsidiaries concerned. The
connection between this expenditure and the benefit is both direct and immediate. In these par-
ticular circumstances the benefit falls within the ambit of the word ‘purposes’ in the section.
. . . I am nevertheless satisfied that the link between the appellant’s activities and the furthering
of the Group’s interests is sufficiently close, on the evidence, to cause the latter to fall within the
ambit of the word ‘purposes’ as used in the section.
The order of the court is that the appeal is dismissed with costs . . .
NICHOLAS AJA and NIENABER AJA concurred in the judgment of BOTHA JA.

Notes
The bench in this case was unanimously of the view that, if a taxpayer carries on the
business of a money-lender or a banker (which is a question of fact) then any losses made
as a result of irrecoverable loans are of a non-capital nature. It was also the unanimous
view that, in the present case, despite some unusual features which were due to the fact
 Deductions: General principles; Assessed losses of prior years 511

that the taxpayer operated under certain constraints within its group of companies, the
taxpayer did indeed carry on the business of money-lending. Hence the capital which it
utilised for this purpose was floating, not fixed capital. Therefore, the losses passed the
tests for deductibility laid down in s 11(a). A majority of the court (three out of the five
judges) however held that, the losses in question failed to satisfy the requirements of
s 23(g). Consequently, the losses were not deductible.
The majority judgment held that the reason the losses failed to satisfy the requirements
of s 23(g) was that the taxpayer’s money-lending business was conducted for a dual pur-
pose, namely to promote the group’s interests and also to make a profit. At the time, the
provisions of s 23(g) precluded any apportionment of the expenditure into a deductible
and a non-deductible component. After the amendment of s 23(g), such an apportion-
ment became possible.
The minority judgment (Grosskopf JA and Friedman AJA) held that the benefit to the
group of companies was a ‘result’, not a ‘purpose’. The taxpayer’s only ‘purpose’ was to
promote its own business. Hence, the minority judgment concluded that the taxpayer’s
activities did not fall foul of s 23(g) and that the losses were accordingly deductible.

Where moneys are borrowed by a money-lending institution for the purpose of investing those funds
to earn income, all the interest paid on such borrowings is deductible in terms of s 11(a). Sec-
tion 23(f) does not bar the deductibility even though some of the borrowed funds do not in fact
produce income.

[264]
CIR v Standard Bank of SA Ltd
1985 (4) SA 485 (A)
The Standard Bank of South Africa Ltd was a registered commercial bank. In its income
tax returns for the years of assessment in issue, it claimed as deductions the interest paid
on moneys deposited by (ie borrowed from) its clients. The bank used a small propor-
tion of the moneys so deposited in the purchase of redeemable preference shares. Since
the amounts received by the bank by way of dividends on those shares were exempt from
tax in its hands by virtue of s 10(1)(k) of the Income Tax Act, the Commissioner con-
tended that a proportionate amount of the interest outlaid by the bank, since it did not
produce ‘income’ (as defined in the Act), should, in terms of s 23(f), be disallowed as a
deduction in the computation of the bank’s taxable income.
Issue: was a proportion of the interest paid by the bank on borrowed moneys non-
deductible by virtue of s 11(a) read with s 23(f) because some of the borrowed funds did
not produce ‘income’ as defined in the Act?
Held: all of the interest outlaid by the bank was deductible. The vital issue was the
bank’s purpose in borrowing the moneys on which it paid interest. The question
was whether the connection between the expenditure on interest and the acquisition
of the redeemable preference shares in question was sufficiently close to justify the
conclusion that such expenditure was, in each year of assessment, incurred in the pro-
duction of the dividends derived from those shares – ie in the production of exempt
income. The answer to the question was in the negative for four reasons. Firstly,
as a matter of commercial necessity, the bank had to accept all deposits offered to it.
Secondly, there was no connection between the acceptance of deposits and the invest-
ment of funds in redeemable preference shares. Thirdly, the bank was reluctant
to invest in preference shares, never did so on its own initiative, and did so in only a
few exceptional cases, for good business reasons and at the request of particular clients.
Fourthly, investment in preference shares was a small and insignificant part of the bank’s
512 Income Tax in South Africa: Cases and Materials

total lending business and was purely incidental to that main business. Consequently,
there was no valid basis for treating portion of the interest paid by the bank to depositors
as not satisfying the requirements of s 11(a) or as being excluded from deduction by
s 23(f).
Corbett JA: In a nutshell, the dispute between the parties concerns the utilization by the Bank,
in the years of assessment under consideration, of a portion of the deposit moneys available to it
for investment in the purchase of redeemable preference shares. Since the amounts received by
the Bank by way of dividends on these shares are not taxable in the hands of the Bank (by virtue
of s 10(1)(k) of the Act), the Commissioner contends that a proportionate amount of the inter-
est paid to depositors on the deposit moneys, being non-productive of ‘income’ (as defined in
the Act), should be disallowed as a deduction in the computation of the Bank’s taxable income.
The Bank disputes the validity of this contention . . .
[B]asically and in simple terms the business of the Bank (and of other commercial banks like
respondent) consists of borrowing moneys by way of customers’ deposits, upon which it pays
interest to the customer, and of lending out these moneys in various ways and thereby earning
income (in the ordinary, non-technical sense of the word) in the form of interest and other
forms of compensation paid by the borrower to the Bank for the use of the money. Naturally,
the Bank so arranges its affairs that the general return it obtains on the moneys lent by it ex-
ceeds the interest which it has to pay to its customers/depositors. This excess represents, broadly
speaking, the gross profit of the Bank . . .
The Bank accepts all deposits that are offered to it, provided that the customer agrees to the
quoted interest rate. Indeed all branches are instructed to take as many deposits as they can.
This is a matter of commercial necessity. In order to grant loans a bank must have money availa-
ble. This money it acquires by taking deposits. Moreover, the Bank has a large and costly infra-
structure and, if this is not used effectively and to its full potential, then the cost of the Bank’s
overheads becomes disproportionate to its earnings, and its commercial efficiency diminishes. As
Dr Strauss put it –
‘. . . it is simply not a practical business proposition for any bank . . . to refuse to take deposits at the rate
that is acceptable.’
Of the deposits that have been gathered by the Bank, certain proportions must, in terms of the
Banks Act,237 be devoted to the maintenance of the required minimum reserve balance with
the Reserve Bank, of the minimum liquid asset requirement and of the minimum prescribed
investments requirement. The balance of the deposits, apart from what is utilized in the
acquisition of fixed property, then goes into a common pool used for financing the borrowing
needs of the Bank’s customers. The Bank’s main instrument of lending is the overdraft on cur-
rent account, which represents the ‘vast bulk’ of customer financing . . . In recent years the tak-
ing up of redeemable preference shares has emerged as a requirement of customers in certain
instances.
The redeemable preference share transaction is seen as an alternative to the grant of a medium-
term loan. Instead of the Bank advancing loan moneys to the customer, the Bank takes up re-
deemable preference shares issued to it by the customer, the term of redemption being equiva-
lent to what would otherwise have been the period of the loan. In fixing the dividend rate
applicable to the shares, termed the ‘coupon rate’, account is taken of the fact that the dividend
is exempt from taxation in the hands of the Bank. This enables the Bank to offer a coupon rate
substantially cheaper than the interest rate on an equivalent medium-term loan would have
been. Therein lies the main advantage to the customer.
On the other hand, from the Bank’s point of view, the non-taxability of the dividend holds no
particular advantage since the coupon rate is correspondingly lower than the interest rate on a
medium-term loan (which interest is taxable) would be. Moreover, the security afforded by a
preference share issue is inferior to that pertaining to a loan in that in the latter case the Bank
has the status of a creditor and in the former is merely a shareholder. Nevertheless, though gen

________________________

237 23 of 1965.
 Deductions: General principles; Assessed losses of prior years 513

erally reluctant to do so, the Bank does participate (and in the tax years in question did partici-
pate) in a small number of redeemable preference share transactions at the customer’s request.
Generally, the Bank is prepared to do so in order to accommodate special customers, with whom
it has a long bank/customer association which might be prejudiced by a refusal, and also cus-
tomers of high financial standing where there is the possibility of expanding the Bank’s business
with that customer. But the Bank never takes the initiative in offering a redeemable preference
share transaction to a customer . . .
Dr Strauss maintained that these redeemable preference share transactions were ‘purely inci-
dental to the main business of the Bank’ . . .
In delivering the unanimous judgment of the Court a quo, the President (Melamet J) . . . re-
ferred extensively to the decision of this Court in the case of CIR v Allied Building Society 238 and
held that the facts of the present case were ‘principally’ indistinguishable from those in the Allied
Building Society case and that, accordingly, the present case was governed by the principles laid
down and applied therein . . .
The facts were very similar to those in the present case. The taxpayer was a registered permanent
building society. It raised funds from the public by the issue of various types of shares, upon
which it paid dividends, and the acceptance of saving and fixed deposits, upon which it paid
interest. As a matter of commercial necessity the Society, like the Bank in this case, accepted all
moneys offered to it in respect of shares, on savings account or on fixed deposit. With these bor-
rowed moneys the Society granted loans upon the security of the mortgage of urban property
and made advances against the security of deposits made with, or shares held in, the Society. All
moneys received by the Society were regarded as forming a single pool which was utilised gener-
ally for making all payments due by the Society, including, inter alia, interest due to depositors,
dividends due to shareholders, management expenditure, expenditure (including capital ex-
penditure) on properties and buildings owned by the Society, and payments made by the Society
in the ordinary course of its business. It was not possible to link any cash receipt with any particu-
lar outgoing. Amongst the immovable properties held by the Society during the tax year in ques-
tion were certain properties which were either temporarily unproductive, eg buildings under
alteration or reconstruction, or non-revenue producing, such as vacant stands. In determining
the Society’s liability for income tax in that tax year, the Commissioner disallowed as a deduction
portion of the total sum paid out by the Society in dividends and interest on moneys borrowed
by it. The amount deducted was calculated in accordance with a formula based upon the ratio of
the value of the non-revenue producing assets of the Society to the value of its total assets. The
Commissioner’s contention was that this proportion of the Society’s expenditure in the form of
dividends and interest must be regarded as having been incurred in respect of borrowed moneys
employed in the acquisition of capital assets not utilized by the Society in its income-earning
operations or in the course of its trade; and that, therefore, such expenditure was not deductible
in terms of s 11(2)(a) of the Act [the counterpart of the present s 11(a)] and was prohibited
from deduction in terms of s 12(g) [the counterpart of the present s 23(g)] . . .
In regard to the general deduction formula, it is settled law that generally, in order to determine
in a particular case whether moneys outlaid by the taxpayer constitute ‘expenditure incurred in
the production of the income’, important, sometimes overriding, factors are the purpose of the
expenditure and what the expenditure actually effects. And in this connection the Court has to
assess the closeness of the connection between the expenditure and the income-earning opera-
tions (see CIR v Nemojim (Pty) Ltd 239 and the authorities there cited) . . .
Subsection (f) [see now s 23(f)] is more pertinent in that its purpose is to exclude from deduc-
tion expenses incurred by a taxpayer in respect of such parts or forms of ‘gross income’ as fall
within the exemptions of s 10 of the Act, including s 10(1)(k) which relates to dividends received
by or accruing to a company (see CIR v Nemojim 240). Here too, when considering whether moneys
outlaid by the taxpayer constitute expenses incurred in respect of amounts received or accrued
which do not constitute income, ie constitute ‘exempt income’, the Court must assess the closeness
________________________

238 1963 (4) SA 1 (A).

239 1983 (4) SA 935 (A) at 947G-H.
240 Supra at 947B-C.
514 Income Tax in South Africa: Cases and Materials

of the connection between the expenses incurred and the exempt income received or accrued,
having regard to the purpose of the expenses and what the expending thereof actually effects
(CIR v Nemojim 241).
I return now to the majority judgment in the Allied Building Society case. [In that case, counsel for
the Commissioner] argued in this Court that the true criterion of deductibility was not the pur-
pose for which the Society borrowed but the actual use to which the borrowed money was put:
the Society’s business consisted of (a) revenue-producing operations and (b) the acquisition of
capital assets, and [he argued that] the cost of borrowing money for (b) was not deductible ex-
penditure . . .
[I]t was assumed, for reasons which need not be detailed, that part of the interest etc paid by the
Society in that year related to borrowed moneys utilized in the acquisition of non-revenue pro-
ducing properties.
With reference to counsel’s argument (stated above) Ogilvie-Thompson JA said –
‘In my view, the ultimate use or destination of all the money borrowed is not – as is implicit in the
Commissioner’s contention – on the facts of the present case to be elevated into a decisive factor in
determining the deductibility or otherwise of the interest payable on that money. In determining the
purpose of the borrowing, the ultimate user of the money may, no doubt, in certain cases be a relevant
factor; but the dominant question remains: what was the true nature of the transaction? In the particular
circumstances of the present case, the most important factor in that enquiry is, in my opinion, the purpose
of the borrowing . . .
The Society’s purpose in borrowing money, upon which it pays the interest in issue, is manifestly to ob-
tain the means of earning income. The Society’s basic business is borrowing money cheaply and lending
it more dearly. The money it borrows constitutes its floating capital which it lends out at interest, there-
by earning income; the interest the Society pays on the money so borrowed is prima facie clearly an ex-
penditure incurred in the production of income.’
The learned Judge of Appeal then went on to emphasize the ‘crucial facts’ that not only was it
absolutely and vitally indispensable to the Society’s business to borrow money, but that it was
commercially necessary for the Society to accept, ie borrow, all money tendered to it by the pub-
lic. The payment of interest was thus a payment necessarily made in order to earn income and
the prerequisites of deductibility . . . were satisfied.
Ogilvie-Thompson JA continued –
‘It is not, in my opinion, material whether all the money borrowed is in fact lent out again by the Society.
For the Court is not concerned with whether a particular item of expenditure produced any part of the
income, but with whether that item of expenditure was incurred for the purpose of earning income. (See
242
Rand Speculation and Finance Co Ltd v CIR. ) . . . Even on the assumption that . . . the Society has not been
able affirmatively to show that all the money upon which it paid interest during the 1959 tax year was in
fact actually used in its income-earning operations, that circumstance would not, in my judgment, pre-
clude the deductibility of all the interest paid by the Society. For it is, I think, abundantly clear that the So-
ciety’s business is not the acquisition of immovable property – revenue-producing or otherwise – but the
earning of income by investment. The contention that the Society’s business consists of both revenue-
producing operations and the acquisition of capital assets, is, in my view, not borne out by the facts. The
acquisition by the Society of such non-revenue producing properties as it holds is purely incidental to the
business of borrowing money in order to earn income by investment. The holding or not holding of un-
productive properties has never played any part in controlling the Society’s policy in regard to the receipt
of moneys from the public. The only controlling factor is what the public offers to the Society on loan. If
the Society chose to let some of the borrowed money lie idle, that would afford the Commissioner no suf-
ficient ground for reducing the sum deductible by the Society in respect of interest paid by it on the bor-
rowed monies . . .
In the present case there is, in my opinion, no sufficiently close association between the borrowing and
the non revenue-producing properties as to warrant the view that portion of the interest paid by the So-
ciety on the money it has borrowed is expenditure of a capital nature, or the view that such interest is
not wholly or exclusively expended by the Society for the purposes of trade. In my judgment, the correct
view of the facts of the present case is that the Society’s expenditure by way of interest on moneys bor-
rowed by it is not aimed at augmenting its fixed capital in general or its non-revenue producing proper-
ties in particular, but is dictated by the very nature of its income-earning operations of cheaply
borrowing all money offered and then more dearly lending out as much thereof as, subject only to the
dictates of business prudence, it can possibly invest.’
________________________

241 Supra at 947H-948A.

242 1953 (1) SA 348 (A).
 Deductions: General principles; Assessed losses of prior years 515

In Financier v Commissioner of Taxes 243 the principles enunciated by Tredgold J and approved of by
Ogilvie-Thompson JA were the following:
‘1. Where a taxpayer borrows a specific sum of money and applies that sum to a purpose unproductive
of income, and not directly connected with the income earning part of his business, then the interest
paid on the borrowed money cannot be deducted as expenditure incurred in the production of
income.
2. Where a taxpayer has for good and sufficient reasons borrowed money for use in the business produc-
ing his income, despite the fact that he subsequently, in pursuit of a legitimate business purpose, in-
vested such money in an investment which does not produce taxable income, the interest is still
deductible for income tax purposes.
It would seem that the test to be applied is the purpose for which the money was borrowed.’
Finally, I would refer to the case of CIR v Genn & Co (Pty) Ltd,244 in which it was expressly held
that interest paid on money borrowed and used as floating capital in the business of the taxpayer
constitutes deductible expenditure in terms of the general deduction formula.
The aforegoing cases establish, I would venture to suggest, the following:
(1) Generally, in deciding whether money outlaid by a taxpayer constitute expenditure in-
curred in the production of the income (in terms of the general deduction formula) im-
portant and sometimes overriding factors are the purpose of the expenditure and what the
expenditure actually effects; and in this regard the closeness of the connection between the
expenditure and the income-earning operations must be assessed. The same general test
applies to the provisions of s 23(f) of the Act.
(2) More specifically, in determining whether interest (or other like expenditure) incurred by a
taxpayer in respect of moneys borrowed for use in his business is deductible in terms of the
general deduction formula and its negative counterparts in the Act, a distinction may in
certain instances have to be drawn between the case where the taxpayer borrows a specific
sum of money and applies it to an identifiable purpose, and the case where, as in the in-
stance of the Society in the Allied Building Society case and the Bank in the present case, the
taxpayer borrows money generally and upon a large scale in order to raise floating capital
for use in his (or its) business.
(3) In the former type of case both the purpose of the expenditure (in the form of interest)
and what it actually effects can readily be determined and identified: a clear and close caus-
al connection can be traced. Both these factors are, therefore, important considerations in
determining the deductibility of the expenditure.
(4) In the latter type of case, however, and more particularly in the case of institutions like the
Society and the Bank, there are certain factors which prevent the identification of such a
causal connection and one cannot say that the expenditure was incurred in order to
achieve a particular effect. All that one can say is that in a general sense the expenditure is
incurred in order to provide the institution with the capital with which to run its business;
but it is not possible to link particular expenditure with the various ways in which the capi-
tal is in turn utilized. (It was, I deduce, with this in mind that in the Allied Building Society
case Ogilvie-Thompson JA held that the ultimate use or destination of the money borrowed
by the Society was not on the facts of that case to be elevated into a decisive factor in de-
termining the deductibility of the interest payable on that money; but that the most im-
portant factor was the purpose of the borrowing.)
(5) The factors I refer to are these:
(a) As a matter of commercial necessity the institution accepts, ie borrows, all moneys
tendered to it by depositors.
(b) All moneys borrowed go into a common pool which constitutes a general fund used
for all purposes.
(c) Generally the institution’s expenditure by way of interest on borrowed moneys is not
aimed at any particular form of utilization of the borrowed moneys: it is rather dictated
by the very nature of the institution’s income-earning operations of cheaply borrowing
all money offered and then H dearly lending out as much thereof as it can possibly invest.
________________________

243 1950 (3) SA 293 (SR).

244 1955 (3) SA 293 (A).
516 Income Tax in South Africa: Cases and Materials

As in the Allied Building Society case, therefore, it seems to me that the vital enquiry in the present
matter is the Bank’s purpose in borrowing the moneys upon which it paid interest to depositors;
and in regard thereto it must be asked whether the connection between the expenditure of the
interest (or some of it) and the acquisition of the redeemable preference shares was sufficiently
close to justify the conclusion that such expenditure was in each year of assessment incurred in
the production of the dividends derived from the shares or was an expense incurred in respect
of exempt income. The immediate purpose of the Bank in borrowing the deposit moneys was to
obtain the floating capital with which to run its business. That floating capital was utilized by the
Bank in many different ways. These have been detailed. Some of this capital was, in each of the
years under consideration, used to take up redeemable preference shares, which produced ex-
empt income. Can it, however, be said that there was a connection between a certain proportion
of the interest paid to depositors and the dividends received on these shares close enough to
justify the conclusion that the payment of such interest was incurred in the production of ex-
empt income (and therefore not deductible in terms of s 11(a) since it was not incurred ‘in the
production of income’) or was an expense incurred in respect of an amount not constituting
income (resulting in deductibility being prohibited by s 23(f))?
In my opinion, these questions must be answered in the negative. There are a number of factors
which lead to this conclusion. Firstly, as the evidence shows, the Bank accepts all deposits offered
to it in accordance with its terms as a matter of business policy. Deposit-raising is not determined
by the manner in which the capital raised is to be utilized. Secondly, as Dr Strauss pointed out so
emphatically, there is no connection between the acceptance of deposits or the rates at which
the bank was prepared to accept deposits and the making of investments in redeemable prefer-
ence shares. Thirdly, there is the unchallenged evidence that the Bank is generally reluctant to
participate in preference share transactions; it does so only in a few exceptional instances, for
good business reasons, at the request of particular customers; it never takes the initiative in offer-
ing a preference share transaction. Fourthly, preference share transactions generally constitute a
small and insignificant part of the Bank’s total lending business and were described by Dr
Strauss (again without being challenged thereon) as being ‘purely incidental to the main busi-
ness of the Bank’. The figures substantiate this assertion. In view of the Bank’s reluctance to
enter into such transactions, it would be a matter of uncertainty every year how many preference
share acquisitions, if any, the Bank would make. Thus, for example, in 1975 there were none and
in 1977 only one was made two weeks before the end of the financial year.
Counsel for the Commissioner argued that the Allied Building Society case was distinguishable
from the present case on the facts, in that –
‘the purchase of redeemable preference shares is part of the Bank’s business whereas the acquisition of
the properties by the Society [in the Allied Building Society case] was merely incidental to its business’.
(I quote from counsel’s heads of argument.) It is true that in the present case the preference
share transactions form part of the Bank’s money-lending operation, whereas this was not the
case with the Society’s property acquisitions, but, in my view, this does not prevent each of these
activities being regarded as incidental to the main business of the Bank or the Society, as the
case may be. If ‘incidental’ in this context means ‘occurring or liable to occur in fortuitous or
subordinate conjunction with something else’ (see Shorter Oxford Dictionary sv ‘incidental’), then
for the reasons which I have already elaborated it seems to me that the word aptly describes both
the share transactions and the property acquisitions . . .
My conclusion is that the Court a quo correctly held that this case was governed by the principles
laid down in the Allied Building Society case. And, in my view, there is no valid basis for treating
portion of the interest paid by the Bank to depositors as not falling within the general deduction
formula of s 11(a) or as being excluded from deduction by s 23(f).
The appeal is dismissed . . .
MILLER JA, VAN HEERDEN JA, HEFER JA and GALGUT AJA concurred.

Notes
The decision in [240] Port Elizabeth Electric Tramway Co held (and it has never since
been doubted) that the deductibility of expenditure in terms of s 11(a) involves two crite-
ria. The first is a subjective criterion (the purpose of the taxpayer in incurring the ex-
penditure in question, and whether that purpose was to produce income) and the
 Deductions: General principles; Assessed losses of prior years 517

second is an objective criterion (whether there was a sufficiently close nexus between the
expenditure in question and the production of income). If both of these criteria are
satisfied, the expenditure is deductible, and the taxpayer does not have to prove, in
addition, that the expenditure actually resulted in any identifiable income.
These principles are subject to the proviso that expenditure is not deductible if it was
incurred for the purpose of producing amounts which are not ‘income’ as defined in the
Act. Hence, expenditure is barred from deduction in terms of s 23(f) if it was incurred in
the production of exempt income, such as dividends which are exempt from tax in terms
of s 10(1)(k).
Since, in the Standard Bank case, some of the expenditure by way of interest, outlaid by
the bank, had been used to finance the acquisition of preference shares which yielded
non-taxable (ie exempt) dividend income, the Commissioner argued that part of the
interest laid out by the taxpayer on the funds which it borrowed was barred from deduc-
tion in terms of s 23(f).
In rejecting this argument, and holding that all the expenditure by way of interest,
incurred by the bank was indeed deductible in terms of s 11(a) and was not barred from
deductibility in terms of s 23(f), the court applied the principles which had been laid
down in Allied Building Society.245 In that case, the Allied Building Society had expended
some of the money borrowed from its clients on properties which were non income-
producing (eg properties under repair or vacant land). In that case, the court held that,
although the user of the funds (ie the manner in which the funds were utilised) was
relevant to deductibility of the interest, it was not decisive, and that the most important
factor was the taxpayer’s purpose in borrowing the funds and whether this purpose was
to produce income. In that case, as in Standard Bank, the institution had no choice but to
accept all the money that the public offered to deposit with it. The acquisition of the non
income-producing properties was not a separate business, but was incidental to the
Building Society’s business of borrowing money in order to invest it and earn income.
The Allied Building Society’s purpose in borrowing money (ie in accepting deposits
from the public) was to obtain the means of earning income. The money it borrowed
constituted its floating capital which it lent out at interest, thereby earning income. The
interest that the Society paid on the money so borrowed (said the court) was clearly
expenditure incurred in order to produce income. Of crucial importance to the tax-
deductibility of such interest was the fact that it was indispensable to the Building Socie-
ty’s business to borrow money, and that it was commercially necessary for the Society to
accept (ie borrow) all money tendered to it by the public. The payment of interest was
thus necessary in order to earn income and the prerequisites for deductibility, laid down
in s 11(a), were satisfied.
The facts of Allied Building Society were essentially the same as those of the present case.
The court in Standard Bank therefore applied the principles laid down in Allied Building
Society to reach a similar conclusion – that all the expenditure on interest was deductible
in terms of s 11(a) and that no portion of such expenditure was barred from deductibil-
ity by s 23(f).
It is significant that, as the court observed in Standard Bank, a distinction must be
drawn between the situation where a taxpayer borrows a specific sum of money, and the
situation where a taxpayer (such as a bank) borrows money generally and on a large scale
to use as floating capital. In the former situation, the purpose of the expenditure outlaid
in the form of interest and what that expenditure actually effects can be traced, and both
the purpose of the borrowing and the user of the funds are significant in determining

________________________

245 1963 (4) SA 1 (A).

518 Income Tax in South Africa: Cases and Materials

the tax-deductibility of the interest. But in the latter situation, the taxpayer outlays inter-
est in order to acquire floating capital (ie borrowed funds) with which to operate its
business, and the link between the payment of interest on a particular borrowing and the
income that it produces is less clear; the important factor in this situation is not the
ultimate use of the funds but the purpose of the borrowing.

§6.5 Section 23(g): any moneys, claimed as a deduction from income derived
from trade, to the extent to which moneys were not laid out or expended
for purposes of trade

Under s 23(g), prior to its amendment, no part of the expenditure could be deducted if it was in-
curred partly for the purposes of trade and partly for a private purpose.

[265]
ITC 734
(1953 – 54) SATC 202
The taxpayer was a farmer who bred a special herd of Brown Swiss cattle. For several
years he had been looking for a particular type of Brown Swiss bull to mate with his cows.
In 1949 he made arrangements to go to Switzerland to select and buy the type of bull he
required. He booked his passage and obtained an import permit for the bull. The import
permit was cancelled and the taxpayer immediately cancelled his passage booking be-
cause his trip was to be undertaken to buy a bull. He wanted to see and select the bull
personally, so he could choose one with the requisite characteristics. Later the taxpayer
obtained an import permit for the bull, and he travelled to Switzerland via London to
select and buy the bull. He spent about 22 days looking at bulls and bought one for £904
which cost some £1 300 to land in South Africa. The bare expenses of travelling to Swit-
zerland and back were £337. In fact the taxpayer took his wife with him and after he had
bought the bull he and his wife had a short holiday in England and Europe the expenses
of which were between £1 500 and £2 000. The Commissioner argued that he was not
entitled to deduct any part of the £337 expenses incurred in purchasing the bull.
Newton Thompson J: The law as laid down in this case and in terms of s 12(g) [see now s 23(g)]
which says that ‘no deduction shall in any case be made for moneys which are not exclusively laid
out or expended for purposes of trade’ seem somewhat harsh. It seems harsh that, on the facts
of this case, the taxpayer should not be able to deduct expenditure incurred in purchasing a bull
because he also took a holiday. I have considered whether, on the evidence, I could find that this
expenditure of £337 was exclusively laid out in connection with the purchase of the bull. In view
of the taxpayer’s own candid and honest evidence I feel that I cannot do that. The following
passages occur in the evidence:
‘Mr Drake: So there was a dual motive? – Yes, there was a dual motive. All I put in is this: my expenses as if
I had gone direct there and back.
‘And you were also going to make this a holiday and a search for a bull? – Yes.
Under s 78 the onus is on the taxpayer to prove the exemption which he claims. Very reluctantly,
I confess, I find that the taxpayer has not discharged that onus in this case and his appeal fails.
It seems to me that the law would be more equitable if it were amended to give the Commission-
er power to allow the taxpayer a portion of his expenditure in a case of this kind.

Notes
Before s 23(g) was amended so as to abolish the ‘wholly or exclusively’ requirement,
an important distinction was drawn between expenditure that was partly of a revenue
nature and partly of a capital nature, but all of which was wholly and exclusively
 Deductions: General principles; Assessed losses of prior years 519

incurred for the purposes of trade, and expenditure which was incurred partly for the
purposes of trade and partly for private purposes. The former category of expenditure
could be apportioned, and the non-capital portion could qualify as a deduction. On
the other hand – prior to the amendment of s 23(g) – where expenditure was incurred
partly for the purposes of trade and partly for a non-trading purpose, no part of the
expenditure could be deducted; this was so in [266] Pick ’n Pay. The amendment of
s 23(g) has the effect that in the last-mentioned situation, the expenditure can be
apportioned, and that portion which was incurred for the purposes of trade can qualify
for deduction.

Prior to its amendment, s 23(g) barred the deduction of expenditure which was not ‘wholly or
exclusively incurred for the purposes of trade’; thus, no apportionment was permissible where ex-
penditure was incurred partly for the purposes of trade and partly for other purposes.

[266]
CIR v Pick ’n Pay Wholesalers (Pty) Ltd
1987 (3) SA 453 (A)
In April 1977 the taxpayer pledged to donate R500 000 to the Urban Foundation in five
annual instalments. In each year, it claimed the instalment as a deduction, describing it
as ‘advertising’. The Commissioner refused to allow the deduction on the grounds that it
was disqualified from deduction by virtue of s 23(g), namely that it was not incurred
‘wholly or exclusively’ for the purposes of trade.
Issue: was the expenditure wholly or exclusively incurred for the purposes of trade?
Held: the taxpayer had failed to discharge the onus of proving that the expenditure
was incurred wholly or exclusively for the purposes of trade.
Nicholas AJA: The facts which gave rise to this case had their beginning in 1977. In April of
that year Pick ’n Pay Wholesalers (Pty) Ltd (‘Pick ’n Pay’) pledged itself to donate to the
Urban Foundation a total of R500 000 in five equal annual instalments. In each of the years of
assessment ended 28 February 1978 and 28 February 1979 it claimed to deduct R100 000 from its
income as ‘advertising’. The Commissioner for Inland Revenue (‘the Commissioner’) disallowed
the deductions and issued assessments accordingly . . .
In the Special Court evidence was given on behalf of Pick ’n Pay by a number of witnesses in-
cluding Mr Raymond Ackerman and Mr Christopher Hurst. This evidence was not contradicted,
and Grosskopf J said in the judgment that the Special Court had no reason to doubt its correct-
ness. The main facts of the case were these.
Despite its name, Pick ’n Pay is not a wholesaler. It carries on business as a retailer, operating
supermarkets in the Western and Eastern Cape, Natal and the Orange Free State. It has associat-
ed companies in the Transvaal, and together they comprise the Pick ’n Pay group, of which Pick
’n Pay is the managing company.
Mr Ackerman is the chairman and managing director . . .
Mr Hurst is the secretary and financial director, and takes a special interest in the marketing
side.
Pick ’n Pay keeps its name constantly before the public by sustained and intensive advertising
which it regards as essential to the successful conduct of its business. Broadly its advertising falls
into three categories. There is the ‘laundry list’ type of advertisement, which appears from day to
day, and lists goods and their prices. Then there is advertising of ‘special events’, which is more
general in its nature: examples of ‘special events’ are an anniversary of the opening of a super-
market . . . Thirdly there is ‘indirect advertising’, which is considered to be the most important
and valuable. This consists, not in placing paid advertisements, but in obtaining notice in the
news and editorial columns of the media. Such publicity is not readily achieved.
520 Income Tax in South Africa: Cases and Materials

Pick ’n Pay has always been concerned to promote its public image as ‘the consumer’s champi-
on’ and as a company which has a concern for people and is aware of its social responsibilities to
the community . . .
A notable example of Pick ’n Pay’s promotion of its persona and its use of ‘indirect advertising’
was provided by the donation to the Urban Foundation. This is an organisation which grew out
of a conference of concerned leading businessmen in 1976. It was formed to tackle South
Africa’s pressing social needs and to improve the quality of life of the less privileged urban
dwellers . . .
As a member of the main board of the Urban Foundation, Mr Ackerman was involved in con-
ceiving the idea of raising money by means of a self-imposed levy in the whole private sector of a
percentage of turnover or profits . . .
When Mr Hurst was asked in his evidence in chief about the motive for the donation, he said:
‘Well, the mainspring behind the idea was Mr Ackerman and we discussed the matter at Board level and its
possibilities and we decided to go ahead and make this contribution as a business exercise.’ . . .
The board of directors of Pick ’n Pay took the decision to make the donation of R500 000 to the
Urban Foundation. It was announced at a press conference in Cape Town which was attended by
Mr Justice Steyn and Mr Ackerman. The announcement received wide publicity throughout the
Republic . . .
For a period of several months after the announcement, the publicity had a marked positive
effect on Pick ’n Pay’s turnover in all its stores throughout the group. . . .
In this court counsel for the Commissioner submitted that:
(a) The expenditure of the two amounts of R100 000 was of a capital nature.
(b) The said amounts were not wholly exclusively laid out for purposes of trade.
(c) . . .
The result of the appeal turns on the proper application to the facts of the present case of
para (a) of s 11 and para (g) of s 23 of the Act . . .
In the view that I take of the matter, it is necessary to consider only the second of the submis-
sions by counsel.
It arises by reason of s 23(g), and the first question to be considered is the meaning of the words
‘moneys . . . which are not wholly or exclusively laid out or expended for the purposes of trade’.
The answer is provided by the analysis of similar words in the judgment of Romer LJ in Bentleys,
Stokes and Lowless v Beeson:246
‘The relevant words . . . – “wholly and exclusively laid out or expended for the purposes of the . . . profes-
sion” – appear straightforward enough. It is conceded that the first adverb – “wholly” – is in reference to
the quantum of the money expended and has no relevance to the present case. The sole question is
whether the expenditure in question was “exclusively” laid out for business purposes, that is: what was the
motive or object in the mind of the two individuals responsible for the activities in question? It is well
established that the question is one of fact: and again, therefore, the problem seems simple enough. The
difficulty, however, arises, as we think, from the nature of the activity in question. Entertaining involves in-
evitably the characteristic of hospitality . . . But the question in all such cases is: was the entertaining, the
charitable subscription, the guarantee, undertaken solely for the purposes of business, that is, solely with
the object of promoting the business or its profit-earning capacity? It is, as we have said, a question of fact.
And it is quite clear that the purpose must be the sole purpose. The paragraph says so in clear terms. If the
activity be undertaken with the object both of promoting business and also with some other purpose, for
example, with the object of indulging an independent wish of entertaining a friend or stranger or of sup-
porting a charitable or benevolent object, then the paragraph is not satisfied though in the mind of the
actor the business motive may predominate. For the statute so prescribes. Per contra, if, in truth, the sole
object is business promotion, the expenditure is not disqualified because the nature of the activity neces-
sarily involves some other result, or the attainment or furtherance of some other objective, since the latter
result or objective is necessarily inherent in the act.’
In a comment on this judgment in Bowden v Russel & Russel,247 Pennycuick J said:
‘. . . As appears from that judgment it may often be difficult to determine whether the person incurring
the expense has in mind two distinct purposes, or a single purpose which will or may produce some
________________________

246 (1952) 33 TC 491 (CA) at 503-504; see also [1952] 2 All ER 83 (CA) at 84G to 85B.
247 (1965) 42 TS 301 (Ch) at 306.
 Deductions: General principles; Assessed losses of prior years 521

secondary consequences. but once it is found that the person has a distinct purpose other than that of en-
abling him to carry on and earn profits in his trade or profession s 137(a) prohibits deduction of the ex-
pense.’
248 249
In his speech in Mallalieu v Drummond Lord Brightman said that the distinction between the
object of the expenditure and its effect was basic:
‘The object of the taxpayer in making the expenditure must be distinguished from the effect of the
expenditure. An expenditure may be made exclusively to serve the purposes of the business, but it may
have a private advantage. The existence of that private advantage does not necessarily preclude the exclu-
sivity of the business purposes.’
In terms of s 82 of the Act, the onus of proof is on the taxpayer. He must show that the donation
was made solely for the purpose of trade. He must exclude any other purpose – in this case a
philanthropic purpose. If he does not do so, the paragraph is not satisfied.
...
In the case of an appeal under s 86A of the Act, an appellant is not bound by the facts found by
the Special Court. He has a full right of appeal. In Hicklin v SIR 250 Trollip JA said:
‘The appeal is therefore a re-hearing of the case in the ordinary, well-known way in which this Court, while
paying due regard to the findings of the Special Court on the facts and credibility of witnesses, is not nec-
essarily bound by them.’
In the present case counsel for the Commissioner does not impugn the credibility of the wit-
nesses for Pick ’n Pay. This court is therefore in as good a position as was the Special Court to
decide the issue.
It was contended on behalf of Pick ’n Pay that the donation was merely the vehicle which it used
to ride to publicity and profits, and that the benefit to the Urban Foundation was incidental.
While charity was an effect of the donation, it was not part of Pick ’n Pay’s purpose, which was
solely the promotion of business. The contention of the Commissioner on the other hand was
that the donation was made with a dual purpose which included philanthropy.
The question is one of fact, and the fact is the state of mind of those responsible for making the
donation at the time it was made . . .
The direct evidence as to the purpose of the donation was given by Mr Ackerman and Mr Hurst.
Their veracity is not in question. There are however circumstances which affect the cogency of
their evidence in this regard.
That evidence was given more than four and a half years after the date of the donation. Human
memory is inherently and notoriously liable to error . . .
Moreover there is the fact that the issue – whether the expenditure was exclusively for the pur-
pose of trade but produced the incidental effect, or the secondary consequence, of benefit to
the Urban Foundation, or whether it had the dual purpose of promoting trade and benefiting
the Urban Foundation – is a narrow one, and the line difficult to draw. There is nothing in the
record to suggest that the distinction was present to the mind of any one at the time of the dona-
tion, or that it was of any importance before the expenditure was disallowed by the Commissioner.
In the circumstances the direct evidence cannot be decisive, but it must be weighed together
with all the other evidence in the light of the probabilities.
It is clear on the evidence that an object of the making of the donation was to obtain major pub-
licity and so attract customers into Pick ’n Pay’s stores. Without that business object, the dona-
tion might indeed have been ultra vires of the directors. . . .
But it may be that there existed a dual purpose, namely, a purpose to make a benefaction to the
Urban Foundation and a purpose to promote the business of Pick ’n Pay by the publicity which
was to be obtained from the announcement of the benefaction.
There are passages in Mr Ackerman’s evidence which point to such a dual purpose. He said:
‘. . . this would be a major way of us being first to support a good cause . . . but . . . we could get major pub-
licity out of it . . .’

________________________

248 [1983] 2 All ER 1095 (HL).

249 At 1100 a-d.
250 1980 (1) SA 481 (A) at 485E.
522 Income Tax in South Africa: Cases and Materials

When asked whether Pick ’n Pay would not have made a donation to the Urban Foundation in
any event, Mr Ackerman replied:
‘Yes, we would have made one. But we went for this high figure as a package deal really to promote it
strongly.’
(There was some debate in argument as to what he meant by ‘package deal’, but I think that in
the context his meaning is reasonably clear. The package consisted of a single large donation
made with two objects: a benefaction to the Urban Foundation and the obtaining of publicity in
consequence.) . . .
The fact that there may have been no discussion at the directors’ meeting about the benefit to
the Urban Foundation does not, I think, affect the matter. There would have been no call
for such discussion. The donation of R500 000 was considerable. It would have been obvious
to anyone that it would greatly benefit the Urban Foundation, which was regarded by all as a
very worthy cause. The case was one where res ipsa loquitur – the purpose was on the fact of it
philanthropic.
Mr Ackerman’s involvement in this matter was in a dual capacity. He was a director of the Urban
Foundation, and the chairman and managing director of Pick ’n Pay. He was on the side of the
donor and also that of the donee. His evidence makes it clear that, sitting at the board table of
the Urban Foundation, he saw the donation as a benefaction to the Urban Foundation, while he
perceived at the same time that it could provide valuable publicity for Pick ’n Pay. Sitting at the
board table of Pick ’n Pay he no doubt saw the operation as an opportunity for indirect publicity,
but it was publicity which would be given to a philanthropic action. It is suggested that when
dealing with the matter as chairman and managing director of Pick ’n Pay, his purpose was solely
a business one, although it was the same donation to the same charity. I cannot accept that. A
man does not change his mind when he changes his hat.
Then regard should be had to what was said at the press conference in April 1977. A ‘press pub-
licity meeting’ was something for which Mr Ackerman had stipulated when agreeing to make the
donation. He attended the meeting as chairman of Pick ’n Pay. He did not in his evidence disa-
vow anything which was said there in regard to Pick ’n Pay by Mr Justice Steyn.
...
[T]he donation was presented at the press conference, and in the ensuing publicity, as an act of
disinterested benevolence. I think that what was said about Pick ’n Pay in Mr Ackerman’s pres-
ence is to be given its face value, and that Mr Ackerman’s philanthropic purpose was genuine.
The alternative – to regard it, so far as Pick ’n Pay was concerned, merely as a cynical ploy to
trade on the charitable sentiments of the community, in order to promote the naked business
advantage of Pick ’n Pay – is unworthy and unacceptable. The alternative is wholly inconsistent
with the persona of a company concerned for people and aware of its social responsibility to the
community, which Pick ’n Pay has sought over the years, no doubt sincerely, to build up.
In all the circumstances I am of the opinion that Pick ’n Pay did not show, on the probabilities,
that in making the donation it did not have a philanthropic purpose as well as a business
purpose.
The appeal is allowed with costs . . .

Notes
This case was decided when s 23(g) was expressed as prohibiting the deduction of ex-
penditure that was not ‘wholly or exclusively’ incurred for the purpose of trade. Sec-
tion 23(g) has since been amended to prohibit the deduction of expenditure to the extent
to which it was not incurred for the purposes of trade, thus explicitly allowing for appor-
tionment where expenditure is incurred partly for trading and partly for non-trading
purposes.
It is debatable whether, on the facts of the case, Pick ’n Pay would have been entitled
to any deduction if the amended s 23(g) had then been in place. The deductibility of the
donation would then not have been barred by s 23(g), but Pick ’n Pay would still have
had to show that the expenditure satisfied s 11(a) in that it was incurred in the produc-
tion of income. It seems that the donation was made only partly for such a purpose, and
 Deductions: General principles; Assessed losses of prior years 523

this would then have raised the issue of apportionment in the context of s 11(a) in
relation to expenditure incurred partly to produce income, and partly for other purpos-
es. It would also have raised the issue of the ‘purpose’ of expenditure as distinct from its
‘effect’; see the notes to [262] Mallalieu v Drummond, below.
The decision in [289] Guardian Assurance Holdings established that expenditure in-
curred for a dual purpose of producing both income and capital can be apportioned in
terms of s 11(a), and the former component will qualify for deduction. Whether s 23(g)
in its amended form which explicitly allows apportionment, differs from or has a differ-
ent sphere of application to s 11(a) is still an open question.

§6.6 Section 20(1)(a): set-off of assessed losses incurred in prior years

Section 20(2) defines an ‘assessed loss’ as any amount by which the deductions in terms
of s 11 to s 19 inclusive251 exceed the income in respect of which they are admissible. (But
where the taxpayer’s business extends beyond the Republic, an assessed loss is deter-
mined under s 31.) Except where the Act explicitly ‘ring-fences’ deductions, all the
taxpayer’s losses and expenditures are aggregated, and the aggregate amount is taken
into account in determining his ‘gross income’.
The general philosophy of the Act is that each year of assessment is a closed compart-
ment, and that the taxpayer’s ‘taxable income’ is determined anew in each year of as-
sessment by taking account of the taxpayer’s income and deductions in respect of that
year only. An important qualification to this principle is laid down in s 20(1)(a) which
provides that, subject to certain requirements, an assessed loss in one year of assessment
can be carried forward into the following year of assessment and set off against the
income of that year for the purposes of determining the taxable income of that year.
Section 20(1)(a) of the Act provides that: ‘For the purpose of determining the taxable
income derived by any person from carrying on any trade (the words ‘in the Republic’ have
been deleted), there shall be set off against the income so derived by such person . . . any
balance of assessed loss incurred by the taxpayer in any previous year which has been
carried forward from the preceding year of assessment . . .’
Certain prerequisites to the carrying forward of losses, which are not explicit in
s 20(1)(a) have been laid down by the cases.
It must also be borne in mind that the Act stipulates that, where the circumstances laid
down in s 103(2) are present, any set-off of assessed loss or balance of assessed loss is
prohibited; see the discussion in chapter 11, below.

If a taxpayer does not trade for an entire year of assessment, he is not entitled in terms of s 20(1)(a)
to carry any balance of assessed loss into the following year of assessment.

[267]
SA Bazaars (Pty) Ltd v CIR
1952 (4) SA 505 (A)
The taxpayer company had carried on business as a general dealer. It closed down its
business on 16 November 1941. During the following years it maintained a banking
account, renewed its trading licences, paid income tax and prepared annual accounts
which showed that it carried its loss forward from year to year until 1943. The Commis-
sioner determined that the taxpayer’s taxable income for the tax years ending 30 June
1944 to 30 June 1947 was nil. The taxpayer objected to the assessments on the grounds
________________________

251 But s 11(x) allows the deduction of any amount which is deductible in any other provision of Part 1 of the
Act, ie s 5 to s 37E, inclusive. Hence an assessed loss can arise out of any and all admissible deductions,
despite the apparent limitation in the reference to ‘s 11 to s 19 inclusive’.
524 Income Tax in South Africa: Cases and Materials

that in each year, the balance of its assessed loss from the previous year should have been
carried forward.
Issue: was the taxpayer entitled to have its assessed loss carried forward into the tax year
ended 30 June 1944?
Held: in the negative. The taxpayer had not, during the tax year ended 30 June 1944,
carried on any trade and it was therefore not competent for it to set off in its income tax
return for that year, the balance of any assessed loss incurred by it in previous years.
Centlivres CJ: Appellant, which is a private company within the meaning of the Income Tax Act
1941, carried on a retail general dealer’s business for a considerable period in West Street, Dur-
ban. Trading losses were incurred during a number of years and on 16 November 1941, the
business was closed down . . .
The decision of this case turns upon the construction to be placed on s 11(1) and (3) of the
Income Tax Act 31 of 1941. The relevant provisions of that section are as follows:
‘(1) For the purpose of determining the taxable income derived by any person from carrying on any trade
within the Union, there shall be deducted from or set off against the income of such person so derived
as defined by s 7 the amounts set out in this section.
(3) There shall be set off –
(a) any balance of assessed loss incurred by the taxpayer in any previous year which has been carried
forward from the proceeding year of assessment . . .
For the purpose of this sub-section ‘assessed loss’ means any amount, as established to the satisfaction of
the Commissioner, by which the deduction admissible under this section exceed the income in respect of
which they are so admissible.’
To simplify matters, I shall in the first instance consider whether it was competent for the appel-
lant to carry forward into the year ending on 30th June 1944, the balance of the assessed loss (ie
£7 623) from the year ending 30th June 1943. If it was not competent for it to do this, then it
follows that it was not entitled to carry forward the balance of the annual loss of £7 623 into the
succeeding years. Under s 11(3) the balance of assessed loss incurred in any previous year can
only be set off when it has been carried forward from the proceeding year of assessment. To
succeed in this appeal the appellant must show that it was entitled to carry forward the balance
of the assessed loss of £7 623 into its income tax return for the year ending 30 June 1947.
During the year ending on 30th June 1944, the appellant did not carry on any trade. The mere
fact that it kept itself alive during that and subsequent periods does not mean that during those
periods it was carrying on a trade. It is clear from the stated case that it closed down its business
and as long as it kept its business closed it cannot be said to have been carrying on a trade, de-
spite any intention it might have had to resume its trading activities at a future date. During the
year ending on 30th June 1944, therefore the appellant did not carry on, within the meaning of
s 11(1), a trade within the Union and it derived no income from any trade. Under that sub-
section a deduction of set-off is admissible only against income derived from carrying on a trade.
As the appellant carried on no trade during the year under consideration it was not competent
for it to set-off in its income tax return for that year the balance of assessed loss incurred by it in
previous years. It is not necessary for the purpose of this case to decide whether the appellant
would have been entitled to set-off that balance in respect of the year ending on 30th June 1944,
if during that year it had carried on a trade but earned no income. Cf Sub-Nigel Ltd v CIR.252
As in my view the appellant was not entitled in respect of the year ending on 30th June, 1944, to
set-off the sum of £7 623 in its income tax return, it follows that it was not entitled, in view of the
provisions of s 11(3) to set-off that sum in respect of any succeeding year . . .
GREENBERG JA and VAN DEN HEEVER JA concurred.

If in any year of assessment, a ‘balance of assessed loss’ cannot be struck, it follows that the balance
of assessed loss has effectively been annihilated and there is no balance of assessed loss that is capable
of being carried forward into the following year of assessment.

________________________

252 1948 (4) SA 580 at 589 and 590 (A).

 Deductions: General principles; Assessed losses of prior years 525

[268]
CIR v Louis Zinn Organization (Pty) Ltd
1958 (4) SA 477 (A)
The case concerned the proper interpretation of (what is presently) s 20(1)(a).
Schreiner ACJ: Whenever there has been a trading loss in the tax year, or where there has been a
balance of assessed loss brought forward from the previous year, there has to be a determination
of the balance of assessed loss to be carried forward into the next year. There may have been
a profit in the tax year, but not large enough to obliterate the balance of assessed loss carried
over from the previous year. Then the new balance of assessed loss will be smaller than the
previous one. If there has been a working loss in the tax year the balance to go forward will be
increased. If there has been no previous balance the assessed loss in the tax year will be the
balance of assessed loss carried forward. The point to keep in mind is that, although at the stage
where it is to be used, ie when it is to be set-off against a profit, a balance of assessed loss looks
back to the past, at the stage when it is determined ie when its amount is being calculated, it
looks forward to the future when it will be used. At the determination stage it is being prepared
for future use . . .

Section 20(1)(a) requires a continuity of trading between the incurring of the loss and the carrying
forward of that loss into a following year of assessment. If the taxpayer ceases to trade for an entire
year of assessment, the necessary continuity is broken.

[269]
New Urban Properties Ltd v SIR
1966 (1) SA 217 (A), 27 SATC 175
For the facts of the case, see extract [367].
Beyers JA: . . . section 11(3) [see now s 20(1)(a)] envisages a continuity in setting off an assessed
loss in every year succeeding the year in which it was originally incurred, so that in each succeed-
ing year a balance can be struck to the satisfaction of the Secretary which can then carried for-
ward from year to year until it is exhausted; if, for any reason, the assessed loss cannot be so set
off and balanced in any particular year, there is then no ‘balance of assessed loss’ for that year
which (viewed from that year of assessment) can be carried forward to the succeeding year, or
(viewed from the succeeding year of assessment) there is no ‘balance of assessed loss which has
been carried forward from the proceeding year of assessment’, in other words, the essential con-
tinuity has been fatally interrupted.
In the SA Bazaars case, supra, that interruption occurred through the taxpayer’s causing to trade
in a particular year . . .
BOTHA JA, WILLIAMSON JA, WESSELS JA, and TROLLIP AJA concurred.

Notes
The decision in New Urban Properties endorsed and expanded on the interpretation of
s 20(1)(a) which had been laid down in [268] Louis Zinn. The decision in New Urban
Properties held that, if in a particular tax year, no ‘balance of assessed loss’ could be
struck, then the loss was effectively annihilated, and could not be carried forward into
the following year.
According to New Urban Properties, there are two circumstances which may make it im-
possible to strike a ‘balance of assessed loss’ in a particular year, thereby resulting in the
permanent annihilation of that loss, with the consequence that there is no ‘balance of
assessed loss’ which can be carried forward into the following year:
(a) if the necessary element of ‘continuity’ which is required by the decisions in [267]
SA Bazaars and [268] Louis Zinn was interrupted because the taxpayer ceased to
trade for an entire tax year; or
526 Income Tax in South Africa: Cases and Materials

(b) if, in a particular tax year, s 103(2) comes into effect and prohibits the ‘balance of
assessed loss’ from being set off against the taxpayer’s trading income for that year.
The result is the same as in (a) above – no ‘balance of assessed loss’ can be struck for
that tax year. For discussion of (b), see chapter 11, below.

The realisation of assets in the course of liquidation does not necessarily constitute trading.

[270]
Robin Consolidated Industries Ltd v CIR
[1997] 2 All SA 195 (A), 59 SATC 199
The taxpayer company was a manufacturer, wholesaler and retailer of stationery. By 1986
the company had become insolvent and was running at a loss. On 16 September 1986 it
was placed in provisional liquidation. The liquidators’ powers included that of carrying
on business in so far as it might be necessary for a beneficial winding up.
The creditors were of the opinion that it would be most beneficial for them if the
business were to be sold as a going concern. In order to make this possible, the liquida-
tors continued to trade as before, from the date of liquidation to 30 September 1986.
The business was sold on the following day, namely 1 October 1986. (The effective date
of the sale was defined as 3 October 1986.) The taxpayer’s activities until 30 September
1986, before and after liquidation, resulted in its having a trading income for the 1987
year of assessment. However, it was the 1988 year of assessment that was in issue in this
case.
The sale of the business took place on 3 October 1986. It was a lock, stock and barrel
sale, although certain assets were excluded. Thus, stock on hand was included in the sale,
but stock in transit or in a bonded or state warehouse was to remain the taxpayer’s prop-
erty; however the business had passed into new hands.
Although the sale became effective immediately, it was envisaged and provided in the
agreement that within 90 days the purchaser of the business would make an offer of
compromise to the creditors under s 311 of the Companies Act. If the compromise were
accepted by creditors and sanctioned by the court, it was to supersede the original sale. It
was eventually so sanctioned and the original sale was superseded on 15 March 1988, ie
after the 1988 year of assessment had run its course.
The basis of the compromise was that the purchaser acquired the shares in the taxpay-
er and then funded the company so as to allow a composition with creditors and a resto-
ration to solvency. The effective date of the sale of the business remained 1 October
1986, with trading during the interim period being deemed to be for the taxpayer’s
account.
While the taxpayer was in a state of limbo, between 1 October 1986 and 15 March
1988, there were two sales which the taxpayer contended constituted ‘trading’ during the
1988 year of assessment. Both were sales of goods that had been in bond and, in accord-
ance with the arrangements made for the sale of the business, the stock in bond re-
mained in the hands of the liquidators. The first sale was in April 1987 and involved a
sale for R6 000. The second sale was for R3 000 in July 1987.
The proceeds of the sales of R6 000 and R3 000 were deposited in the taxpayer’s bank
account on 23 October 1987.
The creditors did not wish the taxpayer to continue trading after the sale of the busi-
ness because of the losses that would be incurred if trading did continue. The liquidators
merely kept the business going long enough for it to be sold as a going concern, which
they regarded as the most advantageous mode of realisation.
 Deductions: General principles; Assessed losses of prior years 527

The Commissioner contended that the taxpayer had not carried on trade during the
1988 year of assessment and that, on a proper construction of s 20(1) of the Income Tax,
the taxpayer was not entitled to set off assessed losses accumulated prior to the 1988 year
of assessment against the income of succeeding years. In other words the Commissioner
contended that a tax year of mercantile abstinence by a company entails the loss forever
of an assessed loss in terms of s 20(1).
The Commissioner contended further that, in effecting the two sales, the liquidators
were not trading, but merely realising assets in the course of liquidation.
The taxpayer contended that the sales in question were effected in the course of their
trading activities and that, accordingly, it did carry on trade in the 1988 year of assess-
ment and accordingly that it was entitled to carry forward the assessed loss.
The taxpayer’s other ground of appeal was that the series of decisions in the Appellate
Division which had construed s 20(1) as meaning that, if there is no income or loss from
trading in a given tax year, the machinery for setting off an assessed loss cannot operate,
with the result that the assessed loss disappears, were wrong and should not be followed.
The taxpayer maintained, therefore, that it was entitled to carry forward the assessed
loss even though there was no trading income during 1988 against which it could be set-
off. This argument entailed an assault on the rule laid down in SA Bazaars (Pty) Ltd v CIR.
Issue: did the taxpayer company carry on a trade during the 1988 tax year, with the
result that it was entitled to set off assessed losses, accumulated prior to that year, against
the income of succeeding years?
Held: in the negative; the company did not trade during the 1988 tax year.
The basis of the decision and the tax consequences, were as follows –
(1) While it may be in the normal course of trading for a liquidator to sell off assets in
bulk, trade and realisation are different concepts. In this case, the disposal of the
stock in bond was designed to allow others to trade in that stock and release the tax-
payer from the risks entailed in doing so itself. Thus, the court a quo was correct in
concluding that two transactions in issue did not constitute the carrying on of trade.
(2) Section 20(1) has been construed by the courts to mean that if there is no income
or loss from trading in a given year the machinery for setting off an assessed loss
cannot operate, with the result that the assessed loss disappears. It was held that
both the propositions laid down in SA Bazaars (Pty) Ltd v CIR, namely that set-off
is admissible only (a) against income derived from trade and (b) where the
balance of an assessed loss has been carried forward from the preceding year, were
correct.
In the present case the creditors had decided to bring an end to trading as soon as
this could be advantageously done and they had accepted an offer to purchase the
business as a going concern, from which was excluded the stock in bond; thereafter,
no new trading venture was commenced.
(3) It was held in New Urban Properties Ltd v SIR that a balance can be carried forward
from any year only if a balance has been struck in that year, in other words only if an
assessment has been issued for that year reflecting the balance of assessed loss at the
end of that year.
For any balance to have been brought forward from the immediately preceding year, it
must have been assessed for that year, as only assessed losses can be carried forward;
accordingly, it is necessary to the operation of s 20(1) that a new balance be struck in
that year.
In the light of the finding that the taxpayer had not traded in the 1988 year of assess-
ment, the first proposition had not been satisfied, and the taxpayer’s appeal must fail.
528 Income Tax in South Africa: Cases and Materials

Schutz JA: The appellant company (‘Robin’) asserts that the Transvaal Income Tax Special
Court erred in upholding the contention of the respondent (‘the Commissioner’) that Robin
did not carry on trade during the 1988 tax year. The significance of that finding is that, as
s 20(1) of the Income Tax Act (‘the Act’) has been interpreted to date, Robin will not be able to
set off assessed losses accumulated prior to that year against the income of succeeding years. In
other words, the Commissioner’s stand is that a tax year of mercantile abstinence by a company
entails the loss forever of that usually valuable asset, an assessed loss.
Robin disputes this contention and maintains that on the facts it did carry on trade in 1988,
basing its case on two transactions of sale during that year. That is the one ground of appeal.
The other could not be advanced before the Special Court, because it runs counter to a series of
decisions in this court, which have construed s 20(1) and its predecessor as meaning that if there
is no income or loss from trading in a given year the machinery for setting off an assessed loss
cannot operate, with the result that the assessed loss disappears. That other ground of appeal is,
then, that those decisions are clearly wrong and should not be followed: Robin is entitled to
carry forward the assessed loss even though there was no trading income during 1988 against
which it could be set off – so Robin contends.
The relevant part of s 20(1) reads:
‘For the purpose of determining the taxable income derived by any person from carrying on any trade
253
within the Republic, there shall be set off against the income so derived by such person –
(a) any balance of assessed loss incurred by the taxpayer in any previous year which has been carried
forward from the preceding year of assessment: Provided that – . . .
Background
[After summarising the facts, the judgment proceeds:]
The Commissioner contends that in effecting the two sales the liquidators were merely realising
assets in the course of liquidation. Robin contends that the sales were effected in the course of
their trading activities.
Did Robin carry on trade in the 1988 year?
Although the submission that Robin did carry on trade in 1988 was advanced as an alternative
one, I shall deal with it first.
Many of the arguments leading up to this submission may be accepted as sound in principle. I
do not propose setting them out in detail, even less the authorities upon which they are correctly
based, but will confine myself to indicating what they are. Reference is made to the wideness of
the definition of the word ‘trade’ in s 1 of the Act and the consequent recognition by the courts
that it should be given a wide interpretation. Further, that it is possible for even a single transac-
tion to constitute trade. Further yet, that it is possible in special circumstances for resale at a loss
to constitute trading. So far so good . . .
The creditors had decided to bring an end to trading as soon as this could be advantageously
done. They accepted an offer to purchase from which was excluded the stock in bond,
which would cost money to reduce into possession. Thereafter no new trading venture was
commenced – certainly no trading venture in any ordinary sense. A decision was taken by
the creditors’ representatives, the liquidators, not to incur any expense in order to take delivery
of the stock in bond. There was a reason for that. It might lead to a loss. There was no
venture into trading in the ordinary way – by the acquisition and holding of stock in the hope
of reselling it at a profit – whilst accepting the risk of loss. On the contrary, the stock in bond
was kept at a distance, and the opportunity was offered to others to make a profit and risk a
loss.
It seems to me that the only possible escape from the conclusion that these activities did not
constitute trade is that . . . it is in the normal course of trading for a liquidator to sell off assets
in bulk. [This argument] is really equating trade and realisation, which are normally viewed as
different, sometimes even opposed concepts. That was also the view in the two cases mentioned.
An indicium, it is no more, of trading is the replenishment of stock. There was none of that
here. Rather, positive steps were taken to see that Robin did not receive stocks already destined
for it, the stocks in transit and in bond. The disposal of the stock in bond was, it seems to me,
________________________

253 The words ‘within the Republic’ no longer appear in s 20(1)(a).

 Deductions: General principles; Assessed losses of prior years 529

designed to allow others to trade in that stock and release Robin from the risks entailed in doing
so itself.
My conclusion is that the court a quo was correct in concluding that the two transactions did not
constitute the carrying on of trade.
Should the rule in SA Bazaars v Commissioner for Inland Revenue be departed from?
Robin argues, in the alternative, that it is entitled to carry forward its assessed loss to later years
even though it neither traded nor earned an income from trade during the 1988 year. This argu-
ment entails a frontal assault on the rule in SA Bazaars (Pty) Ltd v CIR.254 . . .
Two propositions appear from [dicta in this judgment]: set-off is admissible only (a) against in-
come derived from trade; and (b) where the balance of assessed loss has been carried forward
from the preceding year.
The case was explained in New Urban Properties Ltd v SIR 255in the following terms:
‘. . . [s 11(3)] envisages a continuity in setting off an assessed loss in every year succeeding the year in
which it was originally incurred, so that in each succeeding year a balance can be struck to the satisfaction
of the secretary which can then be carried forward from year to year until it is exhausted; if, for any rea-
son, the assessed loss cannot be so set off and balanced in any particular year, there is then no ‘balance of
assessed loss’ for that year which (viewed from that year of assessment) can be carried forward to the suc-
ceeding year, or (viewed from the succeeding year of assessment) there is no ‘balance of assessed loss
which has been carried forward from the preceding year of assessment’; in other words, the essential con-
tinuity has been fatally interrupted.’
This passage makes explicit that a balance can be carried forward from any year only if a balance
has been struck in that year, which clearly means: if an assessment has been issued for that year
reflecting the balance of assessed loss at the end of it.
Robin’s submission is that these decisions, as also the remarks of Grosskopf JA in Conshu (Pty) Ltd
v CIR 256 are clearly wrong and should not be followed . . .
[T]his part of Robin’s argument falls short of demonstrating that the construction adopted in
the two cases is wrong: even less, clearly wrong. In fact I think that it is correct. This disposes of
the argument that the second proposition in the SA Bazaars’ case is wrong . . .
I have reached this conclusion without reference to s 20 (2A)(b), introduced in 1973, the effect
of which is that in the case of a taxpayer other than a company, he may carry forward an assessed
loss even though he has not derived any income from trade during a particular year. If this sub-
section may be taken into account in construing subsection (1) it can only make Robin’s burden
of persuasion more difficult.
Having concluded that the decision in the two cases is clearly right, it is unnecessary to deal with
the consequences had there been an opposite conclusion. However, I should state again, that for
good reason this court is reluctant to depart from its own decisions (Harris & Others v Minister of
the Interior)257 and that once the meaning of the words of a section in an Act of Parliament have
been authoritatively determined by this court, that meaning must be given to them, even by this
court, unless it is clear to it that it has erred (Collett v Priest).258 Particularly is it important to ob-
serve stare decisis when a decision has been acted on for a number of years in such a manner
that rights have grown up under it . . . For 45 years businessmen and the revenue have been
ordering their affairs on the assumption that the SA Bazaars case laid down the law. There has
been no material change in the context in which the rule in that case operates, so that this
would have been a case in which this court would have been especially slow to depart from its
earlier decision.
In order to succeed Robin has to overcome both propositions in the SA Bazaars’ case. The se-
cond I have dealt with. Robin must fail on that leg, with the consequence that the appeal must
fail. Regarding the first proposition (set-off only against income derived from trade) Mr Gaunt-
lett, for Robin, concedes, and correctly so, that the proposition was properly derived from the
________________________

254 1952 (4) SA 505 (A).

255 1966 (1) SA 217 (A) at 224 C-F.
256 1994 (4) SA 603 (A) at 617 E-F.
257 1952 (2) SA 428 (A) at 454A.
258 1931 AD 290 at 297.
530 Income Tax in South Africa: Cases and Materials

section. In the light of the finding which I have made that Robin did not trade in the 1988 year,
this requirement has also not been satisfied, which is an additional reason why the appeal must
fail.
Further arguments addressed on behalf of Robin have not been overlooked. . . [I]t is argued
that we should construe the subsection so as to iron out the anomalies that may arise from the
Act’s artificial separation of a taxpayer’s activities into discrete tax years. But the fact that this
separation may work anomalously is not a reason for not giving effect to it, as is illustrated in CIR
v Sunnyside Centre (Pty) Ltd.259
Further anomalies or arbitrarinesses were pointed out. For instance, what magic is there in
selecting the twelve months of a tax year? A much longer break may pass unscathed, for instance
where a taxpayer stops trading after the first month of year one and resumes after the eleventh
month of year two – the total break being 22 months. Or, what of the trader who does trade in
the year under enquiry, but on a small scale, possibly even to keep his assessed loss alive? The
answer to these examples, and others, is that drawing lines does have random results and that
you cannot have law without lines . . .
Conclusion
. . . For the reasons given the appeal is dismissed . . .
MAHOMED CJ, HEFER JA, HOWIE JA and SCOTT JA concurred.

The taxpayer bears the onus of proving that the claimed set-off of the current year’s income against
prior years’ losses is (a) against income derived from a trade carried on in the current year and (b)
that the taxpayer is, in terms of the Income Tax Act, entitled to carry forward, into the current year,
the balance of an assessed loss from the preceding year.

[271]
CSARS v Megs Investments (Pty) Ltd
2005 (4) SA 328 (SCA)
The two companies in question had carried on the same trade of arranging bulk dis-
counts for independent supermarket stores. On 1 January 1996, both companies sold
their businesses and ceased to carry on their normal trading activity which involved
recovering, for their own account, portion of the discounts they had arranged for their
client supermarkets.
During 1996 the companies received interest on the proceeds of the sale, which were
being held in trust pending the fulfilment of certain condition of the sale. But, after
investing part of the amount with a bank, they received interest only from that investment.
The balance of the purchase price was partly paid out to shareholders and partly in-
vested interest-free in businesses in Namibia with a view to developing a similar business
in other countries. Various activities were carried out to explore the possibility of such a
business. With this objective, considerable money, time and effort was expended by the
directors, but no contracts were concluded, no organisation was established, no active
trading was done, and no income was earned. In their 1996 tax returns, the two compa-
nies sought to set off the balance of their assessed loss carried forward from the 1995 tax
year against the interest income they earned during 1996.
The Commissioner disallowed such set-off on the ground that, during 1996, being the
tax year in question, the two companies did not carry on any trade and did not generate
any income from trade, and hence that they were not entitled to set off losses incurred in
previous years against the current year’s income in terms of s 20(1) of the Income Tax
Act.

________________________

259 1997 (1) SA 68 (A) at 73 D-E.

 Deductions: General principles; Assessed losses of prior years 531

Held: the onus was on the companies to establish that the set-off claimed by them was
(a) against income derived from a trade carried on in the current year and (b) that they
were, in terms of the Income Tax Act, entitled to carry forward, into the current year, the
balance of an assessed loss from the preceding year.
Held further: that the companies’ endeavours to set up a business along the lines of the
business previously carried on by them did indeed amount to carrying on a ‘trade’ as
defined in the Income Tax Act.
Held further: that the companies were required to show that their income they received
in the current year was derived from ‘trade’. Their counsel argued that, in deriving
income from investing the proceeds of the sale of their business, the companies were
carrying on the trade of an investment company. The court held that it was settled law
that in ordinary circumstances income in the form of interest on an investment was not
income derived from carrying on a trade within the meaning of the Act; the court,
however, implicitly accepted that interest derived by an ‘investment company’ (that is to
say, a company carrying on the trade of investing) would be ‘trading’ income, but held
that the companies had failed to prove that they carried on the trade of investment
companies.
Held: accordingly, that the respondents had not shown that s 20(1) of the Act permit-
ted a set-off of their assessed loss from trading during previous years against their current
year’s income derived from interest on the investments.
Jones AJA: (ZULMAN JA, BRAND JA, CLOETE JA and PONNAN AJA concurring)
[1] … The Commissioner disallowed a set-off [of the balance of the companies’ assessed loss
carried forward from the 1995 tax year] … on the ground that the taxpayers, two affiliated
companies, did not carry on any trade and did not generate any income from trade in 1996, and
hence that they were not entitled to set off losses from previous years in terms of s 20(1) of the
Income Tax Act. …
[5] The respondent companies traded at a profit in the 1995 tax year. But they had both accu-
mulated a sizeable assessed loss which had been brought forward from previous tax years and
which was set-off against their profits. There remained a balance of assessed loss, which they
sought to carry forward and set off against the interest income earned during 1996. The Com-
missioner’s contention was that they were not entitled to do so in terms of the Act. …
The interpretation given to [section 20(1)] by this Court in SA Bazaars (Pty) Ltd v CIR260 has con-
sistently been followed and applied. The relevant portion of the judgment reads –
‘… the balance of assessed loss incurred in any previous year can only be set off when it has been carried
forward from the preceding year of assessment. To succeed in this appeal the appellant must show that it
was entitled to carry forward the balance of the assessed loss of £7 623 into its income tax return for the
[current] year ….
During the [current] year … the appellant did not carry on any trade. The mere fact that it kept itself
alive during that and subsequent periods does not mean that during those periods it was carrying on a
trade. It is clear from the stated case that it closed down its business and as long as it kept its business
closed it cannot be said to have been carrying on a trade, despite any intention it might have had to re-
sume its trading activities at a future date. During the [current] year … therefore, the appellant did not
carry on … a trade within the Union and it derived no income from any trade. Under that subsection a
deduction or set-off is admissible only against income derived from carrying on a trade. As the appellant
carried on no trade during the year under consideration it was not competent for it to set-off in its income
tax return for that year the balance of assessed loss incurred by it in previous years. It is not necessary for
the purpose of this case to decide whether the appellant would have been entitled to set-off that balance in
respect of the [current] year … if during that year it had carried on a trade but earned no income. ….’
In once again quoting, approving and applying the principle in the SA Bazaars case, this Court in
Robin Consolidated Industries Ltd v CIR261 said –
‘Two propositions appear from this passage: set-off is admissible only (a) against income derived from
trade; and (b) where the balance of assessed loss has been carried forward from the preceding year.’
________________________

260 1952 (4) SA 505 (A) at 510F-511A.

261 1997 (3) SA 654 (SCA) per Schutz JA at 664G-667A.
532 Income Tax in South Africa: Cases and Materials

It is important to emphasise that in Robin Consolidated Industries Ltd this Court did not decide the
question left open in the SA Bazaars case. [that is, whether the taxpayer would be entitled to set-
off the balance of an assessed loss from a previous year if, during the current year, it had carried
on a trade but earned no income] …
[7] The onus is on the taxpayer to establish these two propositions. The parties have accepted
that, if the first proposition is established, the balance of the assessed loss at the end of the 1995
tax year may be carried forward for set-off. The Commissioner’s argument was that the respond-
ents have not proved that they carried on a trade during 1996, their activities during that year
amounting to no more than acts in preparation for trading at some time in the future. It was
further argued on behalf of the Commissioner that there was no income derived from trade, the
only income being interest on investments. …
[9] Counsel for the respondents submitted that the respondents have discharged the onus of
proving the first proposition. He submitted that they have shown that they carried on a trade
(which I have accepted) and that they had earned income against which to set-off the balance of
an assessed loss, ie the interest income from investment. He conceded that to succeed they had
to overcome the hurdle of showing a connection between the trade they carried on and the
income they received. This concession is in effect a concession of the correctness of the argu-
ment by the Commissioner that the point left open in the SA Bazaars case – whether set-off can
operate if a trade is carried on but no income is derived from it – should be answered in this case
in favour of the Commissioner. I think that … the concession may have been correctly made. I
prefer, however, to say no more on the point.
I must make it clear that no argument to the contrary has been placed before us, the point has
not been given the consideration which contrary argument would require, and my decision is
based on the concession.
[10] In order to overcome the hurdle, counsel for the respondents did not attempt to relate the
respondents’ activities aimed at developing new business in new areas or with different products
to their investment income. But he argued that the necessary connection between income and
carrying on a trade is present when regard is had to the wide definition given to the term ‘trade’
in the Act. He submitted that in deriving income from investing the proceeds of the sale the
respondents had carried on the trade of an investment company. He sought to strengthen the
point by showing from the financial statements that in the previous tax year they had also de-
rived income from investments and had therefore carried on the trade of an investment compa-
ny previously.
[11] This argument cannot be sustained. That the respondents derived some income from in-
vestments in past years, and that they did so during the year in question does not, without more,
show that they carried on the business of an investment company. It is settled that in ordinary
circumstances income in the form of interest on an investment is not income derived from carry-
ing on a trade within the meaning of the Act.
It was, in any event, not the respondents’ case that they carried on business as an investment
company in 1996. On the contrary, they led evidence designed to establish that they intended to
carry on the same kind of trade that they had conducted before because that was the area of
their expertise. Their activities throughout 1996 were directed at finding ways and means (a) of
developing a similar kind of business in Angola, using Namibia as a springboard, and (b) of using
their trading licences to develop a similar kind of business in liquor and firearms. …
[12] The result is that the respondents have not shown that s 20(1) permits set-off of their as-
sessed loss from trading during previous years against their income from interest on investments
…

Notes
It is clear that, in order to be able to set-off an assessed loss carried forward from the
previous tax year, the taxpayer must carry on some trade during the current tax year. (In
the present case, the court held that the taxpayer had discharged the onus of proving
that this requirement was fulfilled.)
 Deductions: General principles; Assessed losses of prior years 533

It is, however, not clear whether it is a requirement that such trade have produced
some income in the current year. This point was left open in SA Bazaars. In the present
case, counsel for the taxpayer (for reasons unknown)262 conceded the correctness of
SARS’s argument that it was necessary that some income be produced from that trade.
The court seized on this concession, saying that –
‘I think that … the concession may have been correctly made. I prefer, however, to say no more
on the point. I must make it clear that no argument to the contrary has been placed before us,
the point has not been given the consideration which contrary argument would require, and my
decision is based on the concession.’
Consequently, this decision is not authority for the proposition that, in order for the
balance of the assessed loss to qualify to be brought forward into the current year, the
taxpayer must not only carry on trade in the current year that the trade must produce
some income. The court did not pronounce upon the correctness of this proposition,
but based its decision on counsel’s concession.
In the present case, the companies had earned interest from the proceeds of the sale
that they had invested with the bank. However, the court held that the interest does not,
ordinarily, constitute income from a ‘trade’. Counsel for the companies argued that the
companies were trading as investment companies, and therefore that interest did consti-
tute income from ‘trade’. The court held that the companies had not proved that they
were carrying on business as investment companies. Moreover, said the court, the evi-
dence led by the companies was that they were, in fact, carrying on the same business as
before, and that their endeavours to develop a similar business in Angola and elsewhere
constituted ‘trading’, even though these endeavours had not yet met with success.
The court was prepared to accept that these (as yet fruitless) endeavours did indeed
suffice to constitute ‘trading’, but pointed out that the income that the companies had
earned in the current year, namely interest, did not come from this trade, but from the
moneys deposited with the bank.
Consequently, the companies had succeeded in showing that they were ‘trading’ in the
current year (in the form of their endeavours to establish a business in Namibia), but
had failed to prove that such trading produced any income.
Since counsel had conceded that, in terms of s 20(1) the companies had to prove, not
only that they were trading, but that the trade produced income, the companies had
failed to prove the second leg of their argument.

[272]
SOUTH AFRICAN REVENUE SERVICE
INTERPRETATION NOTE NO 33
DATE: 4 July 2005
INCOME TAX ACT 1962
SECTION 20(1)(a)
SUBJECT: ASSESSED LOSSES: COMPANIES: THE TRADE AND INCOME FROM TRADE
REQUIREMENTS
SARS’ view
SARS is of the view that section 20 contains a trade requirement and an income from trade re-
quirement. Both these requirements must be satisfied before an assessed loss may be carried
forward. SARS does, however, accept that this may have some unintended results.
________________________

262 Perhaps counsel knew that he could prove that the companies had derived income in the form of interest,
and believed that he was therefore safe in making this concession. If so, counsel overlooked the fact that
the companies had to show, not only that they had derived income in the current tax year, but that such
income came from their trading activities. In the event, the court held that the derivation of interest did
not, ordinarily, constitute income from ‘trade’.
534 Income Tax in South Africa: Cases and Materials

In dealing with the problem SARS will accept that as long as the company has proved that a
trade has been carried on during the current year of assessment, the company will be entitled to
set-off its balance of assessed loss from the preceding year, notwithstanding the fact that income
may not have accrued from the carrying on of that trade. This concession is limited to cases
where it is clear that trade has been carried on.
SARS will apply an objective test in order to determine that a trade has in fact been carried on. It
will not be sufficient that there was a mere intention to trade or some preparatory activities. The
fact that no income was earned during the year of assessment must be incidental or result from
the nature of the trade carried on by the company.

Example – Carry forward of assessed loss where trade carried on but no income derived
from trade
Facts: Pecan Nut (Pty) Ltd was formed on 1 March 2004 with a February year end for the
purpose of operating a pecan nut farm. On 1 April 2004 it acquired a suitable piece of
land and began planting small pecan nut trees during the months that followed. It was
expected that the trees would only be ready for harvesting in four years’ time.
During the 2005 – 2007 tax years the company derived no income although it incurred
considerable expenditure in each of these years in cultivating the nut trees.
During the 2008 tax year the company started harvesting nuts and sold them to a number
of retail outlets.
Result: Despite the fact that the company derived no income from trade during the 2005 –
2007 tax years, SARS will permit the company to carry forward its 2005 – 2007 assessed
losses and set them off against the income derived in the 2008 tax year. The reason for the
failure to derive any income during the years in question clearly stems from the nature of
the company’s trade.
Although SARS is prepared to accept that the absence of income from trade (ie gross in-
come less exempt income) should not in all cases prevent the set-off of a balance of as-
sessed loss, a company that derives no income from trade will have to discharge the onus
that it did in fact trade during the current year. The absence of income from trade may
well indicate that the company did not trade during the year in question.

Conclusion
Whilst the views of SARS as contained in this Note provide direction in interpreting the legisla-
tion, each case will be considered on its merits in deciding whether a company has commenced
or carried on a trade and much will depend upon the nature and the extent of the company’s
activities.
Law Administration
SOUTH AFRICAN REVENUE SERVICE
 10
CAPITAL EXPENDITURE AND LOSSES

§ Page
§1 Introduction ............................................................................................................. 535
§2 Capital expenditure and losses ............................................................................... 536
[273] Smith v SIR .................................................................................................... 536
[274] Sub-Nigel Ltd v CIR ...................................................................................... 537
[275] CIR v George Forest Timber Company Ltd ................................................ 537
[276] Bourke’s Estate v CIR .................................................................................... 537
[277] New State Areas Ltd v CIR ............................................................................ 538
[278] CIR v George Forest Timber Company Ltd ................................................ 539
[279] CIR v African Oxygen Ltd ............................................................................ 539
[280] Vallambrosa Rubber Co Ltd v Farmer ......................................................... 540
[281] British Insulated & Helsby Cables v Atherton ............................................. 540
[282] New State Areas Ltd v CIR ............................................................................ 541
[283] CIR v Stellenbosch Farmers’ Winery............................................................ 544
[284] CIR v African Oxygen Ltd ............................................................................ 547
[285] SIR v Cadac Engineering Works (Pty) Ltd .................................................. 549
[286] Stone v SIR .................................................................................................... 551
[287] Burman v CIR ................................................................................................ 554
[288] CIR v Hilewitz ................................................................................................ 558
[289] SIR v Guardian Assurance Holdings (SA) Ltd ............................................ 561
[290] Taeuber and Corssen (Pty) Ltd v SIR .......................................................... 565
[291] BP Southern Africa (Pty) Ltd v CSARS ................................................... 567
[292] CSARS v BP South Africa (Pty) Ltd ............................................................. 571

§1 Introduction
For purposes of the Income Tax Act 58 of 1962, the question whether an amount is
capital or revenue is relevant to both incomings and to expenditure or losses.
On the incomings side, ‘gross income’, as defined,1 excludes ‘receipts and accruals of a
capital nature’.
On the outgoings side, the general deduction provision, namely s 11(a), provides for
the deduction of expenditure and losses ‘provided such expenditure and losses are not
of a capital nature’.2
________________________

1 Income Tax Act 58 of 1962, s 1 sv ‘gross income’.

2 The Act does however, contain provisions in terms of which specific allowances or deductions are granted
in certain circumstances or in relation to certain kinds of assets, for example, s 11(e), (f), and (g).
Deductibility is then determined with reference to those specific provisions and not in terms of the
general provisions of s 11(a). Thus, a taxpayer whose capital expenditure is not deductible in terms of
continued

535
536 Income Tax in South Africa: Cases and Materials

§2 Capital expenditure and losses

For the purposes of determining whether expenditure is of a capital nature, and thus deductible in
terms of s 11(a), the word ‘capital’ connotes money and every form of property used or capable of
being used in the production of income or wealth.

[273]
Smith v SIR
1968 (2) SA 480 (A)
Steyn CJ: (VAN BLERK, OGILVIE THOMPSON and WESSELS, JJA concurring)
[I]t is not an uncommon thing to describe personal attributes, faculties or qualifications
conferring or enhancing the capacity to earn income, as capital assets. As a figure of speech it
comes into play very naturally in such a connection, and as such there is nothing wrong with it;
but one has to guard against an undue extension of the true meaning of capital as used in
relation to expenditure of a capital nature, in the context of s 11(2)(b)bis,3 by a prevalent
metaphorical turn of language. Good health, an energetic disposition, initiative, tact, a winning
personality, all these and others are qualities which would be correctly described as assets in the
production of income, but it does not follow that, for the purposes here in question, they are
assets in the same sense as capital assets.
As a general proposition it cannot be said that income postulates capital, no matter how the
income is produced, so that every factor contributing to its production is to be characterised as a
capital asset. Certain rights, such as the right to use electricity, public roads or public transport, or
the right to recruit labour or to drive a car, may, in given circumstances, be indispensable for the
production of an income, but, except possibly where special contractual arrangements place them
in a different category, they would not, I consider, figure amongst the capital assets of a taxpayer.
In the absence of any indications to the contrary – and I have found none – the word ‘capital’
has to be given its ordinary meaning. Broadly speaking and for present purposes, it may be said
to connote money and every form of property used or capable of being used in the production
of income or wealth. Such a commercial or business sense is the sense in which one expects it to
be used in the context here in question, and it is to capital in that sense that, for the purposes of
s 11(2)(b)bis at any rate, expenditure is to be related in order to determine whether or not it is
expenditure of a capital nature.

Notes
This decision holds that, in the context of s 11(a) of the Income Tax Act, the term
capital connotes property that, used productively, is capable of producing income. (But
trading stock, that is to say, property that the taxpayer buys and sells in the course of a
business of buying and selling such property, is not a capital asset.) Thus, personal
attributes, such as a winning personality or good health do not constitute ‘capital’; nor
do rights such as the right to use a public road, be capital. However, a contractual right,
being a form of incorporeal property and the rights held by the holder of a copyright or
trademark, do constitute property and could constitute capital for the purposes of
s 11(a).
________________________

s 11(a) may be entitled to deduct that expenditure under another provision, or may be entitled to an
allowance in which the expenditure is deductible, piece-meal, over several years of assessment; see for
example CIR v Manganese Metal Co (Pty) Ltd 1996 (3) SA 591 (T).
3 Section 11(2)(b)bis of the Income Tax Act 31 of 1941 (which was the equivalent of the present s 11(a) of
the Income Tax Act 58 of 1962) permitted a deduction from a taxpayer’s income derived from carrying
on a trade, of ‘any expenditure, other than that of a capital nature, actually incurred by the taxpayer
during the year of assessment in respect of any dispute or action at law arising in the course or by reason
of the ordinary operations undertaken by him in the carrying on of his trade’.
 Capital Expenditure and Losses 537

It is impossible to define comprehensively what is meant by expenditure of a capital or a non-capital

nature.

[274]
Sub-Nigel Ltd v CIR
1948 (4) SA 580 (A), 15 SATC 381
For the facts of this case, see extract [242].
Centlivres JA: It is, in my view, impossible to give a definition of what is expenditure of a non-
capital nature which will act as a touchstone in deciding all possible cases and it would be
impracticable to attempt such a definition.

Capital may be fixed or floating capital.

[275]
CIR v George Forest Timber Company Ltd
1924 AD 516, 1 SATC 20
Innes CJ: Capital, it should be remembered, may be either fixed or floating. I take the
substantial difference to be that floating capital is consumed or disappears in the very process of
production, while fixed capital does not; though it produces fresh wealth, it remains intact. The
distinction is relative, for even fixed capital, such as machinery, gradually wears away and needs
to be renewed. But as pointed out by Mason J in Stephen v CIR 4 the two phrases have an
ascertained meaning in accountancy as well as in economics. Ordinary merchandise in the
hands of a trader would be floating capital. Its use involves its disappearance; and the money
obtained for it is received as part of the ordinary revenue of the business. It could never have
been intended that money received by a merchant in the course, and as the result of his trading,
should not form part of his gross income.
The proceeds of fixed capital stand in a different position. The sale of such capital would,
generally speaking, represent a mere realisation, which ought from its nature to be excluded,
and which I think the section intended to exclude from the calculation of income. Receipts and
accruals resulting from the sale of fixed capital, where that is not the business carried on, would
therefore come within the operation of the words of limitation in s 6.

Notes
When judges refer to ‘capital’ without further qualification, they usually mean ‘fixed
capital’. The distinction between fixed and floating capital was first propounded by
Adam Smith in his seminal work, The Wealth of Nations. It is impossible to categorise an
asset as fixed or floating capital until the nature of the taxpayer’s business and the role of
the asset in that business has been determined; see [276] Bourke’s Estate.

Whether an item is fixed capital or floating capital depends, not on the nature of the asset, but on
the nature of the particular taxpayer’s business and the role which the asset plays in that business.

[276]
Bourke’s Estate v CIR
1991 (1) SA 661 (A), 53 SATC 86 at 94
Hoexter JA: . . . what must steadily be borne in mind is that the assignment of capital to the one
or other category [ie fixed or floating capital] ‘depends in no way upon what may be the nature
of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel
________________________

4 1919 WLD 1 at 5.
538 Income Tax in South Africa: Cases and Materials

or chose in action may be fixed capital. The determining factor must be the nature of the trade
in which the asset is employed. The land upon which a manufacturer carries on his business is
part of his fixed capital. The land with which a dealer in real estate carries on his business is part
of his circulating capital’ (per Romer LJ in Golden Horse Shoe (New) Ltd v Thurgood).5

Notes
Cases dealing with the taxability of profits on the sale of land or shares often centre on
whether the land or shares were fixed or floating capital in the hands of the taxpayer in
question. If the taxpayer acquired the land or shares for the purpose of holding them
more or less ‘for keeps’, they will be fixed capital and any profit on resale will similarly be
of a capital nature; if purchased with the intention of resale at a profit, they will be
floating capital, and any profit on resale will be of a revenue nature and will be included
in the taxpayer’s ‘gross income’.

When s 11(a) prohibits the deduction of expenditure of a capital nature, it is referring to fixed
capital, not floating capital. Expenditure which is part of the cost of performing the income-earning
operations is revenue expenditure; expenditure which establishes, improves or adds to the income-
earning machinery is of a capital nature.

[277]
New State Areas Ltd v CIR
1946 AD 610, 14 SATC 155
For the facts of this case, see extract [282].
6
Watermeyer CJ: It has been pointed out before (see Port Elizabeth Electric Tramway Co v CIR) that
in a literal sense expenditure and losses do not produce income. Save in the case of the leasing
or the loan of capital in some form or other, income is produced by work or service or activities
or operations and as a rule expenditure is attendant upon the performance of such operations
sometimes necessarily, sometimes not. Expenditure may also occur in the acquisition by the
taxpayer of the means of production, that is, the property plant, tools, etc, which he uses in the
performance of his income earning operations and not only for their acquisition but for their
expansion and improvement. Both these forms of expenditure can be described as expenditure
in the production of the income but the former is, as a rule, current or revenue expenditure and
the latter is, as a rule, expenditure of a capital nature. As to the latter, the distinction must be
remembered between floating or circulating and fixed capital. When the capital employed in a
business is frequently changing its form from money to goods and vice versa (eg the purchase
and sale of stock by a merchant or the purchase of raw material by a manufacturer for the
purpose of conversion to a manufactured article), and this is done for the purpose of making a
profit, then the capital so employed is floating capital. The expenditure of a capital nature, the
deduction of which is prohibited under s 11(2),7 is expenditure of a fixed capital nature, not
expenditure of a floating capital nature . . . The problem which arises when deductions are
claimed is, therefore, usually whether the expenditure in question should properly be regarded
as part of the cost of performing the income earning operations or as part of the cost of
establishing or improving or adding to the income earning plant or machinery.
...
[After reviewing case law on the issue, the judge said:] The conclusion to be drawn from all of
these cases seems to be that the true nature of each transaction must be enquired into in order
to determine whether the expenditure attached to it is capital or revenue expenditure. Its true
nature is a matter of fact and the purpose of the expenditure is an important factor; if it is
________________________

5 1934 1 KB 548 (CA) at 563.

6 (1936) CPD 241.
7 The current equivalent of which is s 11(a).
 Capital Expenditure and Losses 539

incurred for the purpose of acquiring a capital asset for the business, it is capital expenditure,
even if it is paid in annual instalments; if, on the other hand, it is in truth no more than part of
the cost incidental to the performance of the income-producing operations, as distinguished
from the equipment of the income-producing machine, then it is revenue expenditure, even if it
is paid in a lump sum.

Notes
Watermeyer CJ here makes the important point that revenue expenditure cannot be
differentiated from capital expenditure by asking whether the expenditure in question
was incurred ‘in the production of income’. Both revenue and capital expenditure, he
points out, usually produce income. Watermeyer CJ suggests – and many subsequent
cases have adopted this criterion – that the distinction between revenue and capital
expenditure is that capital expenditure establishes, adds to or improves the taxpayer’s income-
earning plant or machinery (which is probably better called the ‘income-earning
structure’), whereas revenue expenditure is part of the cost of performing the income-earning
operations. The latter can for brevity be called ‘operating costs’. Applying this distinction,
it is easy to see that, where the taxpayer’s business involves the running of a factory, the
cost of purchasing the factory or of adding to the factory or of making structural
improvements to the factory is expenditure of a capital nature; whereas expenditure
incurred in paying the wages of factory staff and paying for electricity, routine
maintenance of machinery, etc is of a revenue nature.
Watermeyer CJ says that in deciding into which of these two categories particular
expenditure falls, it is necessary to look at the ‘true nature’ of the expenditure and that
in this inquiry the purpose of the taxpayer is an important factor. Thus, just as the
purpose of the taxpayer is important in determining whether a particular income was of
a revenue nature and falls into his ‘gross income’ (see in particular the discussion of
‘schemes of profit-making’ in chapter 5, above), so the purpose of the taxpayer is also
important in determining whether an item of expenditure is deductible under s 11(a).

Expenditure incurred in creating or acquiring, improving or extending the taxpayer’s income-

earning structure is of a capital nature; by contrast, expenditure incurred in operating that structure
is of a non-capital (revenue) nature.

[278]
CIR v George Forest Timber Company Ltd
1924 AD 516, 1 SATC 20
Innes CJ: Now, money spent in creating or acquiring an income-producing concern must be
capital expenditure. It is invested to yield future profit; and while the outlay does not recur, the
income does. There is a great difference between money spent in creating or acquiring a source
of profit, and money spent in working it. The one is capital expenditure, the other is not.

[279]
CIR v African Oxygen Ltd
1963 (1) SA 681 (A), 25 SATC 67
For the facts of this case, see extract [284].
Steyn CJ: Generally speaking, money spent in creating or acquiring an income-producing
concern, a source of profit or a capital asset, is capital expenditure, while the cost incidental to
the performance of the income-producing operations is revenue expenditure.
...
[For expenditure to be of a revenue nature] there must be some link between the expenditure
and the operation, which is so close that the expenditure may properly, naturally or reasonably
540 Income Tax in South Africa: Cases and Materials

be regarded as part of the cost of the operation as distinguished from the cost of the income-
producing machine.

Notes
This dictum elaborates on the point made in earlier cases that expenditure does not, in a
literal sense, produce income. Steyn CJ says that what is significant is the link or nexus
between the expenditure and the income. If the expenditure is incurred in creating or
acquiring a capital asset, then it is capital expenditure; if the expenditure is incurred as
part of the cost of operating the taxpayer’s income-earning machine, then it is revenue
expenditure. In a nutshell, the distinction being drawn is between ‘structural’
expenditure and ‘operating costs’.

Expenditure of a capital nature is usually spent ‘once and for all’, whilst revenue expenditure is
usually of a recurrent nature.

[280]
Vallambrosa Rubber Co Ltd v Farmer
1910 SC 519
Lord Dunedin: Now I do not say that this consideration is absolutely final or determinative, but
in a rough way I think it is not a bad criterion of what is capital expenditure – as against what is
income expenditure – to say that capital expenditure is a thing that is going to be spent once
and for all, and income expenditure is a thing that is going to recur every year.

Notes
The inadequacy of this ‘once and for all’ test is that it has regard only to the form of the
consideration, and not to its substance. Of more influence has been Watermeyer CJ’s
dictum in [277] New State Areas that ‘the true nature of each transaction must be
enquired into in order to determine whether the expenditure attached to it is capital or
revenue expenditure’. The ‘enduring benefit’ test laid down in [281] British Insulated is
generally regarded as more useful than a simple ‘once and for all’ test.

Expenditure which is not merely ‘once and for all’ but by which the taxpayer acquires an asset of an
enduring nature is of a capital nature.

[281]
British Insulated & Helsby Cables v Atherton
[1926] AC 205
Lord Cave: [W]hen expenditure is made, not only once and for all, but with a view to bringing
into existence an asset or advantage for the enduring benefit of a trade, I think that there is very
good reason (in the absence of special circumstances leading to an opposite conclusion) for
treating such an expenditure as properly attributable not to revenue but to capital.

Notes
This dictum has been much quoted in subsequent tax decisions. It should be noted,
however, that it does not say that expenditure is of a capital nature merely because it is a
‘one-off’ outlay. Such a criterion would be simplistic, for it would have regard only to the
form of the payment, and not at what it achieves.
What Lord Cave said was that expenditure which is not only once and for all, but which
brings into existence an asset or advantage for the enduring benefit of the taxpayer’s trade will be of
a capital nature.
 Capital Expenditure and Losses 541

The converse can also apply, namely that recurrent expenditure is not necessarily of a
revenue (non-capital) nature. Recurrent expenditure will be of a capital nature (and
thus not deductible in terms of s 11(a) where it brings into existence an asset or advantage for
the enduring benefit of the taxpayer’s trade. Thus, for example, in [282] New State Areas
certain recurrent expenditure (what was called charge ‘A’ in that case) was held to be of
a capital nature because it secured the taxpayer an asset of an enduring nature.
Some of the most difficult situations in which to distinguish between capital and
revenue expenditure are those in which the expenditure has not resulted in the
acquisition of an identifiable asset. Cases which fall into this category are [285] Cadac
Engineering and [284] African Oxygen.
The expression ‘enduring benefit’ used by Lord Cave in British Insulated v Helsby Cables,
taken in isolation, is ambiguous, given that ‘enduring’ is a relative term. Important light
was shed on the interpretation of this expression in Anglo-Persian Oil Co Ltd v Dale
(Inspector of Taxes)8 where Rowlatt J explained Lord Cave’s phrase ‘asset or advantage for
the enduring benefit of a trade’ as meaning (emphasis added) –
a benefit which endures, in the way that fixed capital endures, not a benefit that endures in the
sense that for a good number of years it relieves you of a revenue payment. It means a thing which
endures in the way that fixed capital endures. It is not always an actual asset, but it endures in the
way that getting rid of a lease or getting rid of onerousus capital assets . . . endures.
9 10
In Regent Oil Co Ltd v Strick (Inspector of Taxes) , Lord Wilberforce said –
‘No rule can be laid down as to a minimum period of endurance for a capital asset or a
maximum permissible period for an item of stock or circulating capital, though obviously the
more closely the period of endurance is related to an accounting period the easier it is to argue
for a revenue character, but no doubt there is a penumbra the width of which may vary
according to the nature of the trade.’
11
In [291] CSARS v BP South Africa (Pty) Ltd a lump-sum payment in advance of 20 years
rental, including a servitude that would remain in existence after the leases terminated,
was held to be expenditure of a capital nature.

[282]
New State Areas Ltd v CIR
1946 AD 610, 14 SATC 155
The taxpayer was a gold mining company, which mined in an area where the Springs
town council had the right of removing sewage. The taxpayer employed many persons,
for whom sanitary conveniences had to be supplied. When waterborne sewage was
introduced, the taxpayer was legally obliged to connect its premises to the municipal
sewers. The necessary connections consisted of internal sewers which were situated on
land over which the taxpayer held surface rights and external sewers situated outside
such land and leading to the municipal sewage farm. All the sewers were constructed by
the town council, though the taxpayer could have applied for permission to construct
the internal sewers itself. The town council lent the taxpayer the funds for the
construction of the sewers and recovered these costs plus interest in respect of both the
internal sewers (charge A) and the external sewers (charge B) by way of charges payable
over 60 and 300 months respectively. When the taxpayer had paid the full cost of the
internal sewers, they would become its property, but the external sewers would remain
the property of the town council even after they had been paid for in full.
________________________

8 (1931) 16 TC 253 at 262.

9
10 Ibid 204H-I.
11 2006 (5) SA 559 (SCA).
542 Income Tax in South Africa: Cases and Materials

Issue: whether the instalments paid by the taxpayer in respect of charge A and charge
B respectively, during the tax year in question, were of a capital nature.
Held: the internal sewers formed part of the equipment of the mine and, when paid
for, became the property of the taxpayer; hence charge A in respect of those sewers,
though recurrent, was expenditure of a capital nature and hence not deductible. The
external sewers, by contrast, never became the property of the taxpayer; consequently, by
paying the instalments under charge B, the taxpayer acquired no asset of any kind;
charge B was thus expenditure which was not of a capital nature and was hence deductible.
Watermeyer CJ: The deductions from income which are allowed for the purpose of arriving at tax-
able income are dealt with positively in section 11(2) and negatively in section 12 of Act 31 of 1941.
The two relevant provisions are: –
1. The deductions allowed shall be expenditure and losses actually incurred in the Union in the
production of the income provided such expenditure and losses are not of a capital nature.
2. No deduction shall in any case be made in respect of any moneys, claimed as a deduction from income
derived from trade, which are not wholly or exclusively laid out or expended for the purposes of trade.
It has been pointed out before (see Port Elizabeth Electric Tramway Co v CIR)12 that in a literal sense
expenditure and losses do not produce income. Save in the case of the leasing or the loan of
capital in some form or other, income is produced by work or service or activities or operations
and as a rule expenditure is attendant upon the performance of such operations sometimes
necessarily, sometimes not. Expenditure may also occur in the acquisition by the taxpayer of the
means of production, ie the property plant, tools, etc, which he uses in the performance of his
income earning operations and not only for their acquisition but for their expansion and
improvement. Both these forms of expenditure can be described as expenditure in the
production of the income but the former is, as a rule, current or revenue expenditure and the
latter is, as a rule, expenditure of a capital nature. As to the latter, the distinction must be
remembered between floating or circulating and fixed capital. When the capital employed in a
business is frequently changing its form from money to goods and vice versa (eg the purchase
and sale of stock by a merchant or the purchase of raw material by a manufacturer for the
purpose of conversion to a manufactured article), and this is done for the purpose of making a
profit, then the capital so employed is floating capital. The expenditure of a capital nature, the
deduction of which is prohibited under s 11(2), is expenditure of a fixed capital nature, not
expenditure of a floating capital nature, because expenditure which constitutes the use of
floating capital for the purpose of earning a profit, such as the purchase price of stock in trade,
must necessarily be deducted from the proceeds of the sale of stock in trade in order to arrive at
the taxable income derived by the taxpayer from that trade. The problem which arises when
deductions are claimed is, therefore, usually whether the expenditure in question should
properly be regarded as part of the cost of performing the income earning operations or as part
of the cost of establishing or improving or adding to the income earning plant or machinery . . .
In ordinary cases it is not difficult to distinguish between capital expenditure and revenue
expenditure, but there are many cases on the border line, some of which, such as repairs and
wear and tear of the means of production, are specially provided for in s 11(2) of the Act.
Several tests for determining the doubtful cases have been suggested in English cases which were
useful in some circumstances, but many of them have turned out to be insufficient and
inconclusive when applied to other circumstances. One such test suggested by Lord Dunedin in
the Vallambrosa case13 and often quoted, namely, that in a rough way a payment made once-for-all is
capital expenditure, and a recurrent expenditure is revenue expenditure, had regard only to the
form and not to the essential character of the transaction and is of little value in those cases
where capital expenditure is given the appearance of revenue expenditure because it is paid in
instalments and where revenue expenditure is given the appearance of capital expenditure
because it is commuted and paid in one lump sum. It has now been recognised by the English
courts that the true character of the transaction and not its form must be looked at to determine
whether it is a capital or a revenue expenditure . . .

________________________

12 1936 CPD 241.

13 Vallambrosa Rubber Co Ltd v Farmer 1910 SC 519.
 Capital Expenditure and Losses 543

In 1926 the English cases were reviewed by the House of Lords in the case of British Insulated &
14
Helsby Cables v Atherton Lord Cave in his judgment said:
‘. . . [I]n Vallambrosa Rubber Co v Farmer, Lord Dunedin, as Lord President of the Court of Session,
expressed the opinion that “in a rough way” it was “not a bad criterion of what is capital expenditure – as
against what is income expenditure – to say that capital expenditure is a thing that is going to be spent
once and for all, and income expenditure is a thing that is going to recur every year”: and no doubt this is
often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord
Dunedin to be a decisive one in every case: for it is easy to imagine many cases in which a payment, though
made “once and for all”, would be properly chargeable against the receipts for the year . . . But when an
expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an
advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of
special circumstances leading to an opposite conclusion) for treating such an expenditure as properly
attributable not to revenue but to capital . . .’
With regard to that judgment of Lord Cave, the remarks of Romer LJ in the case of Anglo-Persian
Oil Co v Dale15 are of sufficient importance to be repeated here. After referring to the lack of
certainty as to permissible deductions furnished by the terms of the Act, and to the numerous
and not easily reconcilable tests suggested by the Judges in past cases, he continued:
‘. . . I agree with Rowlatt J that by ‘enduring’ is meant ‘enduring in the way that fixed capital endures’. An
expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is
made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively
early date. Nor, of course, need the advantage be of a positive character. The advantage may consist in the
getting rid of an item of fixed capital that is of an onerous character, as was pointed out by this Court in
16
Mallett v Staveley Coal & Iron Co. ’
...
There are quite a number of cases in England in which lump-sum payments of considerable
amounts have been made in order to secure some lasting benefit for the payer, but, in spite of
the existence of those supposedly characteristic indications of capital expenditure, they have
been held to be revenue expenditure. Some are referred to in the judgment in Atherton’s case
(supra) and another rather striking one is the case of Mitchell v B W Noble Ltd 17 where a company
in order to get rid of an undesired director paid him a sum of £19 200 in five annual
instalments. These instalments were held to be revenue expenditure . . .
The conclusion to be drawn from all of these cases, seems to be that the true nature of each
transaction must be enquired into in order to determine whether the expenditure attached to it
is capital or revenue expenditure. Its true nature is a matter of fact and the purpose of the
expenditure is an important factor; if it is incurred for the purpose of acquiring a capital asset
for the business, it is capital expenditure, even if it is paid in annual instalments; if, on the other
hand, it is in truth no more than part of the cost incidental to the performance of the income-
producing operations, as distinguished from the equipment of the income-producing machine,
then it is revenue expenditure, even if it is paid in a lump sum.
Turning now to the facts of the present case, it seems clear that the internal sewers formed part
of the equipment of the mine and when the instalments were paid they became the property of
the appellant. They were, therefore, a part of the capital employed by the appellant in earning
its income and consequently the instalments paid to redeem the cost of constructing the internal
sewers, though a recurrent expenditure, were, nevertheless, expenditure of a capital nature and
consequently were not an allowable deduction from income. The appellant did not desire to
construct the sewers, but the mere fact that the expenditure was unwanted and forced on them
by law cannot change its character from capital expenditure into revenue expenditure.
The external sewers stand on a different footing. They do not form any part of the mine, they
were not constructed for the improvement of the mining operations and they never became the
property of the appellant. Consequently, the appellant acquired no asset or right of any kind by
paying the instalments which became due to the Town Council under basic charge ‘B’ . . .
Consequently, on the principles set out above, which I have gathered from the cases referred to,
basic charge ‘B’ was a revenue expenditure and not a capital expenditure.
________________________

14 [1926] AC 205.
15 [1932] 1 KB 124 at 145.
16 [1928] 2 KB 405.
17 [1927] 1 KB 719.
544 Income Tax in South Africa: Cases and Materials

Notes
This is the leading Appellate Division decision in regard to the principles to be applied
to distinguish between capital and non-capital expenditure. Of particular influence has
been the much-quoted observation by Watermeyer CJ that –
‘the true nature of each transaction must be enquired into in order to determine whether the
expenditure attached to it is capital or revenue expenditure. Its true nature is a matter of fact
and the purpose of the expenditure is an important factor; if it is incurred for the purpose of
acquiring a capital asset for the business, it is capital expenditure, even if it is paid in annual
instalments; if, on the other hand, it is in truth no more than part of the cost incidental to the
performance of the income-producing operations, as distinguished from the equipment of the
income-producing machine, then it is revenue expenditure, even if it is paid in a lump sum’.
In Palabora Mining Co Ltd v SIR 18 the Appellate Division described this formulation as ‘the
most useful general guide in what is invariably a somewhat evenly balanced and difficult
problem’.
Watermeyer CJ’s phrase, ‘the purpose of the expenditure’ presumably means ‘the
purpose of the taxpayer in incurring the expenditure’. But the ‘effect’ of the
expenditure as distinct from its ‘purpose’ is also relevant; compare [241] CIR v Genn &
Co (Pty) Ltd which held that the court must have regard to ‘the closeness of the
connection between the expenditure and the income-earning operations having regard
both to the purpose of the expenditure and to what it actually effects’. As to the
distinction between the purpose and the effect of expenditure, see also [262] Mallalieu v
Drummond.
New State Areas is also significant for its illustration of the fact that, although capital
expenditure is often ‘one-off’, recurring expenditure, such as charge ‘A’ in that case, can
be of a capital nature.

Expenditure incurred in order to eliminate a trade competitor is of a capital nature.

[283]
CIR v Stellenbosch Farmers’ Winery
1945 CPD 377, 13 SATC 381
The taxpayer carried on the business of wine and spirit merchants. It marketed a certain
sherry in bottles bearing the logo of a ship, and this became popularly known as ‘Ship
Sherry’ even though it was not called by this name. The taxpayer registered the label
bearing this logo. The sherry sold under this label was extremely popular. Various
competitors of the taxpayer tried to sell their wine under the name ‘Ship Sherry’ and the
taxpayer took legal proceedings against them and obtained judgment or settled out of
court.
Thereafter the Castle Wine and Brandy Co Ltd entered the market with a sherry
labelled ‘Ship Sherry’ and applied for registration of the trademark ‘Ship Sherry’. The
taxpayer opposed the application on the ground that the ship logo had become
distinctive of its product. The Registrar of Patents decided in favour of the taxpayer, and
refused the application of the Castle Wine and Brandy Co Ltd.
Evidence showed that the entry of the Castle Wine and Brandy Co Ltd’s product ‘Ship
Sherry’ onto the market was followed by a decline in the sales of the taxpayer’s sherry,
but that sales increased after the application by the Castle Wine and Brandy Co Ltd was
refused.
________________________

18 1973 (3) SA 819 (A) at 831D.

 Capital Expenditure and Losses 545

The taxpayer sought to deduct the legal and other costs it had incurred in opposing
the application of the Castle Wine and Brandy Co Ltd. The Commissioner disallowed the
deduction, and the taxpayer’s appeal was upheld by the Special Court.
Issue: whether the expenditure incurred by the taxpayer in opposing the application
for a trademark was deductible in terms of s 11(2)(a) of the Act [now s 11(a)].
Held: the expenditure was incurred in the production of income, was not of a capital
nature, and hence was deductible.
Sutton J: These proceedings [taken by the taxpayer before the Registrar of Patents] took the
form of opposition to the attempt to register a trade label, which, if it had succeeded, would
have directly affected the company’s trade. The validity of its own label was not in issue and
accordingly its existence was not threatened and could not have been affected even if the Castle
Wine and Brandy Company had succeeded in establishing their label. It was the competition
consequent upon the establishment of an asset by its rival that the appellant was seeking to
nullify. Moreover, in its opposition the appellant was successful and, as the evidence discloses,
bore fruit, as appears from a graph put in at the hearing. This graph shows that from July 1941
onwards, ie very soon after it was successful in its proceedings against the Castle Wine and
Brandy Company, its sales of its products were in perpendicular form, which the respondent
company attributed to the result of the proceedings referred to. This rise as shown by the graph,
following so closely on the proceedings, is so remarkable that the clear connection between the
two cannot be ignored.
Mr Walter, on behalf of the Commissioner before the Special Court . . . suggested [that] one
must look to the main purpose of the expenditure as laid down in Port Elizabeth Electric Tramways
Co v CIR.19
That being the case, the evidence placed before the court indicates that the subject with which
the company was concerned was the profits which were accruing to it . . . These profits had been
encroached upon by the passing off of similar products by its rivals . . . Its main purpose in
expending this money was not to protect its design but to oust the rival competition and so
maintain and increase its profits and in carrying out this objective it incurred the legal costs it
now seeks to deduct . . .
...
In a consideration of the second question the Special Court dealt with it as follows: ‘One of the
most usual tests adopted for the purpose of ascertaining whether expenditure is of a capital
nature or not is to see whether it has occurred once and for all or is recurrent. Now, the
evidence in regard to this particular trade is that attempts by competitors to share in the profits
derived from the marketing of a popular brand, by passing off a product resembling the former,
are by no means isolated . . . Such costs, therefore, appear to be a recurrent expense, similar to
the cost of transport companies in regard to which actions for damages prove a recurrent
feature. If, therefore, the above test is applied, the expenditure is not incurred once and for all
and cannot be regarded as of a capital nature. One might add that no capital asset was thereby
brought into existence. The asset existed already.’
In this court a similar argument was advanced . . . Though a great deal of the argument for the
appellant was concerned with the first question, it was the second question to which counsel for
appellant directed the weight of his argument.
The first question was considered in the Port Elizabeth Tramway Company case. This is the only case
which has been referred to in our Superior Courts in which the question of legal costs was under
consideration. There Watermeyer AJP says . . . ‘Legal costs can sometimes be deducted . . . but
they must be so closely connected with the earning of the income as to be regarded as part of
the cost of earning it. In the present case they were expended in resisting a demand for
compensation; this is not an operation entered upon for the purpose of earning income.’ May I
say, with the greatest respect to the learned Judges who decided that case, that I incline to the
opinion that on the question whether these legal costs were an allowable deduction too narrow a
view was taken of the matter and that in the light of the authorities that have been cited to us in

________________________

19 1936 CPD 241, 8 SATC 18.

546 Income Tax in South Africa: Cases and Materials

this case, I think they should have been allowed as a deduction. They were, in my opinion,
directly connected with the earning of the income.
...
It will be seen from the authorities that I have referred to that the answer to the question
whether the expenditure was incurred in the production of income within the meaning of
s 11(2)(a) of the Act depends largely upon the particular facts of the case, and I have already
referred to the judgment of the Special Court which sets out its findings of fact. As said, the
main purpose of the expenditure was not to protect its design but to oust the rival competition
and so maintain and increase its profits, and in carrying out this objective it incurred the legal
costs it now seeks to deduct.
...
I am of opinion that the Special Court was right in its conclusion that the expenditure was
incurred in the production of income within the meaning of s 11(2)(a) and 12(g) of the Act, 31
of 1941.
I now come to deal with the second question: Was the expenditure of a capital nature or not?
[The judge, after a review of case law concluded:]
It may be of some interest to refer to the editorial note to [the decision in Rhodesia Railways Ltd v
Bechuanaland Income Tax Collector20]: ‘The decision in this case is as important to the legal
profession generally as to the company concerned. Litigation is often a business necessity and it
is important that the cost, which must be considerable, can be set off against the profits of the
company for the purposes of taxation’.
In the present case it seems to me that the expenditure in legal costs was a business necessity.
. . . I am of opinion that the Special Court was right in its conclusion that such expenditure was
not of a capital nature and that the taxpayer was entitled to claim the deduction . . . The appeal
is therefore dismissed with costs.

Notes
It is now generally accepted that Stellenbosch Farmers’ Winery was wrongly decided, and that
the expenditure in issue in that case ought to have been held to be of a capital nature,
and therefore not deductible.
The question whether particular expenditure was incurred ‘in the production of
income’ is entirely separate from the question whether that expenditure is ‘of a capital
nature’. These are two distinct tests and both must be satisfied if the expenditure is to be
deductible under s 11(a). Thus, most capital expenditure produces or is intended to
produce income, but is nonetheless disqualified from deduction because of its capital
nature. The judgment in Stellenbosch Farmers’ Winery shows confusion on this point. Nor,
in deciding whether expenditure is of a capital nature, is it relevant (as Sutton J held it to
be) that the expenditure was ‘a business necessity’. Capital expenditure is often just as
much a business necessity as revenue expenditure.
To determine whether expenditure is of a capital nature, it is necessary to apply the
test laid down in [241] CIR v Genn & Co (Pty) Ltd, namely to examine ‘the closeness of
the connection between the expenditure and the income-earning operations, having
regard both to the purpose of the expenditure and to what it actually effects’. (As to the
distinction between the ‘purpose’ and the ‘effect’ of expenditure, see [262] Mallalieu v
Drummond.) In the present case, Sutton J concluded that the purpose of the taxpayer in
incurring the expenditure was ‘to oust the rival competition and so maintain and
increase its profits’. The later decisions in [285] Cadac Engineering and [284] African
Oxygen have held that expenditure incurred in eliminating a trade competitor is of a
capital nature.
________________________

20 1933 AC 368.
 Capital Expenditure and Losses 547

The deductibility of legal expenses is now governed by s 11(c), which bars such
expenditure if it is of a capital nature. Hence the analyses in Stellenbosch Farmers’ Winery,
Cadac Engineering and African Oxygen of what constitutes capital expenditure are relevant
to s 11(c).

[284]
CIR v African Oxygen Ltd
1963 (1) SA 681 (A), 25 SATC 67
The taxpayer, a private company, manufactured and sold gases and gas apparatus. A
Swedish company (Aga) carried on a similar business and marketed its products in South
Africa. In order to avoid competition, the taxpayer and Aga agreed to form a new
company, Gas Accumulator Sales (Pty) Ltd (Gasco) in which the taxpayer held a 49%
and Aga a 51% interest. Aga appointed Gasco as its exclusive representative in South
Africa for products of Aga other than the products of the taxpayer. The taxpayer agreed
not to compete with Aga in relation to those products and Aga agreed not to compete
with the taxpayer in regard to the latter’s products. The agreement was to endure for five
years, and was thereafter terminable on six months notice. The taxpayer also agreed to
make good, during the subsistence of the agreement, all trading losses sustained by
Gasco. Trading losses of R2 424 and R1 520 were in fact sustained by Gasco in two
particular years. The taxpayer claimed these amounts as deductions.
Issue: was the expenditure in question of a revenue or of a capital nature?
Held: the expenditure was incurred to remove the trade competition, thereby securing
the taxpayer an enduring benefit of a capital nature.
Steyn CJ: (BEYERS JA, OGILVIE-THOMPSON JA, BOTHA, JA AND WILLIAMSON JA CONCURRING)
Before the Special Court the respondent contended that it had entered into an agreement for
the purpose of protecting the major portion of its trade and of maintaining and, if possible,
increasing its income, and that these amounts did not constitute expenditure of a capital nature
because the Aga company’s undertaking not to compete, in consideration of which they had
been paid, did not give rise to the acquisition of any asset or to an enduring
advantage for the benefit of the respondent’s trade. The Commissioner raised two contentions.
The first was that, although the respondent entered into the agreement with the motive of
protecting its own market, these payments had at least partly been made to maintain Gasco as a
commercial enterprise within the scheme of the agreement, and had therefore not been wholly
and exclusively laid out for the purposes of the respondent’s trade. The second was that, even if
they had been so laid out, they were nevertheless of a capital nature because by the elimination
of the Aga company’s competition, the respondent did obtain a right or advantage of an
enduring character for the benefit of its trade.
It would seem, therefore, that while it was common cause that these payments constituted expen-
diture incurred in the production of the respondent’s income, the disputed issues were, firstly,
whether or not that expenditure had been exclusively laid out for the purposes of the
respondent’s trade, and, secondly, if it had so been laid out, whether or not it was of a capital
nature.
...
Generally speaking, money spent in creating or acquiring an income-producing concern, a
source of profit or a capital asset, is capital expenditure, while the cost incidental to the
performance of the income-producing operations is revenue expenditure. There are numerous
examples of cases in which the expenditure was allocated to the one or the other of these
categories and they are often of assistance, but essentially the enquiry must be into the real
nature of the particular transaction . . .
. . . By the agreement, the respondent acquired the right, enforceable in a court of law, to
prevent the Aga company from competing with it in its main business, ie the sale of dissolved
acetylene and oxygen. The assessment of this right cannot be made unassociated with the
548 Income Tax in South Africa: Cases and Materials

business of the respondent. In relation thereto it was, I think, undoubtedly itself an actual asset.
Added to the then existing profit-earning assets of the respondent, it acquires substantial capital
value by increasing the effectiveness of those assets as an income-producing concern. It is
obvious that this right did not and could not bestow a monopoly upon the respondent by
removing all competition, from whatever source, but it did confer upon the respondent the
advantage of eliminating a competitor whose activities and prospects it quite plainly did not
regard with indifference.
Counsel for the respondent argued that this was not an ‘advantage for the enduring benefit’ of
the respondent’s trade (cf British Insulated & Helsby Cables v Atherton;21 Anglo-Persion Oil Co v Dale.22
The agreement was for a fixed period of five years only and, as pointed out by counsel, in 1956
and 1957 it was terminable at any time by six months’ notice . . . But at the same time it is
evident from the terms of the agreement itself that the parties contemplated the possibility that
it would continue for an indefinite period. It in fact remained in force for some twenty years
until 30th September 1957, when it was brought to an end by the Aga company. There is
nothing to suggest that it endured longer than the parties had reason to expect. The extent of
the advantage which accrued to the respondent should, I consider, be determined in relation to
the position at the inception of the agreement, which was also the inception of the advantage,
rather than at a point of time when it had run most of its course . . . [T]he respondent would in
the ordinary course have been relieved of competition by the Aga company for at least seven
years . . . In all these circumstances I am unable to agree that the respondent acquired under the
agreement a benefit of inadequate duration for present purposes. ‘Enduring,’ in this
connection, cannot mean interminable or even for the whole of the duration of the business of
the respondent company. Depending upon the nature of the enterprise and of the benefit, a
lesser degree of permanence would be sufficient. In relation to the respondent’s business the
benefit here in question is, I think, of sufficient permanence and substance unquestionably to
qualify the right by which it is ensured as an asset acquired under the agreement. As such, it
forms part of the capital assets of the respondent.
Prima facie, at any rate, what is paid for a capital asset is capital expenditure. Here the
consideration for the asset did not consist exclusively of these payments to meet Gasco’s losses.
There was, apart from other obligations, also the reciprocal undertaking by the respondent not
to compete with the Aga company. When the agreement was concluded, the payments and their
ultimate amount were uncertain and unascertained. If Gasco made profits, no occasion for any
such payments would arise and the extent or frequency possible losses could hardly have been
predictable. Also the extent of the benefits which were expected to accrue on either side must
have been uncertain. The whole arrangement was somewhat speculative. The uncertainty as to
these payments and their anticipated and actual recurrent nature may be an indication that they
are to be related to income rather than to capital. They did not constitute a payment ‘once and
for all’, not even in instalments. But that, I think, is, in the circumstances of this case, not by any
means conclusive as to their true nature. Apart from the fact that they formed part of the consid-
eration for a capital asset, they do not appear to be connected in any relevant way with the
performance of any income-producing operation . . . The only possible way in which the
payments here in question might be said to be attached to any such operation, would be as part
consideration for the removal of a retarding factor, in the form of competition by the Aga
company, in the way of more ready sales by the respondent. It may be suggested that on this
account the expenditure is to be regarded as having been incurred for the more effective
performance of business operations. But in a case such as this that would not be enough. The
mere fact that expenditure upon the income-producing machine removes an obstacle in the way
of sales by ensuring, for instance, the elimination of a defect in the article sold and the
production of an article as useful and durable as that of a competitor, or the introduction of an
attractive feature to overcome sales resistance, cannot change the capital nature of such
expenditure and turn it into income expenditure. Before that can happen, there must be some
link between the expenditure and the operation, which is so close that the expenditure may
properly, naturally or reasonably be regarded as part of the cost of the operation as
distinguished from the cost of the income-producing machine. I can find no such link in this

________________________

21 1926 AC 205.
22 [1932] 1 KB 124.
 Capital Expenditure and Losses 549

case. The payments, in whatever year they were made, were for an asset which came into
existence once and for all at the inception of the agreement, and the liability to make them was
undertaken in order to secure the advantage of that asset for the full term of the agreement.
They may be described as expenditure for the general improvement or the better exploitation of
existing capital assets or for rendering the business machine or profit-yielding structure as a
whole more effective. Apart from the increase of sales or their maintenance at the same level,
which may have resulted from such improvement, better exploitation or greater effectiveness,
there is nothing else to link them with the respondent’s operations in conducting its enterprise.
Although they were initially unascertained and became payable recurrently or intermittently,
there is no feature so connecting them with working activities of the respondent as to cause
them to shed their ostensible capital nature and to become current expenditure in the running
of the business. In all the circumstance I cannot avoid the inference that they were not income
expenditure . . .
...
In view of the conclusion at which I have arrived as to the nature of these payments, it is not
necessary to consider whether or not they were wholly and exclusively laid out for the purposes
of the respondent’s trade.

[285]
SIR v Cadac Engineering Works (Pty) Ltd
1965 (2) SA 511 (A), 27 SATC 61
Until 1960 the taxpayer was the sole manufacturer and seller in South Africa of liquid gas
cooking appliances, under licence from the M brothers who held the registered design.
In that year, a competitor (Homegas) entered the market. The taxpayer believed that
Homegas’s appliance infringed its registered design. The M brothers, at the request of
the taxpayer and under an indemnity for costs, applied for an interdict restraining
Homegas from manufacturing or dealing in its appliance. Without deciding on the
merits, and on the basis of the balance of convenience, the Supreme Court dismissed
with costs the taxpayer’s application for an interim interdict. The taxpayer duly refunded
the costs of R3 854 to the M brothers and claimed that sum as a deduction.
Issue: whether the legal costs incurred in applying for the interdict to restrain a com-
petitor from marketing a product which infringed the taxpayer’s registered design was
deductible under the general deduction formula.
Held: the expenditure on legal costs was of a capital nature and therefore not
deductible.
Ogilvie-Thompson JA: As was once again indicated in the African Oxygen case, supra23 citing the Sub-
24
Nigel case, supra, expenditure ‘of a capital nature’ eludes precise and comprehensive definition.
Watermeyer CJ’s well known, and often cited, summary of the authorities in New State Areas Ltd v
CIR 25 remains, in my opinion, the most useful general guide in determining what is almost
invariably a somewhat evenly balanced and difficult problem (as to which, see Rand Speculation and
26
Finance Co Ltd v CIR, supra.) The passage in question in the New State Areas case reads:
‘The conclusion to be drawn from all of these cases, seems to be that the true nature of each transaction
must be enquired into in order to determine whether the expenditure attached to it is capital or revenue
expenditure. Its true nature is a matter of fact and the purpose of the expenditure is an important factor;
if it is incurred for the purpose of acquiring a capital asset for the business it is capital expenditure, even if
it is paid in annual instalments; if, on the other hand, it is in truth no more than part of the cost incidental
to the performance of the income-producing operations, as distinguished from the equipment of the
income-producing machine, then it is revenue expenditure, even if it is paid in a lump sum.’

________________________

23 At 688.
24 At 595.
25 1946 AD 610 at 627.
26 At 356F.
550 Income Tax in South Africa: Cases and Materials

Cf also the Nchanga case, supra,27 where, in applying Watermeyer CJ’s above cited remarks and
adapting the expression from an Australian case, Clayden CJ preferred ‘income-earning
structure’ to ‘income-producing machine’. With respect, I share that preference and shall
accordingly, in what follows, refer to the taxpayer’s income-earning structure.
Before this Court, counsel for the taxpayer submitted that the circumstance that the costs in
issue were incurred in an endeavour to obtain an interim interdict pending action was by itself
conclusive evidence that the sum thus expended was wholly divorced from the taxpayer’s
income-earning structure and fell into the category of revenue expenditure. I am unable to
agree. As found by the Special Court, the object of the litigation was to eliminate Homegas as a
competitor. The obtaining of an interim interdict was an initial step towards the attainment of
that dominant object . . .
It was further argued by counsel for the taxpayer that the expenditure in issue had neither
added any asset to the taxpayer’s income-earning structure nor was it calculated or intended so
to do . . . The circumstance that an expenditure under consideration has added nothing
tangible to the taxpayer’s assets has no doubt sometimes been invoked as a ground for regarding
it as a revenue expenditure. See eg Southern v Borax Consolidated Ltd 28 . . . In my judgment, the
mere circumstance that a payment has neither created a new asset nor made any addition to an
existing asset is not necessarily conclusive in favour of such payment being a revenue expense. As
was stressed by the Chief Justice in the African Oxygen case, supra,29 each case must be decided on
its own facts and circumstances . . .
In the present case the taxpayer’s income-earning structure, inter alia, comprehended its
goodwill . . . The expenditure in issue, directed as it was towards the protracted, if not
permanent, elimination of Homegas as a competitor, was, in my view, expenditure to protect,
and perhaps expand, the taxpayer’s existing market and goodwill. The expenditure was directed
towards preserving and perhaps expanding, the field in which the taxpayer’s business operated.
In short, the expenditure was incurred in order the better to exploit the taxpayer’s existing
capital assets, which latter included the exclusive licence to manufacture the Marcovitch cooker.
So regarded, the expenditure would appear to me to be more closely related to the taxpayer’s
income-earning structure than to its income-earning operations. Money expended in buying out
a competitor will, I think, ordinarily fall into the category of capital expenditure . . . In the
present instance, the expenditure in issue was incurred in an endeavour to eliminate the
competition of Homegas by litigation. The difference in the means employed does not appear to
me to be decisive. Under both methods, the object is the same and, if successful, the result
ensures, as it seems to me, to augment the income-earning structure of the taxpayer rather than
to pertain to the operation of that structure. For it does not appear to me that, having regard to
the nature of the taxpayer’s business operations, the expenditure in issue can rightly be
regarded ‘as part of the cost of performing those operations’ (see Port Elizabeth Electric Tramway
Co v CIR,30 which was again approved by this Court in the African Oxygen case, supra.31) . . . When
regard is had to the purpose of the expenditure in issue in the present case and to what it was
designed to effect, I am unable to find any sufficient link between that expenditure and the
taxpayer’s income-earning operations which is so close as to warrant the conclusion that it
formed part of the cost of the taxpayer’s income-earning operations, as distinct from the cost of
expanding its income-producing structure . . .
In so far as the Stellenbosch Farmers’ Winery case, supra, and the Duro Travel Goods case, supra, are in
conflict with the views I have expressed, it follows, from what I have already said, that I disagree
with the reasoning in those decisions in relation to the ‘capital nature’ issue . . . In deciding that
the costs in question were revenue expenditure, the respective learned Judges in the Stellenbosch
Farmers’ Winery case and in the Duro Travel Goods case paid, in my judgment, insufficient regard to
the necessity for linking such costs with the taxpayer’s income-producing operations.
________________________

27 At 387, 388.
28 [1940] 4 All ER 412.
29 At 691.
30 1936 CPD 241 at 246.
31 At 689-890.
 Capital Expenditure and Losses 551

For the foregoing reasons, I come to the conclusion that the costs, amounting to R3 854, in issue
in the present case constituted expenditure of a capital nature and are, therefore, inadmissible
for deduction . . .
VAN BLERK JA, WILLIAMSON JA, WESSELS JA and POTGIETER JA concurred.

A loss incurred through an irrecoverable loan or in terms of liability as a surety is of a capital nature
unless it was incurred in the course of a trade as a money-lender.

[286]
Stone v SIR
(1974 (3) SA 584 (A), 36 SATC 117
The taxpayer was a shareholder in and director of S Stone and Sons (Pty) Ltd which
carried on business as a manufacturer of furniture and bedding. His main source of
income was his salary from the company. He also received interest and dividends. In the
tax year ended 28 February 1967, the taxpayer sought to deduct R40 483 under s 11(a)
for irrecoverable loans and expenditure incurred in terms of contracts of suretyship, but
these deductions were disallowed by the Commissioner. The loss had come about
because the taxpayer had been the victim of a confidence trickster, Kasmai, who had
induced the taxpayer to lend him money to execute various contracts for the supply of
goods to the state, and had promised the taxpayer a share of the profits from these
contracts. In three of these contracts, the taxpayer bound himself as surety for moneys
borrowed by Kasmai from third parties. All of these contracts were forgeries and
Kasmai’s conduct throughout was fraudulent. Kasmai was subsequently declared
insolvent, and the loans made by the taxpayer to him were irrecoverable. The taxpayer
was obliged to pay out money in terms of his suretyship, and he expended R1 901 in
unsuccessfully resisting this claim.
Issue: were the taxpayer’s losses of R38 352 in respect of loans and guarantees and
R1 901 in respect of legal fees, deductible in terms of s 11(a), or were they of a capital
nature?
Held: the true issue was not the expenditure involved in lending money to Kasmai, but
the loss incurred by the taxpayer as a result of his inability to recover these moneys from
Kasmai’s insolvent estate and the liabilities the taxpayer had incurred as surety; in these
transactions, the taxpayer had risked his ‘fixed capital’ (not his ‘floating capital’) and the
losses were consequently of a capital nature. The legal costs were incurred solely in
connection with capital losses and were therefore not deductible.
Corbett AJA: To sum up the position, the losses suffered by the appellant by reason of these
various transactions were as follows (the individual transactions being numbered for
convenience of future reference):
Transaction Date Amount of Loss
(1) Loan – R20 000 20.5.66 R20 000
(2) Loan – R4 000 7.8.66 R4 000
(3) Suretyship 7.8.66 R7 333
(4) Suretyship 12.9.66 R6 667
(5) Suretyship 12.9.66 R 582
(6) Legal costs R1 901
R40 483
It is stated (in the statement of case) that appellant entered into transactions (1) to (5) inclusive
with a view to making a profit and that he believed that a profit would result from each
transaction. The stated case proceeds:
‘. . . The appellant did not incur the expenditure by way of investment, for he was to receive no interest on
his money but was looking for a share of the profits in the case of a number of transactions involved in the
purchase by Kasmai of goods or shares and their subsequent resale. The money was paid and in the case
552 Income Tax in South Africa: Cases and Materials

of the suretyships, the obligation to pay was incurred with the intention that the money be repaid and the
obligation cease within comparatively brief periods.’
Appellant’s claim to deduct these losses, totalling R40 483, has at all times been founded upon
the general deduction formula appearing in s 11(a) [read with] s 23(g) of the Act . . . As was
pointed out in Port Elizabeth Electric Tramway Co v CIR,32 the two subsections provide positively for
what may be deducted and negatively for what may not be deducted. A deduction claimed must
pass both tests.
...
In submitting to this court that the court a quo had erred in characterising the expenditure in
question as being of a capital nature, appellant’s counsel referred to the test set forth by
Watermeyer CJ in his judgment in the well-known case of New State Areas Ltd v CIR 33 and, more
particularly, to the following passage in the judgment:34
‘The problem which arises when deductions are claimed is, therefore, usually whether the expenditure in
question should properly be regarded as part of the cost of performing the income earning operations or
as part of the cost of establishing or improving or adding to the income-earning plant or machinery.’
Reference was also made to other decisions in which the test has been similarly stated, save that a
slightly different terminology is sometimes adopted; eg in SIR v Cadac Engineering Works (Pty)
Ltd 35 a preference is expressed for the description, ‘the taxpayer’s income-earning structure’.
In my view, it is important at the outset to obtain clarity as to precisely what it is that appellant
seeks to deduct. The deductions claimed fall into three separate categories: (i) the losses
sustained in respect of the two loan transactions, ie transactions (1) and (2) above; (ii) the losses
sustained in respect of the suretyship transactions, ie transactions (3), (4) and (5) above; and
(iii) the legal cost incurred in endeavouring to obtain release from liability under the
suretyships. It will be convenient to deal separately with these different categories.
In regard to the loan transactions, what it is that appellant seeks to deduct is the loss suffered by
him by reason of the fact that the capital sum loaned to Kasmai proved irrecoverable. In essence,
therefore, these two loans became bad debts. Section 11(i) of the Act makes special provision for
the deduction of the amount of debts proved to the satisfaction of the Secretary to be bad, but
subject to the following proviso:
‘provided such amount is included in the current year of assessment or was included in previous years of
assessment . . . in the taxpayer’s income’.
This proviso would clearly exclude the bad debts in question from the operation of s 11(i)
inasmuch as the capital amounts of the loans were never, and could never have been, included
in appellant’s income. Consequently, if these bad debts are deductible at all, they must be so in
terms of the general deductions formula in s 11(a).
I have been at pains to emphasise what I conceive to be the true nature of the deduction claimed
by appellant because, as I have indicated above, appellant’s counsel tended to found his
argument upon the ‘expenditure’ which it was said appellant had incurred in making these
loans to Kasmai. But it is not this ‘expenditure’ which appellant claims to deduct: it is the loss of
the loan capital by reason of its having become irrecoverable. Indeed, were it not for this loss
there would be no question of any such deduction . . .
...
The central issue remains: was this loss of a capital or non-capital nature? One way of dealing
with this issue – and one that to me has a logical appeal – is to ask what was it that was lost? The
answer, I think is clear: the appellant lost the capital which he had advanced by way of loan to
Kasmai. The next enquiry follows as a natural corollary: was the capital lost fixed or floating
(circulating) capital? If it was fixed capital, then the loss was of a capital nature; if floating (or
circulating) capital, then it was a non-capital loss. These conclusions would be in conformity with
the dicta of Watermeyer CJ – cited above – in which the concept of a ‘loss’ is identified with a loss
of floating capital.

________________________

32 1936 CPD 241 8 at 243.

33 1946 AD 610, 14 SATC 155.
34 At 620-621.
35 1965 (2) SA 511 (A) at 522, 27 SATC 61.
 Capital Expenditure and Losses 553

The distinction between fixed and floating capital had been delineated upon several occasions
by this court. In CIR v George Forest Timber Co Ltd 36 Innes CJ described it thus:
‘Capital, it should be remembered, may be either fixed or floating. I take the substantial difference to be
that floating capital is consumed or disappears in the very process of production, while fixed capital does
not; though it produces fresh wealth, it remains intact . . .’
And, in explaining the distinction between revenue expenditure and capital expenditure,
Watermeyer CJ stated in the New State Areas case:37
‘As to the latter, the distinction must be remembered between floating or circulating and fixed capital.
When the capital employed in a business is frequently changing its form from money to goods and vice
versa (eg the purchase and sale of stock by a merchant or the purchase of raw material by a manufacturer
for the purpose of conversion to a manufactured article), and this is done for the purpose of making a
profit, then the capital so employed is floating capital . . .’
Applying the distinction, thus described, to the ordinary case of a loan of money, there is no
doubt, in my opinion, that the capital lent constitutes fixed capital. Such capital is not consumed
in the very process of income production: it does not disappear to be replaced by something
which when received by the taxpayer forms part of his income . . . It has been accepted in a
number of cases, mainly in the Special Court, that where the taxpayer can show that he has been
carrying on the business of banking or money-lending, then losses incurred by him as a result of
loans, made in the course of his business, becoming irrecoverable are losses of a non-capital
nature and deductible . . . The rationale of these decisions appears to be that the capital used by
a moneylender to make loans constitutes his circulating capital and that consequently losses of
such capital are on revenue account. I shall accept, for the purposes of this case, that these
decisions are correct . . . There is, however, in my view, no warrant for extending this principle
to loans by persons who are not conducting a moneylending business.
At no stage was it contended in this case that appellant was carrying on a moneylending business
...
Upon the facts set forth in the stated case it is clear that appellant was not conducting such a
business . . . The word ‘trade’ has an extensive statutory definition (see s 1) and it would not
follow that because one or more loan transactions by a taxpayer constituted a ‘trade’ he was
carrying on business as a moneylender in the above-described sense.
If, therefore, transactions (1) and (2) be looked upon simply as loans made by the appellant
which became irrecoverable because of the default and subsequent insolvency of the borrower,
Kasmai, the above-stated reasoning would lead to the conclusion that the consequential losses
were losses of a capital nature. It is argued, however, that these are not ordinary loans, which
would be classified as investments, but schemes of profit-making and that the losses, having been
incurred in each case in a scheme of profit-making, were revenue losses. I do not find the use of
words such as ‘investment’ and ‘scheme of profit-making’ particularly helpful in dealing with a
problem such as this. They are not terms of art, capable of precise definition; nor does the
labelling of a transaction in this way reach the heart of the matter.
The loans in question are, admittedly, not conventional ones in that in each instance the lender,
appellant, was to be given a share of the profit to be derived from the transaction which the loan
was allegedly designed to finance. In essence, however, that share of profit is simply a
remuneration paid by the borrower for the use of the capital lent. The transaction was in no
sense a partnership; nor did the appellant regard it as such. The remuneration was fixed with
reference not to the size of profit but to the amount of the capital advanced. The possibility of
no profit, or insufficient profit, being realized does not appear to have been considered by the
appellant. The remuneration promised was, it is true, very rewarding – it was far in excess of
normal (even legal) rates of interest for such short-term loans – but I am unable to see how this
can alter its essential character as a quid pro quo for the loan. Accordingly, in so far as a ‘loan
investment’ may signify the laying out of capital which is to be returned by the borrower and the
payment of a sum of money by the borrower to the lender for the use of the money, these loans
qualify as ‘investments’. To the extent also that the term ‘loan investment’ may be used to
distinguish such loans from those made in the course of banking or moneylending, the
appellant’s transactions clearly fall into the former category.
________________________

36 1924 AD 516, 1 SATC 20 at 5.

37 Supra, at 620.
554 Income Tax in South Africa: Cases and Materials

The argument of appellant’s counsel based upon the contention that the loans were schemes of
profit-making and upon the analogy of the purchase of land or goods for the purpose of resale
at a profit, equally fails to convince me. The ‘profit-making’ label does not really further the
enquiry: it depends on how the profit is to be made. Any non-gratuitous loan involves profit-
making in the sense that interest or other remuneration is to be derived therefrom by the
lender. Nor do I find the purchase and sale analogy to be of any real assistance in the very
different context of a loan transaction. The owner of goods purchased for resale at a profit who
suffers loss through, for example, some of the goods being stolen or accidentally destroyed, may,
no doubt, deduct this loss, provided that his activities can be regarded as a trade; but this would
be because the goods constituted portion of his floating capital and the loss, therefore, was of a
non-capital nature. If any analogy is to be drawn, then it would seem to reinforce the conclusion
that a loss of capital loaned would be deductible only if it was circulating capital, as in the case of
a moneylending business.
...
It is for these reasons that I have come to the conclusion that the losses sustained by appellant
through the loans made under transactions (1) and (2) becoming irrecoverable were losses of a
capital nature and not deductible under s 11(a) . . .
I turn now to the second group of deductions, the losses sustained in respect of the suretyship
transactions . . . It seems to me that in entering into these transactions appellant risked his capital
in a manner similar to that in which the loans were made to Kasmai; and that the losses which he
ultimately sustained were losses of capital . . . In my view, the losses must be regarded as losses of
fixed capital. It is again true that, as a quid pro quo for appellant giving the guarantee in each case,
Kasmai promised to pay out of the profits which he pretended would be made a very substantial
remuneration. I fail to see, however, how this can in any way alter the situation. The question of the
deductibility of losses sustained by a taxpayer in terms of a guarantee furnished by him has arisen
for decision on several occasions not only under our Income Tax Acts . . . but also under the
similarly worded Rhodesian and Australian legislation . . . The conclusion reached in this case
would appear to be in conformity with these decisions . . .
Finally, there is the question of the legal costs incurred in an endeavour to obtain release from
legal liability under the three suretyships. The costs were accordingly incurred in order to avoid
what have been held to have been capital losses. There is, in my view, no basis on which it could
be held that such costs constituted expenditure incurred in the production of income. I express
no view on what the position would have been had the suretyship losses been deductible.
...
The appeal is accordingly dismissed with costs.
BOTHA JA, JANSEN JA, RABIE JA and MULLER JA concurred.

Where the taxpayer suffers a loss by reason of an irrecoverable loan, the loss is not deductible unless
the loan was floating capital, as opposed to fixed capital.

[287]
Burman v CIR
1991 (1) SA 533 (A), 53 SATC 63
The taxpayer was a member of a syndicate whose objective was to buy properties for
resale at a profit. The modus operandi was that the properties were put into the names of
companies in which the members of the syndicate took shares. The members made loans
to the companies to use as operating capital, to develop the property and to cover the
company’s day to day expenses. There was no agreement that the company would pay
interest on the loans, nor any agreement regarding repayment of the loans. The ultimate
objective was for the members of the syndicate to sell their shares at a profit and for the
purchaser to repay their loan accounts. The main company for these property
speculations was Concord Development Holdings (Pty) Ltd, in which the taxpayer held
shares and to which he lent the sum of R36 774. The scheme failed, the company
 Capital Expenditure and Losses 555

became insolvent, went into liquidation, and was unable to repay the loan made to it by
the taxpayer.
Issue: was the taxpayer entitled, under s 11(a), to deduct the loss he had sustained on
his loans to the company which became irrecoverable when the company went insolvent?
Held: (by a majority) in the negative; the moneys lent to the company by the taxpayer
were fixed capital, not floating capital. Hence the loss sustained when the loan was not
repaid was of a capital nature and not deductible under s 11(a).
Goldstone JA: the sole issue in this appeal is whether the losses sustained by the taxpayer, Mr
Daryl Burman (‘Burman’) were of a capital nature. The conclusion reached by Nestadt JA and
Nicholas AJA is that they were not of a capital nature and were therefore properly deductible in
the assessment of Burman’s taxable income. With respect, I have come to a different conclusion.
In this type of case the preliminary step is:
‘to obtain clarity as to precisely what it is that appellant seeks to deduct’.
per Corbett AJA in Stone v SIR.38 As it was put in New State Areas Ltd v CIR 39 it is necessary to
ascertain the true legal nature of the transactions which gave rise to the losses.
The true legal nature of the transactions which gave rise to the losses in the present case was that
they were a number of contracts of loan between Burman and property companies in the
‘Concord Group’. The loans were made for the purpose of financing these companies and
enabling them to purchase fixed property ie the provision of working capital. What Burman
seeks to deduct from his taxable income are the losses sustained on the loans by reason of the
insolvency of the companies.
It was the intention of Burman that as soon as possible his shares and loan accounts would be sold.
The envisaged sale was to a public company. The purchase consideration would be paid by way of
an issue of shares in the public company to Burman . . . [T]he shares in the property company
would have been sold at their market value in return for shares in the public company having a
similar value. The loan accounts would have been sold for shares in the public company having a
value equal to that of the respective loan accounts. Burman would then have sold the shares in the
public company on the market and thereby recouped his expenditure and realised a profit. It
follows that the anticipated profit would come about by reason of the difference between the cost
to Burman of his shares, on the one hand, and the proceeds of the shares in the public company
received therefor, on the other hand. No profit would accrue to Burman on the sale of the loan
accounts. He would simply recoup his outlay in full. As it was put by Jeannett J in the judgment of
the Special Court:
‘The purpose of the loans was in order to make a profit on the sale of shares.’
...
. . . As in Stone’s case, s 11(i) of the Income Tax Act 58 of 1962 (‘the Act’), was of no assistance to
Burman as the capital amounts of the loans had never been included in Burman’s income.
Hence, the enquiry as to whether these bad debts are deductible in terms of the provisions of
s 11(a) of the Act.
The next stage of the enquiry was described as follows by Corbett AJA in Stone’s case:40
‘The central issue remains: was this loss of a capital or non-capital nature? One way of dealing with this
issue – and one that has to me a logical appeal – is to ask what was it that was lost? The answer, I think,
is clear: the appellant lost the capital which he had advanced by way of loan to Kasmai. The next enquiry
follows as a natural corollary; was the capital lost fixed or floating (circulating) capital? If it was fixed cap-
ital, then the loss was of a capital nature; if floating (or circulating) capital, then it was a non-capital loss
. . .’
In New State Areas Ltd v CIR 41 Watermeyer CJ said:
‘When the capital employed in a business is frequently changing its form from money to goods and vice
versa (eg the purchase and sale of stock by a merchant or the purchase of raw material by a manufacturer
________________________

38 1974 (3) SA 584 (A) at 592H, 36 SATC 117 at 127.

39 1946 AD 610 at 627, 14 SATC 155 at 170.
40 At 594 in fine – 595B, 36 SATC 117 at 129.
41 1946 AD 610 at 629, 14 SATC 155 at 164.
556 Income Tax in South Africa: Cases and Materials

for the purpose of conversion to a manufactured article), and this is done for the purpose of making a
profit, then the capital so employed is floating capital.’
In the present case there was certainly no question of Burman’s money ‘frequently changing its
form’. As far as one can glean from the record, loans were made once and for all to the property
companies and they would have remained as such until purchased by the public company. There
was no suggestion that, if recouped, the amounts of the loans would be utilised in the making of
further loans. It follows, in my opinion, that the moneys lent by Burman to the property
companies were fixed capital. For this reason I cannot agree with the contrary conclusion
reached by Nestadt JA and Nicholas AJA. That conclusion has insufficient regard to the absence
of any intention by Burman that there would be any recurrence of expenditure; see Atlantic
Refining Company of Africa Ltd v Commissioner for Inland Revenue.42
...
. . . However Burman regarded his shares and loan accounts, the fact is that he did indeed hold
two different economic entities. His intention did not destroy or even mask the reality that if he
made a profit in the manner contemplated by him that profit would have come about only
because of an increase in the market value of his shares. The value of his loan account could
never have exceeded the capital amounts thereof which he lent to the property companies . . .
It follows, in my opinion, that the loans made by Burman constituted fixed capital and the loss of
the capital amounts thereof were not deductible in the computation of his taxable income. A
43
similar conclusion was reached in ITC 1321. . . .
...
I do not agree with Nestadt JA and Nicholas AJA that ITC 1321 is distinguishable from the
present case.
...
1. The order of the Special Court is amended to read as follows:
‘The appeal is allowed only to the extent that the assessment is set aside and the matter is remitted to the
Commissioner to reassess appellant’s liability for income tax on the basis that the interest paid by him is
deductible subject only to an adjustment in terms of s 19 of the Income Tax Act No 58 of 1962 to the
extent that the borrowings funded the purchase of shares.’

BOTHA JA and KUMLEBEN JA concurred in the judgment of GOLDSTONE JA.

Nicholas AJA: The learned president of the court, Grosskopf J, said [in ITC 1344]:44
‘It is clear on the agreed facts that the shares and loan accounts were acquired by the appellant for the
purpose of resale at a profit. The appellant was consequently, in our view, engaged in an operation of
business in a scheme of profit making, viz to sell the shares and loan accounts at a profit. In fact the
scheme produced a loss and not a profit. In our view such a loss was properly deductible.’
...
I respectfully agree.
In my view there is no valid ground for distinguishing ITC 1344 from the present case . . . In this
case it is clear from the evidence that the shares and loan accounts were acquired by the
taxpayer for the purpose of resale at a profit. It is clear also that when Burman acquired his
shares and advanced moneys on loan account to the companies concerned, it was at all relevant
times his intention to sell the shares and loan accounts together, in order to make a profit, when
that was judged to be opportune. Burman’s unchallenged evidence was that he did not expect to
get the loans repaid by the debtor company: he would just sell shares and loan accounts. The
intention throughout was that he was not to get a ‘rental dividend return’ but a ‘speculative
interest in property, interest acquired from the resale at a profit’; the properties were in
companies in which Burman had shares and loan accounts, and this was virtually a package
which he saw himself as selling.
________________________

42 1957 (2) SA 330 (A) at 336C-F.

43 (1980) 42 SATC 269.
44 (1982) 44 SATC 19 at 24 in fin – 25.
 Capital Expenditure and Losses 557

...
The losses sustained in respect of the suretyship transactions stand on the same footing as the
loans. What Burman did by entering into these transactions was to ‘pledge or lend his credit’ so as
to enable the companies concerned to obtain finance for the carrying on of their operations. . . .
Conclusion
In my opinion the losses claimed in Burman’s return of income were properly deductible . . .
Nestadt JA: If the loss in respect of the loans is deductible, so too is that resulting from
appellant’s liability under the suretyships. They share the same fate. I therefore confine my
attention to the loans. There is no reason in principle why, even though appellant was not a
money-lender, they should not qualify as expenditure of a non-capital nature. Stone’s case is not
contrary to this approach. The business of money-lending is given at 597G45 only as an example
of a loan being circulating or floating capital. But there are other situations where this may be
the case and where the loss resulting from the irrecoverability of the loan would accordingly be
an allowable deduction. A number of reported judgments in both the United Kingdom and
South Africa illustrate this (see Whiteman and Wheatcroft on Income Tax;46 Silke on South African
Income Tax;47 Meyerowitz and Spiro Income Tax in South Africa.48) Many of the cases relate to loans
between inter-connected companies; some to loans made by a trader for the purpose of
obtaining business; and others to loan accounts of a shareholder in a private company to finance
its activities. It would seem that what has to be determined is whether the loan was made in
order to earn income apart from interest on the loan (Meyerowitz and Spiro.)49 But no precise
formula for doing this emerges. In these circumstances the guidelines laid down for
distinguishing between capital and revenue expenditure (as to which see New State Areas Ltd v
CIR)50 have to be applied . . .
In a number of respects appellant’s evidence lacks clarity. It does, however, establish that his
acquisition of an interest in the companies was in furtherance of a scheme of profit-making.
...
But the crucial issue concerns the status of the loans. They were made (by appellant as well as his
co-shareholders) to provide the companies with working capital. I understand this to mean that
the companies would thus have the finance to be able to pay for the properties which were being
purchased by each of them. In these circumstances they were prima facie capital payments (cf
Milnes (HM Inspector of Taxes) v J Beam Group Ltd)51 and the onus resting on appellant to show that
they were revenue transactions may be said to be a heavy one, more especially is this so when it is
borne in mind that the loans, unlike the shares, would not ordinarily be able to be sold, ie
ceded, at a profit. On the other hand, however, appellant with justification regarded his shares
and loan accounts as one indivisible economic unit or asset. The acquisition of the shares took
place when the loans were made and depended on them . . .
...
What has been stated shows, to my mind, that appellant was engaged, besides his profession, in
another income-earning operation or business. His shares were his trading stock. And the money
he outlaid for the loans, though his capital, was his floating capital. It was not invested in the
ordinary sense. It was capital employed in his other business . . .
In the result, therefore, expenditure was incurred on acquiring an asset (the shares and loan
accounts) which appellant hoped would be sold at a profit. However, the asset turned out to be
substantially valueless. The consequential loss was, accordingly, of a non-capital nature. And the
money expended in order to make the loans was laid out wholly for the purposes of trade. This
________________________

45 36 SA Tax Cases 117 at 130

46 2 ed para 8-67.
47 11 ed vol 1 para 7.43.
48 Paras 715-717.
49 Para 715.
50 1946 AD 610, 14 SATC 155.
51 50 TC 675 at 687E.
558 Income Tax in South Africa: Cases and Materials

was appellant’s trade. It is this factor that distinguishes the present matter from cases such as ITC
132152 and ITC 1327.53 On the other hand, this case does not differ substantially from that of ITC
134454 in which a similar deduction was allowed.
I accordingly agree with Nicholas AJA that the appeal be allowed in the terms suggested by him.

Where a person incurs losses as a result of binding himself as surety for the company from which he
derives his income, those losses are of a capital nature and not deductible under s 11(a) if his
purpose in signing the suretyships was to ensure the continued existence of the company, which
constitutes his income-earning structure.

[288]
CIR v Hilewitz
(1998) 60 SATC 86 (T)
The taxpayer, a shareholder in and the full-time managing director of Carvel (Pty) Ltd,
jointly controlled the company with one other person, holding between them 60% of the
shares. In order to expand its business, the company had to borrow money, and the
directors were required to sign as sureties for the company. The taxpayer entered into an
agreement with the company that he would bind himself as surety for the company in
return for which the company would pay him certain emoluments, linked to the
company’s turnover. The provision of such suretyships was necessary to enable the
company to obtain finance or credit facilities which would enable it to continue trading.
The taxpayer testified that he was taking a low salary and wanted a percentage of the
company’s turnover. The taxpayer signed suretyships securing some R2.2 million of the
company’s debts, and was paid the emoluments due to him under the agreement
whereby he had consented to bind himself as surety. The company was later liquidated
and the taxpayer was called on to pay the debts covered by the suretyships. Having done
so, the taxpayer was unable to recover the moneys from the company in liquidation, and
his losses were thus irrecoverable.
The Tax Court ruled that the taxpayer’s losses resulting from the suretyships had been
incurred in the production of income and were deductible in terms of s 11(a).
In this appeal, the full bench of the Transvaal High Court reversed the finding of the
Tax Court, and held that the suretyships had been entered into by the taxpayer for the
purpose of ensuring the continued existence, as a business enterprise, of the company
which was the structure that had to endure in order for the taxpayer to earn his
emoluments and rewards. Hence the losses incurred by the taxpayer as a result of the
suretyships were of a capital nature and not deductible in terms of s 11(a).
Wunsh J: The appellant testified that he had entered into the suretyship as he was taking a low
salary and wanted a percentage of the turnover. He wanted the additional remuneration and
that is why he signed the agreement of suretyship . . .It may well be the respondent incurred the
losses in the production of his income – at least partly so, bearing in mind that the respondent
had a shareholding in the company which he must also have been endeavouring to protect by
issuing guarantees to enable it to raise finance. As I shall show later, it is doubtful whether the
respondent established that the production of income was his dominant purpose in binding
himself to the suretyships which resulted in his losses . . .
The [Tax] court held also that the losses were not of a capital nature, even though the
Commissioner relied on Stone v SIR.55 The principle that emerges from the Stone case is that, if a
taxpayer lends money otherwise than in the course of a banking or money-lending business,
________________________

52 (1980) 42 SATC 269.

53 (1981) 43 SATC 47.
54 (1981) 44 SATC 19.
55 1974 (3) SA 584 (A).
 Capital Expenditure and Losses 559

even if the main purpose of the loan is to earn income quite apart from the interest, losses which
he or she sustains are of a capital nature. This was reaffirmed in Burman v CIR 56 and applied in
57 58
Sentra-Oes Koöperatief Bpk v KBI. Meyerowitz on Income Tax considers that the ability to claim the
deduction of loan losses is not confined to banks and moneylenders. He says –
‘But where the loan or advance is not for the purpose of securing an enduring advantage but is an integral
part of the taxpayer’s business operations, or the lending of money is an adjunct or ancillary part of the
taxpayer’s business, the loss will be deductible . . .’
Mr Strydom who appeared for the respondent in this court, submitted that it is not the law that
losses incurred as a result of loans becoming irrecoverable are deductible only in the case of a
banker or moneylender. That may be so because deductibility extends also to cases where loans
are made as an integral part of the taxpayer’s business operations or as an adjunct or ancillary
part of the taxpayer’s business. But these are the limitations, and the effect of Stone v SIR,
Burman v CIR and Sentra-Oes Koöperatief Bpk v KBI, supra is that it is not legitimate to have regard
to all the other criteria which, in a given set of facts, are applied by the courts in distinguishing
expenditure and losses of a capital nature from those of a revenue nature.
The position where, instead of himself or herself advancing the funds, a taxpayer guarantees a
loan made by another is the same if the guarantee is not given as an integral part of the
taxpayer’s business operations or as an adjunct or ancillary part of his or her business (see the
Stone case.59) . . .
The court a quo thought that this case differed because the guarantees in the Stone case were
‘isolated transactions’. Yet the court a quo did not find nor was there any basis upon which it
could have found that the suretyships were given by the respondent ‘as part of a business to give
such guarantees’. Indeed it was common cause that the respondent did not carry on such a
business. I shall deal later with the contention, advanced in this court, that he furnished the
suretyships as an adjunct to a business carried on by him.
The court a quo based its distinguishing of the Stone case also on the fact that the respondent did
not enter into the suretyships in order to procure or protect his directorship or shareholding
but for the sake of earning the additional emoluments or rewards. This distinction assumes, with
respect incorrectly, that in the Stone case the taxpayer sought to establish or protect some asset.
In any event in the present case the guarantees were issued in order to ensure the continued
existence, as a business enterprise, of the company which was the structure that had to endure in
order to enable the respondent’s services to produce his emoluments and rewards. In the words
of the respondent’s counsel in his heads of argument ‘in the absence of such financial assistance
by way of suretyships there would have been no employer.’
The ratio of the Stone case was that capital lent is ordinarily fixed capital. The court assumed,
without deciding, that the capital used by a moneylender to make loans constitutes his or her
circulating capital and that consequently losses of such capital are on revenue account –
‘provided that the business is purely that of moneylender and the loans are not made in order to acquire
an asset or advantage calculated to promote the interests and profits of some other business conducted by
the taxpayer (cf Atlantic Refining Company of Africa (Pty) Ltd v Commissioner for Inland Revenue 1957 (2) SA
330 (A) [10] (at 596C-D) [11])
The principle that money lent was circulating capital could not, so it was held, be extended to
loans by persons who are not conducting a money-lending business (ibid). It is only in the case of
a money lender (and a bank) that the absence of the acquisition or enhancement of an asset or
advantage is relevant to determine whether the money lost is floating capital.
In any case, contrary to the view of the court a quo, it must have been a purpose of the
respondent’s suretyships that he would protect his shareholding in the company. Even on the
question whether the dominant purpose of the provision of the guarantees was the production
of the remuneration, it is unrealistic to hold that the respondent would have exposed himself to
________________________

56 1991 (1) SA 533 (A).

57 1995 (3) SA 197 (A).
58 1995-1996 at para 11.119.
59 Supra at 598A-H.
560 Income Tax in South Africa: Cases and Materials

the substantial liability under the suretyships, running into more than R2 000 000, only to earn
or for the main purpose of earning the envisaged income. For him to achieve a 10% annual
return, before tax, on this exposure, the company’s annual turnover would have had to reach
R11 439 000 (subject to the effect of profits for the purpose of the provisos to the commission
provision) . . .
With respect, the court a quo, in my opinion, in any event, erred when it said:
‘The entering into the suretyship agreement did not in any way produce an enduring benefit for the
appellant . . .’
As I have said, the enduring benefit which the respondent sought to achieve was the continued
operation of the company . . .
Mr Strydom, argued that the provision of the suretyships did not create or lead to the acquisition
of any asset ‘the operation of which was expected to yield profit’ . . . But it is obvious that the
suretyships facilitated, and that their purpose was to ensure, the continued existence and the
enhancement of the capital structure, ie the company, which was to provide the respondent’s
income and increase his wealth – it was an income-producing concern (cf CIR v George Forest
Timber Co Ltd).60 . . .
As the respondent’s suretyships were not given in the course of a business of giving guarantees
or making loans, Mr Strydom argued that their provision was ‘an adjunct and ancillary to (the
respondent’s) business relationship with Carvel which consisted of the rendering of personal
services and the provision of guarantees in return for a fixed salary and directors emoluments’.
The business relationship was that of director/shareholder/employee and company. It cannot
seriously be contended that the respondent carried on a business in any of the three named
capacities and, therefore, that the provision of guarantees was an adjunct or ancillary to any
business. It follows that the court a quo should have held that the respondent failed to establish
that his losses were not of a capital nature.

Notes
This decision is significant for the light it throws on the issue of whether losses resulting
from giving a suretyship would be deductible under s 11(a) if the taxpayer had entered
into the suretyship for the purpose of earning income.
In this case, the Tax Court held that, because the taxpayer had entered into suretyships
with his company in return for which he had, by agreement with the company, been paid
additional emoluments, the losses that he incurred as a result of the suretyships had been
incurred by him ‘in the production of income’ and were thus deductible under s 11(a).
It needs to be remembered that, simply because expenditure or losses were incurred
‘in the production of income’, does not of itself make them deductible in terms of
s 11(a). In order to be deductible, the expenditure or losses must satisfy the further
criterion that they were not ‘of a capital nature’.
On appeal, the full bench of the Transvaal High Court reversed the decision of the
Tax Court and held that the taxpayer’s losses in this regard were of a capital nature and
not deductible under s 11(a).
It is clear from Wunsh J’s judgment that, as a matter of credibility and probability, he did
not accept that the taxpayer in question had indeed entered into the suretyships for the
dominant purpose of earning income, because his potential losses from the suretyships
were disproportionate to the amount of turn-over related extra income he could have
earned under his agreement with the company in return for giving the suretyships.
The judgment discusses whether the principles laid down by the Appellate Division in
CIR v Stone 61 were applicable in this case, and answers this question affirmatively.
________________________

60 1924 AD 516 at 526.

61 1974 (3) SA 584 (A), 36 SATC 117.
 Capital Expenditure and Losses 561

The principle laid down in Stone was that if a taxpayer lends money, otherwise than in
the course of a banking or money-lending business, then even if the main purpose of the
loan was to earn income in addition to interest, any losses sustained from that lending
are of a capital nature. This is so because capital which is lent out is ordinarily fixed
capital; only where the taxpayer is in the business of banking or money-lending is it
circulating capital. Hence, it is only where the taxpayer carries on the business of
banking or money-lending that losses incurred through irrecoverable loans are of a
revenue (non-capital) nature and are deductible in terms of s 11(a). Where the taxpayer
does not carry on the business of banking or money-lending, any losses incurred through
irrecoverable loans are of a capital nature and not deductible in terms of s 11(a).
In this judgment, Wunsh J concedes (endorsing the view of Meyerowitz on Income Tax,
quoted in the judgment) that losses resulting from irrecoverable loans are not of a
capital nature and are thus deductible under s 11(a) where the loans were made as an
integral part of the taxpayer’s business operations or as an adjunct or ancillary part of
the taxpayer’s business, but Wunsh J says that this was not so in the present case.
Wunsh J goes on to say that, ‘the effect of Stone v SIR, Burman v CIR and Sentra-Oes
Koöperatief Bpk v KBI, supra is that it is not legitimate to have regard to all the other
criteria which, in a given set of facts, are applied by the courts in distinguishing
expenditure and losses of a capital nature from those of a revenue nature.’ It seems that
Wunsh J is saying, here, that the effect of these decisions is that losses are only deductible
either if the taxpayer was in the business of banking or money-lending or if the loans
were an integral part of the taxpayer’s business or an adjunct or ancillary part of the
taxpayer’s business, and that none of the other criteria that the courts usually rely on in
distinguishing capital losses from revenue losses are applicable. This dictum seems to
suggest that if, in the present case, the taxpayer had indeed entered into the suretyships
for the dominant purpose of producing income, this would still not have entitled him to
deduct the losses that he suffered. This, according to Wunsh J, would have been one of
‘the other criteria’ which he says cannot be used to determine the capital or revenue
nature of losses from irrecoverable loans or from suretyships.

Where a single amount of expenditure is incurred for the dual purpose of acquiring a capital asset
and producing income, s 11(a) impliedly allows the expenditure to be apportioned; the portion
incurred in producing income qualifies for deduction.

[289]
SIR v Guardian Assurance Holdings (SA) Ltd
1976 (4) SA 522 (A), 38 SATC 111
A company based in the United Kingdom decided to transfer all the shares held by it in
South African companies to a holding company, namely the taxpayer. After weighing up
whether to offer the shares by a private placing or by an offer to the public, it decided on
the latter. The plan was that the taxpayer would issue to the South African public six
million shares of 25 cents each at a price of R1.50 per share. If fully subscribed, this
would provide the taxpayer with R9 million in capital. It was believed that such an issue
would, in the financial climate then prevailing, be heavily oversubscribed. Although an
offer to the public would involve the taxpayer in considerably greater expense than
would a private placing of the shares, it was believed that the taxpayer would be able to
invest the amount subscribed at interest for two to three weeks before refunding the
amount over-subscribed. This interest, to which the taxpayer would be entitled, would
substantially exceed the extra costs involved in an offer to the public. The taxpayer
adduced evidence that it was this factor, namely the prospect of making a profit by way of
interest on the application moneys, that caused it to decide on the more expensive route
562 Income Tax in South Africa: Cases and Materials

of an issue to the public, rather than a private placing. In the event, the issue of shares
was oversubscribed some 30 times. The expenditure incurred by the taxpayer was
R226 775, and the interest earned by the taxpayer on the short term investment of the
application moneys was R616 049. The taxpayer claimed as a deduction under s 11(a)
the sum of R98 085, being the additional expenditure incurred in offering the shares to
the public as compared with the expenditure that would have been incurred in a private
placing of the shares.
Issue: whether the expenditure which the taxpayer claimed as a deduction had been
incurred for the dual purpose of raising capital and producing income and, if so, whether
s 11(a) permitted the expenditure to be apportioned into a deductible and a non-
deductible component.
Held: that the expenditure had been incurred for the aforesaid dual purpose; that
s 11(a) impliedly permitted it to be apportioned and for that portion which had been
incurred to produce income to be deducted.
Muller JA: The Special Court . . . made the following findings:
(a) That the issue of the 6 000 000 shares by public subscription in fact caused a great deal of
extra expense; that this extra expense was incurred with the express purpose of making a profit
and this profit was designedly sought and worked for and was the result of a planned effort;
(b) That, whilst it is correct to say that the purpose of the issue in the first place was to raise
capital, namely R9 million, it is equally clear that the purpose of the extra expenditure was
to attract vast extra sums . . . and to earn interest thereon and so make a profit;
(c) That the total expenses incurred, therefore, had as it were ‘two dominant motives’, namely
the raising of the capital and the making of a profit by way of interest. . .
(d) That the expenditure in question was not debarred as a deduction under s 23(g) of the Act. In
the judgment of the Special Court, delivered by Galgut J, this aspect was dealt with as follows:
‘This section requires that to be deductible the money must have been “wholly or exclusively . . . expended
for the purposes of trade”. These words are clear. In my view “wholly” expended refers to the quantum of
money expended. I agree in this regard with the remarks of Romer LJ, quoted by Plowman J in Murgatroyd
62
v Evans-Jackson. There the court was dealing with s 137(a) of the Income Tax Act in the United Kingdom.
“Exclusively” expended for purposes of trade means the expenditure must not be partly for the purpose of
earning income and partly for private purposes. It was urged that “trade” means to raise profits. Reference
63
was made to Joffe & Co (Pty) Ltd v CIR for this submission. Hence it was urged that, as part of this
expenditure was to raise capital, it was not “exclusively” expended for purposes of trade. I do not accept
64
this submission. As I read [the decision in Joffe] Watermeyer CJ does not suggest that ‘trade’ has the
narrow meaning of to raise profits. The acquisition of capital for business seems to me to be clearly “for
65
the purpose of trade”. In this regard I find myself in agreement with the following passage in Silke:
‘A further example of where apportionment is permissible is where expenditure is incurred partly for
the purpose of deriving income which is not of a capital nature and partly for the purpose of acquiring
a fixed capital asset for the business. In all these cases it is considered that the expenditure is,
nevertheless, wholly or exclusively laid out for the purpose of trade and that an apportionment is
permissible within the meaning of s 11(a) read with s 23(g).’
On appeal before us, counsel for the appellant did not contend that the expenditure in question
was debarred as a deduction by s 23(g) of the Act. His main contention was based squarely on
the provisions of s 11(a) of the Act . . .
Counsel conceded that, on the facts of the present case, expenditure was incurred in the
production of income. The problem, however, said counsel, was that this expenditure was not
incurred only in the production of income – the selfsame expenditure was incurred for the
purpose of a capital nature, namely, the raising of the required share capital by an issue of
shares.
...
________________________

62 43 TC at 589.
63 13 SATC 354.
64 At pp 357 and 358.
65 Silke on South African Income Tax 6 ed at p 196.
 Capital Expenditure and Losses 563

Although, said counsel, the selfsame operation and expenditure had two motives – one being the
raising of capital and the other the earning of income – the expenditure could not be dissected
and allocated to the different objects. Nor could there, for the purposes of income tax, be an
apportionment, on any basis, of the expenditure incurred, the reason being, said counsel, that,
inasmuch as the expenditure in question was incurred for a dual purpose, there was a ‘capital
element’ in every item of the expenditure incurred, which meant that the expenditure was of a
capital nature and therefore not deductible under s 11(a) of the Act.
In support of his contention counsel referred to s 23(g) of the Act, which requires that
expenditure, in order to qualify for deduction, must be ‘wholly or exclusively laid out or
expended for the purpose of trade’. As I have stated earlier, counsel did not contend that the
expenditure was debarred as a deduction under s 23(g) – a contention which was advanced in
the Special Court. His contention in this Court was as follows (I quote from his heads of
argument):
‘Expenditure cannot be deducted if it is “blemished” or “tainted” with any element of private purpose not
linked with trade. By a parity of reasoning is submitted that, under s 11(a), expenditure is not deductible if
“tainted” or “blemished” with an element of a capital nature.
It would be anomalous and inconsistent totally to disallow trade expenditure under s 23(g)
because it is in part expended for private purposes and yet to allow a deduction under s 11(a)
where expenditure is partly for income purposes and partly for capital purposes.
Expenditure which is of a capital nature is disallowed under s 11(a); expenditure which is of a
private nature is disallowed under s 23(g); why, one asks, should apportionment be permissible
in the former case and not in the latter?’
Counsel for the appellant cited no authority in support of his main submission that, where
expenditure is incurred for a dual purpose – the one being the raising of capital and the other
being the earning of income – and the expenditure cannot be dissected and allocated to the
different objects, then no apportionment is permitted because there is ‘capital element’ in every
item of expenditure incurred. Indeed counsel conceded that he was not aware of any such
authority.
We were however referred, by counsel for the appellant and counsel for the respondent, to a
number of cases, not one of which is directly in point, where the courts, in South Africa and in
other countries, have, in principle, approved of apportionment of expenditure laid out for a
dual or mixed purpose . . .
In the absence of any prohibition or direction in the Act, itself, I can see no reason why, in
principle, an apportionment should not be applied in the instant case. It is of course true, as
contended by counsel for the appellant, that all the expenditure in the present case was
incurred for a dual purpose and that it is physically impossible to dissect the various items of
expenditure for allocation to the different objects. But I cannot agree with counsel’s further
contention that, for that reason, the expenditure as a whole must, for the purpose of the Income
Tax Act, be regarded as expenditure of a capital nature within the meaning of s 11(a) of the Act.
In the instant case it is not disputed that expenditure was deliberately incurred (ie the
expenditure in excess of that required to raise the R9 000 000 capital by a private placing) with
the very object of producing an income, and it seems to me that it would be contrary to the basic
principles of the Act not to permit of an apportionment but to declare such expenditure to be
non-deductible merely because it is inextricably tied up with the expenditure which in any event
had to be incurred for the purpose of raising the required capital.
With regard to the argument propounded by counsel with reference to the provisions of s 23(g)
of the Act, I must say that to me it does not appear anomalous or inconsistent that expenditure
is disallowed as a deduction, in terms of s 23(g), if it is in part incurred for private purposes
whereas, on the other hand, where expenditure is incurred for the purpose of raising capital
and for the purposes of earning an income, an apportionment is permitted so that an
apportioned share of the expenditure can be deducted from the income earned. Two different
considerations are involved. In the one case the expenditure is ‘not wholly or exclusively laid out
or expended for the purposes of trade’, in the other case it is.
The Legislature may well have considered that, in the case where expenditure is laid out partly
for private purposes, no apportionment, and therefore no deduction, should be allowed, as that
could lead to abuse (and therefore made provision accordingly in s 23(g)) whereas, in the case
564 Income Tax in South Africa: Cases and Materials

where expenditure is laid out partly for income purposes and partly for capital purposes, but still
exclusively for the purposes of trade, an apportionment should be permitted so as to allow a
deduction in respect of that part of the expenditure apportioned to income (and therefore
made no provision prohibiting apportionment).
For the reasons aforestated I cannot agree with counsel’s main contention. An alternative
contention advanced by counsel for the appellant was that, if in principle as apportionment was
permissible, it should not be allowed in the instant case inasmuch as, so he submitted, the
dominant purpose of the whole operation was to raise capital and that the predominant nature
of all the expenses was therefore capital.
In this regard counsel submitted that it was only incidentally that a more expensive method of
raising capital was employed so that an ancillary benefit of an income nature could be obtained.
...
I cannot agree with counsel’s contention that the object of raising capital should, on the facts of
the case, be regarded as the ‘dominant purpose’ of the whole operation, while the object of
earning an income should be seen as merely incidental to such dominant purpose (as to which see
the remarks of Steyn CJ in African Life Investment Corporation (Pty) Ltd v Secretary for Inland Revenue.)66
Although it is true that the purpose of the issue in the first place was to raise a capital sum of
R9 000 000, it is clear that, before the expenditure was incurred, respondent decided to adopt a
method by which it could pursue two objectives, namely, to raise the required capital, and to
earn an income. To that end it incurred expenditure far in excess of what it would have
expended if the object was merely to raise the capital required. The additional expenditure
incurred can therefore properly be regarded as having been laid out in pursuance of the object
of earning an income . . .
In the circumstances I think it is wrong to say that the ‘dominant purpose’ of the whole oper-
ation was to raise capital and that the purpose of earning an income was merely incidental
thereto.
Yet a further contention advanced on behalf of the appellant was that, even if in theory an
apportionment is permissible, there cannot in the instant case be an apportionment because
there is no sensible or clear basis on which an apportionment can be made. In this regard the
submission was that, in essence, any apportionment in this type of situation must be wholly
arbitrary and that it could not have been the intention of the Legislature to permit such a result.
In view of the fact that a contention of this nature was not raised in the Special Court, and does
not appear to have been canvassed there, I do not propose to say much with regard thereto. It is
sufficient, I think, to say that I cannot agree with the view that any apportionment in this type of
situation must necessarily be arbitrary or that the apportionment suggested by the respondent in
the instant case is an arbitrary apportionment.
Prima facie the method of apportionment applied by the respondent appears to me to be sensible
and clear. But, even if I were to be wrong in holding that view, there could be other possible
methods by which a logical and fair apportionment could be made.
For the reasons aforestated the appeal is dismissed with costs . . .
JANSEN JA, CORBETT JA, DE VILLIERS JA and KOTZÈ, AJA concurred.

Notes
In the Special Court, counsel for the Commissioner based their argument that none of
the expenditure was deductible on both s 11(a) and s 23(g). In the Appellate Division,
counsel dropped the argument based on s 23(g)67 and conceded that all the expenditure
________________________

66 1969 (4) SA 259 (A) at 268H-270A.

67 The Appellate Division judgment does, however, deal with counsel’s argument in regard to s 23(g).
Counsel had argued that, because s 23(g) prohibited the apportionment of expenditure which was laid
out for dual purposes, one being a trading and the other a non-trading purpose (such as expenditure
incurred partly for trading purposes and partly for private purposes), it would be inconsistent to allow
continued
 Capital Expenditure and Losses 565

was incurred in the production of income. The Appellate Division judgment is thus
concerned entirely with deductibility in terms of s 11(a) where expenditure is incurred
with a dual purpose of producing both capital and income.
This decision is the leading authority on the apportionment, in terms of s 11(a), of
expenditure incurred for the dual purpose of producing both capital and income. It
seems implicit in the judgment that the court would find difficulty in apportioning
expenditure which is incurred partly for trading and partly for non-trading purposes; but
perhaps such apportionment would be made in terms of s 23(g) which seems explicitly
directed to this situation.
As to the principle for quantifying the apportionment, the court said that it was not
arbitrary but ‘sensible and clear’. It seems, from this dictum and a similar approach in
[146] Tuck that the court will not be deterred from making an apportionment merely
because it cannot be done with mathematical precision.
The opening words of s 11 restrict deductions falling under all of its sub-sections to
expenditure incurred in relation to income from ‘trade’. It has therefore been suggested
that expenditure incurred in order to produce interest qualifies for deduction under
s 11(a) only where the taxpayer is carrying on the trade of a money-lender. (The
Commissioner’s practice in regard to the deductibility of interest is set out in [227]
Practice Note 31.) There is no hint of this suggestion in the Guardian Assurance Holdings
judgment, but perhaps this was because the expenditure which was incurred in that case
was undeniably incurred in the course of the taxpayer’s trading activities, albeit not as a
money-lender.

Compensation, payable in terms of a contract, for a restriction on the right to trade, even though only
a partial restriction, is of a capital nature. Such compensation does not become ‘income’ simply
because it was calculated with reference to the taxpayer’s loss of income.

[290]
Taeuber and Corssen (Pty) Ltd v SIR
1975 (3) SA 649 (A)
The taxpayer, a private company, had since 1928 acted as the sole agent in South Africa
of a German producer, and this constituted a substantial part of the taxpayer’s business.
In 1954 these two parties entered into a written agreement whereby the taxpayer was
appointed sole agent for the producer’s products.
The agreement provided for termination on notice, in which event clause X of the
agreement stated that the taxpayer would be barred for two years from selling products
in competition with the producer. As ‘consideration therefor’ the producer would be
obliged to pay the taxpayer, annually for two years, monthly instalments equivalent in
aggregate to 60% of the commission which the producer had paid the taxpayer during
the previous twelve months.
The producer thereafter established its own subsidiary company in South Africa and,
in 1967, terminated the agreement on notice, invoked clause X, and thereafter paid the
taxpayer the amounts became payable to the latter in terms of that clause. The taxpayer,
in its tax return for the year of assessment ending 31 December 1967, described the
amount received under clause X as ‘consideration for undertaking not to compete’. The
________________________

apportionment where expenditure was incurred for the dual purpose of producing capital and producing
income, even though both of these were ‘trading’ purposes. The court said this distinction was not
inconsistent or anomalous, as different considerations applied to the two cases.
566 Income Tax in South Africa: Cases and Materials

Commissioner, however, included it in the taxpayer’s gross income and assessed the
taxpayer accordingly.
The taxpayer contended that the payment was made in terms of the restraint clause of
the agreement and was an accrual of a capital nature. The Court considered it to be
important that (1) the agreement could have been terminated without invoking the
restraint clause, in which case there would have been no compensation for the loss of the
agency business; and (2) the effect of the invoking of clause X was that a section of the
appellant’s income-producing structure was restrained from selling the stipulated products.
Issue: was the amount paid to the taxpayer in terms of clauses X of the agreement of a
capital nature?
Held: in the affirmative. The amount was intended to compensate the taxpayer for the
temporary loss of part of its income-producing structure, and not for the loss of
commission which might otherwise have been earned. The amount paid to the taxpayer
was thus an accrual of a capital nature.
Rumpff CJ: The agreement came to an end on 30 June 1967 being terminated on due notice
given by BASF which also gave notice that it was invoking the provisions of clause X of the
agreement . . .
In its judgment the Court below stated that it had been referred to the judgments in CIR v Illovo
Sugar Estates Ltd68 Income Tax Case 772,69 and to number of English and Australian cases,
including those in which it was held that amounts received were not of a capital nature because
their purpose was to ‘fill a hole’ in the income . . . The Court below then proceeded to say the
following:
‘. . . I have, therefore, come to the conclusion that the ‘consideration’ referred to in para X of the
agreement is not to compensate the appellant for the sterilisation of the ‘income-producing machine’,
because that has been taken care of with the six months’ notice, but to compensate the appellant for the
‘hole’ in the commission it cannot earn in this particular field of agency activity. The mode of calculating
the ‘consideration’ at 60% of previous commission is in my view also indicative of that intent . . . Finally, it
was in our unanimous view a payment in terms of the agency contract in lieu of commission which might
otherwise have been earned and is as such not of a capital nature. It was, therefore, correctly determined
as taxable income.’
. . . It was argued on behalf of respondent in this Court that the payment was not linked to the
disposal or sterilisation of any property, that what was given up was the ‘right to trade’, an
inherent attribute of nearly all persons, and that it was not property, a commercial asset or
capital in the ordinary senses of those words, or in the sense in which the word “capital” is used
in the Income Tax Act. In regard to the meaning of the word capital as used in the Act, reliance
was placed on the decision in Smith v SIR.70 It was stressed that the restriction of the right of trade
was of a limited and partial character, that the period of restriction was limited, that the right to
impose a restriction was an integral part of the agency agreement, that the mode of calculation
and the measure of the amount payable is an indication (though not conclusive) of the income
nature of the payment and that it is a fair inference in all the circumstances that the payment
was made to compensate the appellant for income which it might have earned by dealing in
products competitive to those of BASF during the period of restraint.
Having regard to the particular facts of this case, I have come to the conclusion that the Court
below erred in holding that the amount paid to appellant was an amount in lieu of commission
which might otherwise have been earned, and was therefore not of a capital nature. There is no
doubt that, at the time of notice of cancellation of the agreement, the appellant had established
an income-producing structure. The structure of appellant consisted not only of premises,
personnel and the right to trade but also of certain specific contractual rights and duties, inter
alia, those that flowed from the agreement with BASF . . . [I]t is clear that the BASF agency
business contributed an important part of appellant’s business, conducted by a section of the
________________________

68 1951 (1) SA 306 (N).

69 19 SATC 301.
70 1968 (2) SA 480 (A) at 490.
 Capital Expenditure and Losses 567

income-producing structure . . . As a result of the termination and the restraint clause being
invoked, appellant was not only prevented from marketing the products of BASF but also, in
addition, for a period of two years, from handling any products that might compete with the
products of BASF . . . In other words, a section of the income-producing structure which had
hitherto operated to sell products of a certain type could no longer sell products of that type.
. . . What the parties intended, therefore, was a payment of a sum of money to restrain the
appellant, for a period of two years, from earning income by the sale of all products competing
with those of BASF. In the result, in my view, that part of appellant’s income-producing structure
which had sold only BASF products was not only permanently prevented from selling BASF
products by the termination of the agreement, but also effectively closed for two years to the
extent that it was prevented, for that period, from selling all such products as would compete
with the BASF products, and the amount payable in terms of clause X was intended to be, and
must be construed as, compensation for this closure. The fact that there was only a partial
restriction of appellant’s rights, and for a limited period only, does not affect, in my view, the
quality of the accrual in the present case. Nor is the calculation of the amount paid, in the
present case, a factor of decisive importance . . .
In my view the appeal succeeds . . .

BOTHA, JA, JANSEN, JA, TROLLIP JA and CORBETT JA concurred.

Notes
Although the compensation paid to the taxpayer in terms of clause X was, in terms of the
contract, determined as being equivalent to the aggregate commission income earned by
the taxpayer in the previous two years, this did not mean that the compensation was, for
tax purposes, of the same character as the commission, that is to say, of an income
nature.
The decision of the United Kingdom courts in the case of Glenboig Union Fireclay,71
established the principle that the method of calculating an amount does not determine
its character, that is to say, whether it is income or capital. The question is whether the
compensation was intended to fill a hole in the taxpayer’s income, or to compensate it
for a substantial change to its profit-making structure. If the latter; then the
compensation is of a capital nature, irrespective of the method of calculation.
In Glenboig’s case, like the present case, compensation for the ‘sterilisation’ of a capital
asset was calculated with reference to loss of income, but (applying the principle
summarised above) the court held that the compensation was of a capital nature.
The concept of the ‘sterilisation’ of a capital asset (which is usually associated with the
decision in Glenboig Union Fireclay) refers to the situation where the taxpayer is
compensated, not for the alienation or loss of a capital asset, but for its being rendered
(permanently or temporarily, wholly or partially) incapable of earning income.

Recurrent payments for the right to use an asset, as distinct from payments made to secure ownership
of the asset, are revenue, not capital expenditure

[291]
BP Southern Africa (Pty) Ltd v CSARS
(2007) 69 SATC 79 (SCA)
The taxpayer, a marketer of petroleum products, had concluded a written trademark
licence agreement with its UK parent company in which, in return for the payment of an
________________________

71 Glenboig Union Fireclay Co Ltd v CIR 12 TC 427.

568 Income Tax in South Africa: Cases and Materials

annual royalty fee, (expressed as a rate per litre of product sold), the taxpayer was
granted the right to use and display the licensed marks and licensed marketing indicia of
that parent company. On termination of the agreement the taxpayer would cease to have
the right to use those licensed marks and marketing indicia.
The taxpayer claimed the royalty payments as deductions in terms of s 11(a) of the
Income Tax Act.
Issue: was the annual royalty fee expenditure ‘of a capital nature’ and therefore not
deductible in terms of s 11(a)?
Held: the annual royalty fee secured for the taxpayer the use – not the ownership – of
the intellectual property of its parent company. The recurrent nature of the payment,
which neither created nor preserved any asset in the taxpayer’s hands, was indistinguish-
able from recurrent rent paid for the use of another’s property. Consequently, the
expenditure in respect of the annual royalty fee was so closely linked to taxpayer’s
income-earning operations during the tax years in question as to constitute revenue
expenditure in respect of each of those tax years and hence such amounts were
deductible in terms of s 11(a).
Ponnan JA: (HOWIE P, BRAND JA, NUGENT JA and CACHALIA JA concurring)
[3] The BP trademarks (‘the licensed marks’) and the trade dress, colour schemes, designs and
symbols (‘the licensed marketing indicia’) which BPSA commenced using during about 1959 are
owned by BP worldwide. … During 1997 BPSA concluded a written trade mark licence
agreement (‘the agreement’) with BP, in terms whereof it was granted authorisation to use and
display the licensed marks and licensed marketing indicia against payment of royalties.
[4] In terms of the agreement the royalty fee payable to BP was expressed as a rate per litre of
product sold. It thus obviously varied from year to year. For the tax years 1997, 1998 and 1999
the royalty fee payments were respectively R40 190 000, R45 150 000 and R42 519 000.
[5] BPSA subsequently claimed those payments as deductions in terms of s 11(a) of the Income
Tax Act (‘the Act’) in the determination of its taxable income. The respondent, the
Commissioner of the South African Revenue Services (‘SARS’) disallowed those deductions.
BPSA’s objection to the disallowance was overruled and its subsequent appeal to the Cape Town
72
Income Tax Special Court was dismissed. Against that decision BPSA now appeals with leave of
the Special Court.
[7] As has occurred many times in the past, this court is required yet again to determine
whether expenditure incurred by a taxpayer is either capital or revenue expenditure. By now,
the distinction is hopefully clear enough conceptually (see Rand Mines (Mining & Services) Ltd v
73
CIR and the cases there cited). The purpose of expenditure is important and often decisive in
assessing whether it is of a capital or revenue nature. Expenditure incurred for purposes of
acquiring a capital asset of the business is capital expenditure whereas expenditure which is part
of the cost incidental to the performance of the income-producing operations as distinct from
the equipment of the income-producing machinery is revenue in nature (New State Areas Ltd v
74
CIR 1946 AD 610 at 627). A distinction is thus drawn between expenditure made to acquire an
income-producing concern (in respect of which the outlay is usually non-recurrent) and money
spent. ‘. . . in working the concern for the present production of profit’ (CIR v George Forest
75
Timber Co Ltd.
[8] The conclusion to be drawn from all of the cases seems to be that the true nature of each
transaction must be examined in order to determine whether the expenditure in question is
76
capital or revenue expenditure. (New State Areas Ltd v CIR. ) In deciding that question each case
77
must be decided on its own facts and circumstances. (CIR v African Oxygen Ltd. )
________________________

72 ITC 1798 (2005) 68 SATC 9.

73 [1997] 1 All SA 279 (A) at 285 59 SATC 85 at 92.
74 1946 AD 610 at 627, 14 SATC 155 at 170.
75 1924 AD 516 at 526-527, 1 SATC 20 at 25-6.
76 1946 AD 610 at 627, 14 SATC at 170.
77 1963 (1) SA 681 (A) at 691 A-B, 25 SATC 67 at 79.
 Capital Expenditure and Losses 569

[9] In this case, the agreement commenced on 1 January 1997 and was initially to endure for a
period of two years where after it would be renewed automatically for succeeding periods of 12
months, unless terminated by either party upon the giving of six months notice. For the
purposes of this judgment, the further material terms of the agreement, in summary, were:
‘(a) BPSA was granted a personal non-exclusive and non-assignable authorisation to use the licensed
marks and the licensed marketing indicia;
(b) BP remained the sole rightful owner of the licensed marks and licensed marketing indicia, and all
rights and goodwill attaching or arising out of the use by BPSA thereof accrued to the benefit of BP; and
(c) Upon termination of the 1997 agreement, BPSA would no longer be entitled to use the name BP
Southern Africa or the licensed marks and the licensed marketing indicia.’
[10] … [D]uring 1996 BP decided that users of the licensed marks and the licensed marketing
indicia should be required to pay a royalty. Accordingly, it commissioned an independent
company, Interbrand UK Limited (“Interbrand”) to determine the value of its licensed marks
and licensed marketing indicia. Interbrand was also commissioned to assess the fair market value
of any royalty payments to be made to BP for usage of such licensed marks and licensed
marketing indicia by all users thereof, including the appellant.
It was thus only after Interbrand had concluded its investigation that the agreement was
concluded in accordance with recommendations made by it.
[11] It was contended for the respondent that the ostensibly brief initial duration of the
agreement and the relatively short period required for termination after that initial period
should not be accorded significant weight as the umbilical cord that ties BPSA to its UK parent is
unlikely, after the initial term of the agreement or at any later time, to be severed. Accordingly,
so it was argued, BPSA will effectively garner a benefit of far greater magnitude than, at first
blush, the agreement confers upon it. That may well be so. But, to engage in such speculation
would in my view be an act of grave folly. For it is to the agreement itself that one must look,
which as ought to be apparent, provides the ready counter that the agreement might well not
endure beyond its initial term of two years. There is nothing to suggest that the parties have
78
concealed the true character of their agreement (see Zandberg v Van Zyl or that they did not
intend it to have effect according to its tenor; it must accordingly be interpreted by a court
79
according to its tenor (see Commissioner of Customs and Excise v Randles Bros and Hudson Ltd. ).It
bears noting that it was not contended by counsel for SARS that the transaction was simulated.
….
[12] For the reasons that follow, the conclusion reached by the court below that the
expenditure in issue is of a capital nature, does not, in my opinion have due regard to the
essential features of the agreement and is therefore unsustainable.
[13] In order to determine whether expenditure has been incurred in the production of
income ‘important, sometimes overriding, factors are the purpose of the expenditure and what
80
the expenditure actually effects’. (Per Corbett JA in CIR v Nemojim (Pty) Ltd. The annual royalty
payment, as the Statement of Agreed facts makes plain, was ‘in consideration for the use of the
licensed marks and the licensed marketing indicia’. Its purpose was to procure for BPSA the use
– not ownership – of the intellectual property of another from its sole and rightful owner for the
duration of the agreement. Thus the ownership of the intellectual property remained with BP
throughout and, upon termination of the agreement, whether by virtue of non-renewal after the
initial two-year period or the giving of six months notice by either party thereafter, BPSA would
automatically cease to have the right to use the intellectual property in question.
[14] The anticipated and actual recurrent nature of the disputed payments is a strong indicator
that they related to revenue rather than capital. The recurrent cost of procuring the use of
something which belongs to another is usually recognised as being of a revenue nature. The
most obvious example is the recurrent rent paid by a taxpayer for the use of premises from
which he/she trades. As Centlivres CJ stated: ‘[r]ent is an expenditure incurred in the
production of income and is of a non-capital nature and is therefore deductible . . . for the
________________________

78 1910 AD 302 at 309.

79 1941 AD 369 at 395-6), 33 SATC 48 at 67.
80 1983 (4) SA 935 (A) at 947F-H, 45 SATC 241 at 256.
570 Income Tax in South Africa: Cases and Materials
81
purpose of determining taxable income’ (Turnbull v CIR ). The annual royalty fee in the
present case is to all intents and purposes indistinguishable from recurrent rent paid for the use
of another’s property.
[15] A cardinal feature of the present case is that the expenditure in issue neither created nor
preserved any capital asset in the hands of the taxpayer. Whilst not in itself conclusive, that is
82
indeed a consideration of considerable importance. (Warner Lambert SA (Pty) Ltd v CSARS.
Where no new asset for the enduring benefit of the taxpayer (enduring in the way that fixed
83
capital endures (New State Areas Ltd ) has been created, any questioned expenditure naturally
84
tends to assume more of a revenue character (Warner Lambert SA (Pty) Ltd. )
[16] Having regard to all of the circumstances, the expenditure in issue was, in my judgment, so
closely linked with the appellant’s income-earning operations during the tax years in question, as
to constitute revenue expenditure in respect of each of those tax years. It follows that those sums
were deductible under the provisions of s 11(a) of the Act. …
[17] In the result …or the tax years 1997, 1998 and 1999, respectively, the sums of R40 190 000,
R45 150 000 and R42 519 000 are declared to be deductible under s 11(a) of the Act.

Notes
SARS argued that, although the taxpayer’s contract with its UK parent, whereby it would
enjoy the right to use licensed marks and other indicia was of relatively brief duration
(namely, an initial period of two years, which would be renewed automatically for
succeeding periods of twelve months, until terminated), the reality was that those rights
would probably be allowed to continue. However, the Supreme Court of Appeal refused
to look beyond the terms of the agreement, observing that there was nothing to suggest
that the agreement was simulated, or that the parties did not intend to give effect to it.85
The relatively short duration of the taxpayer’s rights to the licensed marks under the
agreement was significant, as one of the hallmarks of capital expenditure is that it brings
into existence an asset or advantage for the taxpayer ‘of an enduring nature’.
The court highlighted the following features as significant in establishing that the
expenditure incurred by BP to acquire that right of use was of a revenue, and not a
capital nature –
• the relatively short period for which BP would enjoy the rights in terms of its agree-
ment with its UK parent; on termination of the agreed period, the taxpayer would
automatically cease to hold those rights;
• the fact that, in terms of the agreement with its UK parent, the taxpayer would only
acquire a right to use the licensed marks and would not acquire ownership of them;
• the recurrent nature of the payments for those rights, which made the payments
indistinguishable from rent paid for the use of another person’s property;

________________________

81 1953 (2) SA 573 (A) at 579 A-B, 18 SATC 336 at 342.

82 2003 (5) SA 344 (SCA) at para 17, 65 SATC 346.
83 Supra at 625A, 14 SATC at 168.
84 Supra para 17, 65 SATC (supra) at 352.
85 The least persuasive aspect of the judgment was the court’s refusal to accord any significance to the fact
that, in terms of the agreement, it was potentially capable of enduring indefinitely; thus, the agreement
for the use of the licensed marks provided that the periodic renewal of the agreement for successive
twelve-month periods was to occur automatically, and that the agreement was to endure until six months’
notice of termination was given. In the writer’s view, this was, however, irrelevant. It is submitted that, so
long as what the taxpayer acquires is a mere right of use as distinct from a right of ownership, and where
payment for the right of use is to be made on a recurrent basis and not on a one-off basis, it is immaterial
for how long the agreement for the right of use is to endure. Rent, for example, is regarded as non-capital
expenditure, irrespective of the term of the lease.
 Capital Expenditure and Losses 571

• the fact that the payments neither created nor preserved any capital asset in the
hands of the taxpayer, and did not create a ‘new asset for the enduring benefit of the
taxpayer’, as contemplated in New State Areas.
These considerations led the court to conclude that the expenditure incurred by the
taxpayer to acquire the right to use the licensed marks was so closely linked to the
appellant’s income-earning operations (as distinct from establishing or expanding the
capital structure of the taxpayer’s income-earning operations) that the expenditure
could not be regarded as of a capital nature. In short, the expenditure was part of the
cost of operating the taxpayer’s income-earning structure, and not a cost incurred in
creating, expanding or preserving that structure.
86
The Special Court judgment, which this decision overruled, held that the recurrent
payments made by the taxpayer to its UK parent in terms of the agreement were
(emphasis added) ‘in substance a purchase price for a business which gave a substantial
market share in the defined area, similar to a franchise agreement. The payments made
to obtain these rights must therefore by its very nature be a capital expense’.87 In
reversing this decision, the Supreme Court of Appeal took the view that, to have regard
to whether the agreement between the taxpayer and its UK parent might endure for a
long period was ‘speculative’, and that the court should regard the parties’ rights as
being those recorded in the agreement unless SARS formally attacked the agreement as
being simulated.

Payments of rental are not necessarily of a revenue nature; they will be of a capital nature when paid
in a lump-sum, not for the purpose of producing income, but to establish the taxpayer’s business over
a substantial period.

[292]
CSARS v BP South Africa (Pty) Ltd
2006 (5) SA 559 (SCA); 68 SATC 229
The taxpayer company, a marketer of petroleum products, had entered into head leases88
which, in most cases, were for a period of some twenty years. Each such lease provided
for the payment of rental by way of a lump-sum,89 paid in advance. The purpose of such
‘up-front’ lump-sum payments was to secure sites from which taxpayer’s petrol could be
sold for a period of some twenty years and servitudes were registered to ensure that the
sites would be used for this purpose by the taxpayer even after the leases came to an end.
Hence, the payments were to acquire assets that were intended to endure and to
produce income for twenty years.
Issue: were such lump-sum advance payments deductible in terms of s 11(a)?
Held: The mere fact that a payment constitutes a payment of rental does not of itself
qualify the payment as revenue (non-capital) expenditure. In this case, the lump-sum
payments of rental were more closely related to the taxpayer’s income-earning structure
than to its income-producing operations, since the payments were made, not to carry on
the business of the taxpayer but to establish the business.

________________________

86 ITC 1798 (2005) 68 SATC 9.

87 Ibid at para 6.3.
88 Where an owner leases to a lessee, and the lessee sub-leases the property to a sub-lessee, the first-
mentioned lease is the ‘head lease’.
89 Usually, rent is paid weekly or monthly. In this case, the rental for the entire period was paid in a lump-
sum at the commencement of the lease, that is to say, ‘up front’.
572 Income Tax in South Africa: Cases and Materials

Held further: in the light of the nature of the payments (that is to say, by way of a lump-
sum), the nature of the advantage that the taxpayer obtained by the payments (namely,
security that the taxpayer’s products would be sold from the leased premises) and taking
into account the substantial periods for which that advantage was obtained (some twenty
years) the expenditures in issue were of a capital nature.
Held further: The rental payments were not deductible in terms of s 11(a) in the year of
assessment when they were incurred, but were deductible as lease premiums over the
duration of the leases in proportionate annual instalments in terms of s 11(f).
Streicher JA: (HOWIE P, NUGENT JA, CLOETE JA and HEHER JA concurring)
[19] In Turnbull v CIR 1953 (2) SA 573 (A) at 579A-B90 Centlivres CJ said that rent is an
expenditure incurred in the production of income and that it is of a non-capital nature and
therefore deductible for the purpose of determining taxable income. In general that is so but it
would not always be the case. In this regard Wilcox J said in Federal Commissioner of Taxation v
Creer 65 ALR 485 (FC) at 493 (25-35):
‘Ordinarily, of course, rental payments, made to obtain the right to occupy premises used for the purpose
of earning assessable income, are deductible. But ordinarily such payments are recurrent; and ordinarily
they bear a relationship to the income expected to be earned by virtue of that occupation during the
relevant accounting period. Where those features are absent, it is better to set aside nomenclature and to
examine the substance of the transaction and – where relevant – the purpose for which it was undertaken.’
[20] In Regent Oil Co Ltd v Strick [1965] 3 All ER 174 (HL) the House of Lords was dealing with
four contracts in terms of which garage owners were tied by way of a lease and a sublease to sell
an oil company’s petrol. The consideration for the lease was an agreed lump sum payment plus a
nominal rent of one pound per annum. In two of the four cases the lump sums were expressly
stated to be premiums while in the other two they were not. It was held that the lump sum
payments were of a capital nature. It is true that some of the law lords drew a distinction between
rent and a premium. Their view was that rent is paid for the use of property and is a revenue
expenditure91 whereas a premium is a capital expenditure as it is a payment for the acquisition of
an asset, being the right to use the property for the purpose of carrying on a trade.92 However,
whether a payment is made for the use of property or whether it is made for the right to use
property the payment is a rental payment. In this regard I agree with the following statement by
93
Lord Reid in Regent:
‘It was argued that a rent and a premium paid under a lease are paid for different things – that the
premium is paid for the right but that the rent is for the use of the subjects during the year. I must confess
that I have been unable to understand that argument. Payment of a premium gives just as much right to
use the subjects as payment of a rent and an obligation to pay rent gives just as much right to the whole
term of years as payment of a premium.’
[21] It is not the legal categorisation of a payment which determines whether it is of a revenue
94
or a capital nature. The mere fact that a payment constitutes a payment of rental does,
therefore, not qualify it as a revenue expenditure. As in the case of every other expenditure ‘the
true nature of each transaction must be enquired into in order to determine whether the
expenditure attached to it is capital or revenue expenditure’. (Per Watermeyer CJ in New State
Areas Ltd v CIR 1946 AD 610 at 627.)95 Again the purpose of the expenditure is an important
factor in determining the true nature of a transaction. If the expenditure is incurred for the
purpose of acquiring a capital asset for the business it is capital expenditure.96
[22] In the present case the purpose of the lump sum payments ‘up front’ was to secure sites
from which BPSA’s petrol could be sold. The registration of the servitudes referred to above

________________________

90 18 SATC 336 at 342.

91 At 197A-B and 201G.
92 At 197C-F and 201G; see also Brownlie and Jooste, ‘The Lease Premium Concept in South African Tax
Law’ 1993 Acta Juridica 241.
93 At 180I to 181A.
94 See Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648.
95 14 SATC 155 at 170.
96 New State Areas Ltd supra at 627; 14 SATC, supra, at 170.
 Capital Expenditure and Losses 573

ensured that the sites would be used for this purpose, even after termination of the leases by
BPSA, for as long as prepaid rental remained in the hands of the lessor. The expenditures were,
therefore, intended to secure sites from which BPSA’s petrol could be sold even in situations
where there was no lease. By paying the lump sums BPSA secured these sites for a period of
some 20 years that is, it acquired assets which were intended to endure for 20 years and which
were going to produce income for 20 years without any further expenditure required in respect
of the acquisition of the assets.
[23] A test that has been adopted to assist in the determination whether expenditure is of a
capital or revenue nature is to ask whether the expenditure is more akin to the income
producing operations of the taxpayer or whether it is more akin to the income-earning structure
of the taxpayer, or to ask ‘is it expenditure required to carry on a business or is it required to
establish a business?’.97 Money spent in creating an income-producing concern is capital
98
expenditure; it is invested to yield future profit. In this case the purpose of BPSA was to
establish a base for its income-producing operations for the next 20 years. In the circumstances
the lump sum expenditures are more closely related to the income-earning structure of BPSA
than its income-producing operations. They were incurred not to carry on the business of BPSA
but to establish it. Through the payment of a lump sum BPSA acquired an asset which, in the
words of Lord Wilberforce in Regent,99 ‘was a source or foundation for the earning of profits,
through orders for petrol . . . it can fairly be described as a piece of fixed capital which is to be
used in order to dispose of circulating capital’.
[24] To allow these lump sum payments as a debit against income would distort the profit for
the particular year in that the profit for that year would be unduly diminished and it is only after
20 years that a fair result would be reached. This is a consideration that weighed with Lord Reid
in Regent. He said100 ‘recurrence as against a payment once and for all has (ever since Vallambrosa
Rubber Co Ltd v Farmer (Surveyor of Taxes) (1910) 5 Tax Cases 529) been accepted as one of the
criteria in a question of capital or income’ and added that he ‘would have great difficulty in
101
regarding a payment to cover 20 years as anything other than a capital outlay’. Lord
102
Wilberforce said:
‘No rule can be laid down as to a minimum period of endurance for a capital asset or a maximum
permissible period for an item of stock or circulating capital, though obviously the more closely the period
of endurance is related to an accounting period the easier it is to argue for a revenue character, but no
doubt there is a penumbra the width of which may vary according to the nature of the trade.’
[25] In the light of the nature of the payments, being lump sums, the nature of the advantage
obtained, being security that BPSA’s products would be sold from the leased premises, and the
substantial periods involved, I am of the view that the expenditures were of a capital nature. My
103
reasons are essentially the same as the reasons advanced by Lord Wilberforce in Regent for
concluding that the lump sum payments dealt with in Regent were capital and not revenue
payments. In one of the other speeches in Regent Lord Morris of Borth-y-Gest expressed
agreement with the conclusion of Lord Denning MR in the court of Appeal, which conclusion is
particularly apposite to this case and reads:104
‘The company make a payment once and for all. In return they get an advantage which is of enduring
benefit to the company. It brings in revenue to the company week after week, and month after month,
from the petrol they supply to the retailer. I have no doubt this advantage is a capital asset and the
payment for it is capital expenditure.’

________________________

97 New State Areas Ltd v CIR 1946 AD 610 at 620-621, 14 SATC supra at 163-4; SIR v Cadac Engineering Works
(Pty) Ltd 1965 (2) SA 511 (A) at 522B; 27 SATC 61 at 74; Hallstroms Proprietary Limited v Federal Commissioner
of Taxation (1946) CLR 634 at 646-647; and Regent Oil Co Ltd v Strick (Inspector of Taxes) [1965] 3 All ER
174 189-190.
98 CIR v George Forest Timber Co Ltd 1924 AD 516 at 526, 1 SATC 20 at 25.
99 At 202G.
100 See also CIR v George Forest Timber Co Ltd supra.
101 At 181B-F; see also 200A (per Lord Pierce).
102 At 204H-I.
103 At 205A.
104 Regent at 188B-C.
574 Income Tax in South Africa: Cases and Materials

[26] The parties were agreed that should it be held that the lump sum payments constituted
expenditure of a capital nature, s 11(f) would be applicable.105 It follows that the appeal should
be dismissed in respect of the deduction of interest on the loan by BPSA plc but that it should
succeed in respect of the prepaid rental to the extent that BPSA is not entitled to a deduction in
terms of s 11(a) but is entitled to a deduction in terms of s 11(f). Counsel for the Commissioner
suggested that should this be our conclusion it would be fair to apportion the costs of the appeal
80:20 in favour of BPSA. Counsel for BPSA on the other hand submitted that BPSA should be
awarded all its costs. In the light of the fact that the appeal is successful to the extent mentioned
above it would be fair to award the Commissioner 20% of the costs of the appeal as requested by
his counsel.
[27] The following order is made:
Paragraph 2 of the order by the Cape Tax Court is replaced with the following order: ‘The respondent is
directed to apply the provisions of s 11(f) of the Income Tax Act 58 of 1962 in respect of the [prepaid
lump-sum] rental expenditure . . . ’

Notes
Oil companies, such as the taxpayer, were by law not allowed to operate service stations
in South Africa. Instead, the taxpayer sold is products, including petrol, to independent
dealers who in turn sold to the public. The taxpayer company therefore had an indirect
interest in the sale of its petrol to the public and also had an interest in securing long-
term sites from which its petrol could be sold. The taxpayer achieved this, either by
purchasing suitable sites and leasing them to dealers, or by leasing the sites from the
owners under long-term leases and then sub-letting the sites to dealers who in some cases
were the owners of the property.
The mere fact that a payment is described in an agreement as ‘rent’ does not mean
that it is revenue, rather than capital expenditure. The facts of each case must be
scrutinised to determine the true nature of the expenditure and whether it is revenue or
capital expenditure. The Act does not define the term ‘capital’. Consequently, the
criteria established by judicial precedent to determine whether a payment is revenue or
capital must be applied, and in this regard the purpose of the taxpayer in incurring the
expenditure has been recognised as being an important factor.
Rent is a payment for the use of property for the period of the lease, and it is normally
a recurrent payment rather than a one-off payment. In other words, rent is usually paid
monthly or at other intervals. But in this case, the leases were for a long period – usually
20 years – and rent for the entire period was paid in a lump sum at the commencement
of the lease. That lump-sum put the owner of the site in a position to build a service
station on the property or to improve an existing service station. The head leases also
provided for a servitude to be registered over the leased property as security for BP South
Africa, in case that the lease was prematurely cancelled and the pre-paid rent had to be
repaid. The head leases precluded the occupier of the property from selling petrol or
other petroleum products from the property, except products supplied by BP South
Africa.
________________________

105 S 11: For the purpose of determining the taxable income derived by any person from carrying on any
trade, there shall be allowed as deductions from the income of such person so derived –. . .
(f) an allowance in respect of any premium or consideration in the nature of a premium paid by a
taxpayer for –
(i) the right of use or occupation of land or buildings used or occupied for the production of
income or from which income is derived; or . . . (aa) the allowance under sub-para (i), (ii),
(ii)bis or (iii) shall not exceed for any one year such portion of the amount of the premium or
consideration so paid as is equal to the said amount divided by the number of years for which
the taxpayer is entitled to use or occupation, or one twenty-fifth of the said amount, whichever
is the greater.’
 Capital Expenditure and Losses 575

In this case, it was held (at para [22]) that the purpose of the lump sum payments in
issue was ‘to secure sites from which the taxpayer company’s petrol could be sold’ – in
other words, the purpose went further than merely paying for the right to occupy the
property for the period of the lease, in that the servitudes that the taxpayer company
obtained from the owners in return for the lump-sum payments in question gave the
taxpayer the right to occupy the properties even after the leases had come to an end.
As the judgment notes at para [22], in return for the lump-sum payments, BP South
Africa ‘acquired assets which were intended to endure for 20 years and which were going
to produce income for 20 years without any further expenditure required in respect of
the acquisition of the assets’.
In the result, the court held (at para [23]) that the lump-sum expenditures ‘are more
closely related to the income-earning structure of BPSA than its income-producing
operations’ and were therefore capital in nature. They were payments that were incurred
‘not to carry on the business of BPSA but to establish it’.
The court concluded at para [25] that, ‘In the light of the nature of the payments,
being lump sums, the nature of the advantage obtained, being security that BPSA’s
products would be sold from the leased premises, and the substantial periods involved, I
am of the view that the expenditures were of a capital nature.’
In the result, the court regarded the payments in question as being, not rent, but lease
premiums, the deductibility of which is specifically provided for in s 11(f) of the Act.
Unlike rent, which is deductible in the year in which the expenditure is incurred, the
deduction of a lease premium is spread over the period of the lease.
 11
STATUTORY DEDUCTIONS AND ALLOWANCES

§ Page
1 The inter-relationship between s 11(a) (the general deduction formula)
and the specific deductions..................................................................................... 578
[293] Section 23B ................................................................................................. 578
2 Specific deductions permitted in terms of section 11 ........................................... 578
2.1 Legal costs: section 11(c) ................................................................................ 579
[294] Smith v SIR .......................................................................................... 579
[295] CIR v Thor Chemicals SA (Pty) Ltd ................................................... 584
2.2 Repairs: section 11(d) ..................................................................................... 588
[296] Lurcott v Wakely and Wheeler ........................................................... 588
[297] ITC 855 ................................................................................................ 589
[298] B v COT Southern Rhodesia .............................................................. 591
[299] CIR v African Products Manufacturing Co Ltd ................................. 592
[300] Heron Investments (Pty) Ltd v SIR .................................................... 593
[301] ITC 626 ................................................................................................ 595
[302] Rhodesia Railways Ltd v Collector of Income Tax,
Bechuanaland Protectorate ................................................................ 596
[303] FCT v Western Suburbs Cinemas Ltd ................................................ 598
[304] ITC 133 ................................................................................................ 599
[305] ITC 162 ................................................................................................ 600
[306] ITC 163 ................................................................................................ 600
[307] ITC 561 ................................................................................................ 601
[308] ITC 605 ................................................................................................ 602
[309] ITC 643 ................................................................................................ 603
[310] Flemming v KBI ................................................................................... 604
2.3 Wear and tear or depreciation allowance: section 11(e) .............................. 607
[311] Blue Circle Cement Ltd v CIR ............................................................ 607
[312] SIR v Charkay Properties (Pty) Ltd .................................................... 610
2.4 Accelerated wear and tear or depreciation allowances: ss 12B and 12C
(assets used in a process of manufacture) ..................................................... 613
[313] SIR v Hersamar (Pty) Ltd ................................................................... 614
[314] SIR v Safranmark (Pty) Ltd................................................................. 616
[315] Automated Business Systems (Pty) Ltd v CIR .................................... 618
[316] National Co-operative Dairies Ltd v CIR............................................ 620
2.5 Lease premiums: section 11(f) ....................................................................... 622
2.6 Leasehold improvements: s 11(g) .................................................................. 622
[317] CIR v Carletonville Motors (Pty) Ltd ................................................. 623
577
578 Income Tax in South Africa: Cases and Materials

§ Page
2.7 Section 11(o) (the ’scrapping allowance’) .................................................... 624
[318] ITC 205 ................................................................................................ 624
[319] ITC 631 ................................................................................................ 625
[320] ITC 657 ................................................................................................ 626
[321] ITC 754 ................................................................................................ 628
[322] ITC 1245 .............................................................................................. 629
[323] ITC 1380 .............................................................................................. 630

§1 The inter-relationship between s 11(a) (the general deduction

formula) and the specific deductions
It was held in Feldman Ltd v SIR 1 that expenditure which did not satisfy the requirements
of s 11(m), might nevertheless qualify for deduction under s 11(a). The principle that
deductions specifically provided for in the Act could, in the alternative, qualify for de-
duction under the general deduction provisions of s 11(a) was of particular importance
where the specific provision puts a ceiling on the amount of the deduction (for example
s 11(m)) but s 11(a) does not, or where s 11(a) is broader in scope than the specific
provision, for example s 11(d).
Section 23B(3)2 was introduced to negate the principle laid down in Feldman.

[293]
Section 23B
‘(3)3 No deduction shall be allowed under s 11(a) or (b) in respect of any expenditure or loss of
a type for which a deduction or allowance may be granted under any other provision of this
Act, notwithstanding that such other provision may impose a limitation on the amount of
such deduction or allowance.’

§2 Specific deductions permitted in terms of section 11

The opening words of s 11 are as follows (italics added):
‘For the purpose of determining the taxable income derived by the taxpayer from carrying on any trade,
there shall be allowed as deductions from the income of the person so derived . . .’
The italicised words make clear that the deductions permitted by the various subsections
of s 11 are available only if the taxpayer is carrying on a trade. This is a threshold require-
ment for all the specific deductions in the various subsections of s 11.
Thus for example, expenditure which is incurred by the taxpayer before he com-
mences trading (colloquially called ‘preliminary’ or ‘pre-production’ expenditure) is not
deductible under any of the subsections of s 11, except s 11(bA); see [224] ITC 697.
Section 11(bA) permits the deduction of ‘interest, including related finance charges’
which are not otherwise deductible by the taxpayer, and which were incurred by him for
‘the acquisition, installation, erection or construction of any machinery, plant or build-
ing, or any improvement to a building, to be used by him for the purposes of his trade’.
If such expenditure is incurred prior to the commencement of trading, it can be carried
forward and deducted in the tax year in which he commences trading.
________________________

1 1969 (3) SA 424 (A), 31 SATC 121.

2 Which is effective from years of assessment ending on or after 1 January 1990.
3 Deemed to have come into operation as from the commencement of years of assessment ending on or
after 1 January 1990.
 Statutory deductions and allowances 579

§2.1 Legal costs: section 11(c)

Not everything that produces income is ‘capital’. For tax purposes, capital means property or rights of
property. Thus, goodwill is property and expenditure incurred to protect it is expenditure of a capital
nature. Personal attributes, such as tact or a person’s good name, may help a person to earn income,
but they are not ‘capital’ for tax purposes.

[294]
Smith v SIR
1968 (2) SA 480 (A)
The taxpayer was a registered public accountant and auditor who held directorships of
companies, from which he derived income in the form of remuneration. The companies
went into liquidation and criminal charges were brought against the directors, including
the taxpayer, for fraud, contraventions of the Companies Act and contraventions of
the Insolvency Act. There was a preparatory examination, followed by a protracted
prosecution in the Orange Free State Provincial Division. The taxpayer incurred expend-
iture by way of legal fees in defending himself against the charges. He was found not
guilty. He claimed a deduction in respect of that expenditure in terms of the predecessor
to the present s 11(c) of the Income Tax Act. The Commissioner refused to allow the
deduction.
Issue: was the expenditure, incurred by the taxpayer in defending himself against crim-
inal charges, of a capital nature and thus not deductible in terms of the said section?
Held: (by a majority, Holmes JA dissenting) the expenditure was not of a capital na-
ture, because his purpose was not to protect the goodwill of his business, but to prevent
the disgrace of a conviction; given that this was his dominant purpose, the legal expenses
were not of a capital nature and the legal expenses were indeed deductible.
Steyn CJ: The appellant bases his claim upon s 11(2)(b)bis of the Income Tax Act 31 of 1941, as
amended, which is to the effect that there shall be deducted from a taxpayer’s income derived
from carrying on a trade,
‘any expenditure, other than that of a capital nature, actually incurred by the taxpayer during the year of
assessment in respect of any dispute or action at law arising in the course or by reason of the ordinary
4
operations undertaken by him in the carrying on of his trade’.
In the Special Court the respondent conceded that the expenditure in question is expenditure
incurred as provided in this paragraph. The only issue was whether or not it is of a capital nature
and I shall deal with the matter on that footing . . .The Special Court followed the decision in
5
ITC 992 in regard to the identical issue between the appellant and the respondent in respect of
the previous year of assessment, and found that the expenditure was of a capital nature. Before
this Court counsel for the respondent reiterated the concession made in the Special Court, mod-
ifying it only by invoking the effect upon s 11(2)(bis) of the following provision in s 12(g):
‘No deduction shall in any case be made in respect of the following matters:
(g) any moneys, claimed as a deduction from income derived from trade, which are not wholly or
exclusively laid out or expended for purposes of trade.’
I shall deal first with the question whether or not this expenditure is of a capital nature within
the meaning of s 11(2)(b)bis. It is well established that, in deciding whether expenditure is of
such a nature, the purpose of the expenditure is an important factor to be A considered. In re-
gard to the purposes, the Court below made the following findings and observations:
‘This litigation was forced upon the appellant and it was conducted to preserve different things, of which
the following must have been the most important: His good name, his freedom from imprisonment or
other punishment, his right to remain on the register of accountants, his social standing, his family life, his
general acceptability for income-producing employment. If one has to find a common denominator for
________________________

4 See now s 11(c) of the Income Tax Act 58 of 1962.

5 25 SATC 129.
580 Income Tax in South Africa: Cases and Materials

these, I would call it his integrity as a man . . . The power source of the appellant’s income-earning capacity
was of course his brain, his training and knowledge, and he was not defending that. It was not in danger. But
around the origin of power is a structure essential to its efficient functioning. That is his integrity and his
freedom to work at his trade. Although it is intangible, it is akin to capital, or otherwise expressed, it is of a
capital nature. It can be likened to the goodwill of a business . . . He was preserving the surrounding
circumstances essential to the proper functioning of his wit and labour, and that, too, is akin to capital assets.’
‘Expenditure of a capital nature’ is, of course, not a precise expression. It connotes a relation
between expenditure and capital close enough to draw the expenditure into the ambit of capital.
The features of that relationship are not readily definable with any precision and our Courts
have not attempted any comprehensive definition. The words ‘of a capital nature’ qualify ‘expend-
iture’. The Court below paraphrased these words as meaning ‘of a nature akin to that of capital’.
As a description of the kind of expenditure contemplated that may not be a misstatement. The
Court, however, applied this meaning, not to the expenditure, but to the concept of capital, and
found that the ‘structure’ surrounding the appellant’s income-earning capacity is akin to capital,
ie of a capital nature, and from that premise concluded that the expenditure is of a capital na-
ture. That, I consider, is begging the issue. The first question is not whether this ‘structure’ is of
a capital nature, but whether it is capital in terms of s 11(2)(b)bis. That was the question which
had to be answered affirmatively before the Court could determine whether or not the connec-
tion between the expenditure and the appellant’s capital is sufficiently close to characterise the
expenditure as of a capital nature. The answer to this question is not to be found in the phrase
‘of a capital nature’, which qualifies ‘expenditure’ and nothing else, but in the meaning of the
word ‘capital’.
In support of his finding as to the nature of this ‘structure’, the learned Judge refers to Millin v
CIR 6 and states:
‘There the wit and labour of a well-known novelist was called her capital.’
That is not correct. The relevant remarks [in the judgment] are the following:
7
In the case of COT v Booysen’s Estate, it was pointed out that income was sometimes the product of capital
invested, and sometimes was earned by the labour or wits of the recipient. Mrs Millin’s business of writing
novels was based, not upon capital, but upon her wits and labour . . . It is true that in this case no capital in
the ordinary sense of that term was employed by Mrs. Millin. It was the exercise of her wits and labour that
produced the royalties.’
The Court was not there dealing with the present issue, but with the question as to the source of
Mrs. Millin’s income. The contention had been raised that the source was in London, where the
capital asset of her copyright had been employed in the production of royalties. The Court
found that her copyright was not capital, and that the source of her income was in this country,
where her wits and labour that produced the royalties had been exercised. The remarks quoted
above may not have been essential to the decision of the case. It may be said that the real point
was that, whether or not her wits and labour constituted capital, the source of Mrs Millin’s in-
come was where they had been exercised to produce royalties, and that these remarks cannot
therefore be regarded as a binding pronouncement on the meaning of capital. They do, howev-
er, figure in the reasoning of the Court and to the extent to which they express a considered
view in relation to a contention raised, they carry some weight. They are not irrelevant to the
general question as to what may be regarded as capital for the purposes of the Act, and clearly
point away from the reasoning and conclusion of the Court below. As against this, there is the
following dictum in SIR v Watermeyer:8
‘the capital need not necessarily consist of money: a working man’s sole capital may be his capacity to
work, and his earnings are his income.’
The judgment in that case, to which I was a party, deals with the question whether an annual ex
gratia payment to the widow of a former professor at a University, was, in her hands, to be re-
garded as a receipt or accrual of a capital nature. The question whether the capacity to work may
be classed as capital was not in issue or argued. This dictum was, I consider, obiter, and I cannot
accord it any greater weight then the remarks in Millin’s case.
________________________

6 1928 AD 207.
7 1917 TPD 278.
8 1965 (4) SA 431 (A) at 437.
 Statutory deductions and allowances 581

The learned Judge also referred to a passage in Household v Grimshaw (Inspector of Taxes),9 as in-
directly applicable in the present case. There the Court was concerned with the taxability under
Schedules D and E of the Income Tax Act, 1918 (Chap. 40), of an amount received by an author
in return for surrendering his rights under a contract providing for the employment of his ser-
vices as an author. One of the contentions was that these rights were in the nature of a capital
asset. Upjohn J rejected this contention and observed:
‘The capital asset which the taxpayer has in this case is his own brain, talents and flair as an author and not
this agreement . . .’
10
To this may be added the following remark by Cardozo J in Welch v Helverling:
‘Reputation and learning are akin to capital assets, like the goodwill of an old partnership . . . For many
they are the only tools with which to hew a pathway to success. The money spent in acquiring them is well
and wisely spent. It is not an ordinary expense of the operation of a business.’
The remarks in these cases do not appear to have been made in considered elucidation of the
concept of capital in the ordinary sense as understood in the business world. They relate to stat-
utory contexts different from our own. There are, moreover, other statements which, by
11
implication at any rate, seem to point the other way. In CIR v Tellier, for instance, the issue was
the deductibility of expenses incurred by the taxpayer in an unsuccessful defence against charg-
es of statutory frauds, for which a fine and four and a half years’ imprisonment had been im-
posed, a substantial and foreseeable interference with the taxpayer’s ability to earn.
There is the following statement in the judgment of the Court:
‘The legal expenses deducted by the respondent were not capital expenditures. They were incurred in his
defence against charges of past criminal conduct, not in the acquisition of a capital asset. Our decisions
establish that counsel’s fees comparable to those here involved are ordinary business expenses, even
though a lawsuit affecting the safety of a business may happen once in a lifetime.’
In No 166 v Minister of National Revenue,12 the taxpayer, a chartered accountant, had been found
guilty of professional misconduct and suspended from practice for three years. The deduction of
costs of a successful appeal against this finding and suspension was disallowed by the Minister on
the ground that the expenditure had not been made in order to gain or produce income within
the meaning of the relevant provision in the Canadian Act. The Court decided that the expendi-
ture was properly deductible in a commercial sense.
‘The order of suspension prevented the appellant from practising as a chartered accountant and greatly
harmed the firm’s prestige. It became imperative that the expense involved be incurred in order to enable
the appellant to continue in his profession and restore the firm to the position it had formerly enjoyed.’
There is no mention here of any defence of a capital asset.
Remarks such as those in the Welch and Household case, supra, show that it is not an uncommon
thing to describe personal attributes, faculties or qualifications conferring or enhancing the
capacity to earn income, as capital assets. As a figure of speech it comes into play very naturally
in such a connection, and as such there is nothing wrong with it; but one has to guard against an
undue extension of the true meaning of capital as used in relation to expenditure of a capital
nature, in the context of s 11(2)(b)bis, by a prevalent metaphorical turn of language. Good
health, an energetic disposition, initiative, tact, a winning personality, all these and others are
qualities which would be correctly described as assets in the production of income, but it does
not follow that, for the purposes here in question, they are assets in the same sense as capital
assets. As a general proposition it cannot be said that income postulates capital, no matter how
the income is produced, so that every factor contributing to its production is to be characterized
as a capital asset. Certain rights, such as the right to use electricity, public roads or public
transport, or the right to recruit labour or to drive a car, may, in given circumstances, be indis-
pen-sable for the production of an income, but, except possibly where special contractual ar-
rangements place them in a different category, they would not, I consider, figure amongst the
capital assets of a taxpayer.

________________________

9 (1953) 2 All ER 12 at 21.

10 290 US 111 at 115.
11 383 U.S. 687.
12 54 DTC 220.
582 Income Tax in South Africa: Cases and Materials

In the absence of any indications to the contrary – and I have found none – the word ‘capital’
has to be given its ordinary meaning. Broadly speaking and for present purposes, it may be said
to connote money and every form of property used or capable of being used in the production
of income or wealth. Such a commercial or business sense is the sense in which one expects it to
be used in the context here in question, and it is to capital in that sense that, for the purposes of
s 11(2)(b)bis at any rate, expenditure is to be related in order to determine whether or not it is
expenditure of a capital nature.
I can find nothing in the components of the structure described in the judgment of the Court
below which could rank as any recognised form of property. According to the stated case, an
accountancy practice is a saleable commodity and the goodwill can be valued, but there is no
finding that the appellant, in incurring these expenses, was defending his goodwill. There is a
reference to his good name, both private and professional, but, in regard to this structure as a
whole, it is merely said that it can be likened to the goodwill of a business, and according to the
stated case the appellant’s accountancy practice did not suffer during his trial. In fact, his clients
lent him money to pay his expenses. There is also a reference to the appellant’s right to remain
on the register of accountants, and in ITC 992, supra, which the Court followed, there is mention
of the right of a professional man to practise his profession lawfully. I do not conceive of this as
property employed by the appellant to produce an income. His right to practise is the right to
enter into contracts of employment as an accountant. That right is not a commercial commodi-
ty. The requirement of registration under the Public Accountants’ and Auditors’ Act 1951, imposes
a limitation upon that right. This limitation does not alter its nature, so as to turn it into a right
of property. The control of his activities arising from registration and the power of the Public
Accountants’ and Auditors’ Board to remove his name from the register or to suspend him from
practice does not alter the fact that his income is produced by his trained wits and labour. These
are not property and do not constitute capital in the ordinary sense, as contemplated in
s 11(2)(b)bis.
In ITC 992, supra, the Court found that the appellant’s right to practise his profession lawfully is
indistinguishable from the right to a permanent directorship and director’s fees dealt with by
this Court in CIR v Hersov.13 There it was held that an amount received by Hersov, as considera-
tion for abandoning his right to a permanent directorship, was received in respect of a capital
asset and was therefore of a capital nature. The right there in question was, however, a contrac-
tual right enforceable against the company, ie a species of property. As already indicated, I am
unable to find in the matters mentioned in the judgment any relevant right of property. Hersov’s
case can accordingly not be regarded as conclusive against the appellant.
If, in spite of the absence of any finding that the purpose of the expenditure was also to defend
the appellant’s goodwill, it is to be inferred from the facts mentioned in the stated case that such
defence was in fact one of the purposes, the question as to the dominant purpose, concerning
which there is likewise no finding, would arise. In regard to that question I would have little
doubt that the immediate and dominant purpose would have been to prevent a conviction which
would in all probability have entailed a term of imprisonment and certainly lasting disgrace to
him as a man. That, rather than the possible loss of goodwill, would, I consider, have been fore-
most in his mind. It follows from what has been said above that I am unable to regard freedom
from imprisonment and from such disgrace as capital assets in the ordinary sense.
In the result, I am of opinion that the appellant’s expenditure in defending himself against the
charges preferred against him is not of a capital nature.
There remains the effect of s 12(g) upon s 11(2)(b) bis.
Section 12(g) is couched in general terms. It purports to exclude, in the case of income derived
from trade, every deduction of moneys not wholly or exclusively laid out or expended for pur-
poses of trade. In spite of its wide language, it could, for instance, hardly apply to the deduction
in respect of bad or doubtful debts under paras. (g) and (h), or of contributions to a retirement
annuity under para. (i)quat, or of the taxes mentioned in paras. (k) and (l) of s 12(2). Its gener-
ality can accordingly not be conclusive as to its applicability to deductions under s 11(2)(b)bis.
________________________

13 1952 (1) SA 485 (A).

 Statutory deductions and allowances 583

The apparent purpose, moreover, of the introduction of para. (b)bis into s 11(2), is to do away,
in the case of expenditure incurred in respect of disputes and actions at law as described in that
paragraph, with the requirement under para. (a) that, in order to be deductible from income,
the expenditure must have been ‘incurred . . . in the production of the income’. In regard to
provisions in an earlier Income Tax Act similar to those in s 11(2)(a) and s 12(g), Watermeyer AJP
expressed the view in Port Elizabeth Electric Tramway Co v CIR 14 that this require-ment is the same
one as is dealt with negatively by the prohibition of a deduction where the expenditure is not
incurred wholly or exclusively for the purposes of trade. (Cf CIR v Genn & Co (Pty) Ltd.)15 Where
moneys have in fact been expended wholly or exclusively for purposes of trade, it would be diffi-
cult, if not indeed impossible, to avoid the conclusion that the expenditure has been incurred in
the production of income. The effect of applying s 12(g) to deductions under s 11(2)(b)bis
would accordingly be to introduce into the latter provision the words ‘in the production of in-
come’, which have significantly been omitted from it; and the purpose of the omission would be
frustrated. In my view s 12(g) does not apply to such deductions.
The appeal is allowed with costs and the judgment of the Court below is altered to allow the
appeal.
VAN BLERK, JA, OGILVIE-THOMPSON, JA and WESSELS, JA, concurred in the above judg-
ment.
[Holmes JA delivered a minority dissenting judgment in which he concluded that the
taxpayer had not discharged the onus of proving that the expenditure was not of a
capital nature. Holmes JA said that the criminal charges constituted a massive attack on
the taxpayer’s integrity as a director, and conviction would probably have resulted in his
being imprisoned and would have destroyed the goodwill of his practice. Goodwill can
be valued and the practice was a saleable commodity. It was clear, said Holmes JA, that
the taxpayer was indeed defending the goodwill of his practice and that this was one of
the main purposes of his incurring legal costs.]

Notes
The current provision of the Income Tax Act which governs the deductibility of legal
expenses is s 11(c).
The issues in this case were both factual and legal. The factual issue was – what was the
taxpayer’s dominant purpose in incurring the legal expenses in question? The legal issue
was – what is meant by the words ‘capital’ and ‘of a capital nature’ in the Income Tax
Act? Steyn CJ said that the Special Court had erred in regard to the latter issue.
It was not in dispute that if the taxpayer’s dominant purpose in incurring the legal
expenses had been to defend the goodwill of his professional practice, then those ex-
penses would not be deductible, as it was clear that goodwill was a capital asset, and the
applicable provision of the Income Tax Act (see now s 11(c)) barred the deduction of
legal expenses that were of a capital nature.
The majority judgment held that (on the basis of the record of the proceedings in the
Special Court and the factual findings of that court) the taxpayer’s purpose in incurring
the legal expenses in defending himself against the criminal charges was not to protect
the goodwill of his practice, but to prevent the disgrace of conviction and imprisonment.
In his dissenting minority judgment, Holmes JA said that, on a proper interpretation
of the proceedings in the Special Court, the taxpayer was indeed defending the goodwill
of the practice.

________________________

14 1936 CPD 241 at 244.

15 1955 (3) SA 293 (A) at 298.
584 Income Tax in South Africa: Cases and Materials

It should be borne in mind that, at the time, findings of fact by the Special Court were
conclusive, and even the Appellate Division could not overturn them. Hence, it was
critical, for the purposes of the appeal, to determine what factual findings the Special
Court had made in regard to the taxpayer’s purpose in incurring the legal expenses.
The Special Court had made no explicit finding as to what the dominant purpose of
the taxpayer was in incurring the legal expenses. On appeal, the court had to draw
inferences as to what the finding of fact by the Special Court had been in this regard.
The majority judgment held that, on a proper interpretation of the record, the taxpay-
er’s purpose had been to avoid imprisonment and disgrace. Holmes JA’s minority dis-
senting judgment held that, on a proper interpretation of the record, the taxpayer’s
purpose was to defend the goodwill of his practice.
Steyn CJ, giving the majority judgment, said that the record of the Special Court
showed that the taxpayer’s immediate and dominant purpose in incurring the legal
expenses was to avoid a conviction which would have brought disgrace on him, and this,
rather than the possible loss of goodwill, would have been foremost in his mind. The
taxpayer’s personal and professional good name was not a capital asset; hence legal
expenses incurred to protect that good name were not of a capital nature.
On the issue of law in this case, Steyn CJ’s judgment is important for clarifying the
meaning of the words ‘capital’ and ‘of a capital nature’. Of particular significance is his
dictum that –
‘it is not an uncommon thing to describe personal attributes, faculties or qualifications conferring or en-
hancing the capacity to earn income, as capital assets. As a figure of speech it comes into play very natural-
ly in such a connection, and as such there is nothing wrong with it; but one has to guard against an undue
extension of the true meaning of capital as used in relation to expenditure of a capital nature, in the con-
text of s 11(2)(b)bis, by a prevalent metaphorical turn of language. Good health, an energetic disposition,
initiative, tact, a winning personality, all these and others are qualities which would be correctly described
as assets in the production of income, but it does not follow that, for the purposes here in question, they
are assets in the same sense as capital assets. As a general proposition it cannot be said that income postu-
lates capital, no matter how the income is produced, so that every factor contributing to its production is
to be characterized as a capital asset. Certain rights, such as the right to use electricity, public roads or
public transport, or the right to recruit labour or to drive a car, may, in given circumstances, be indispen-
sable for the production of an income, but, except possibly where special contractual arrangements place
them in a different category, they would not, I consider, figure amongst the capital assets of a taxpayer.’
The judge is here making the important observation that not everything that produces
income is ‘capital’ for tax purposes. For example, a winning personality may help a per-
son to earn income, but it is not, for tax purposes, a capital asset. Certain broad rights,
such as the right to recruit labour, may be indispensable to earning income, but they are
not capital assets except, perhaps, where there is some special contractual right which is
of a capital nature. Such a contractual right would be ‘property’ and thus might qualify
as goodwill.
Steyn CJ said in this regard (italics added) that, ‘Broadly speaking and for present
purposes, [capital] may be said to connote money and every form of property used or
capable of being used in the production of income or wealth. Such a commercial or
business sense is the sense in which one expects it to be used in the context here in
question’. It followed that personal attributes such as energy and tact are not capital
because they are not ‘property’.

[295]
CIR v Thor Chemicals SA (Pty) Ltd
(2000) 62 SATC 308 (N)
The taxpayer company manufactured mercury products at its factory in KwaZulu-Natal.
Several of its employees were diagnosed as suffering from gross mercury vapour poison-
ing. The Department of Manpower (as it then was) carried out an investigation which led
 Statutory deductions and allowances 585

to an inquiry in terms of the Machinery and Occupational Safety Act 6 of 1983 which was
held in the Magistrates’ Court. The inquiry was to investigate the occurrence which led
to the contamination of the employees in question.
The wide scope of the inquiry was such that there was a likelihood that the evidence
might incriminate the taxpayer and certain of its employees. The taxpayer briefed senior
counsel to represent it at the inquiry, and to protect the taxpayer and its employees by
asserting their rights against self-incrimination or the incrimination of other employees.
The inquiry lasted three days, and eleven witnesses were examined and cross-examined.
A report was made to the Attorney-General on the findings of the inquiry to enable
him to decide whether any criminal offences had been revealed and whether prosecu-
tion should ensue. Some months later, the taxpayer company and certain of its employ-
ees were charged with culpable homicide and contraventions of the Machinery and
Occupational Safety Act. The taxpayer company pleaded guilty at the criminal trial to
certain contraventions of that Act and, together with its employees, was found not guilty
on all other charges, including culpable homicide.
That inquiry gave rise to the legal costs which were in issue in this case.
The issue before the High Court was whether the legal expenses incurred by the tax-
payer company were deductible in terms of s 11(c) of the Income Tax.
SARS contended that the legal costs were of a capital nature, and thus not deductible
under s 11(c) in that the dominant purpose of the expenditure was to protect the tax-
payer’s goodwill, to retain its client base and its existence as a chemical manufacturer.
The taxpayer contended that it had incurred the legal expenses in respect of the in-
quiry in order to prevent a prosecution and had incurred the legal expenses of the
criminal trial in order to prevent a conviction.
It was held that the dispute or action in question clearly arose in the course of or by
reason of the ordinary operations undertaken by the taxpayer in the carrying on of its
trade.
It was further held that that the deductibility of legal costs such as these involve the
question whether or not they were incurred in respect of an event which constituted a
risk that was a necessary concomitant of respondent’s income-producing operations; the
court held that risk of mercury poisoning was such a risk.
The court held that, on the evidence, the legal expenses were incurred to defend the
respondent’s stance that it had not been negligent and that it had not contravened
regulations and that there had been no dominant intention to incur legal costs for the
purposes of defending the company’s goodwill.
In the circumstances, the legal expenses fulfilled the requirements of s 11(c) and were
thus deductible.
Booysen J: This appeal was directed only at the decision of the Special Court on the question of
the deduction in respect of legal costs claimed by the respondent in respect of its 1992 tax year.
The attack on the court’s decision that such legal costs were legitimately deducted is founded on
the contention that the court erred by finding that the costs were connected to the income earn-
ing operations of the taxpayer, whereas it ought to have found that such legal expenses were of a
capital nature and therefore not deductible . . .
The enquiry which gave rise to the legal costs centred around the respondent’s ‘operation’, how
it was run, and these very same questions were dealt with at the subsequent trial.
The death of the two workers, and the poisoning of a third was accordingly, at a factual level, a
failure in the conduct of the respondent’s manufacturing operations. There is no evidence to
support an attack on the finding of the Special Court that ‘there can be no doubt that the fail-
ures which gave rise to the alleged contraventions were part and parcel of the taxpayer’s oper-
ations.’ In my view the dispute or action clearly arose in the course of or by reason of the
ordinary operations undertaken by the respondent in the carrying on of its trade. It is against
586 Income Tax in South Africa: Cases and Materials

the very obvious and strong finding on that score that the appellant chooses to contend that the
limitation contained in s 11(c)(i) of the Act, that the amount should not be ‘of a capital nature’,
applies to this case . . .
[I]t is necessary to set out the provisions of ss 11(a) and 11(c). The material portions of the sec-
tions read as follows:
‘Section 11. General deductions allowed in determination of taxable income.
‘For the purpose of determining the taxable income derived by any person from carrying on any trade
within the Republic, there shall be allowed as deductions from the income of such person so derived –
(a) expenditure and losses actually incurred in the Republic in the production of the income, provided
such expenditure and losses are not of a capital nature;
(b) . . .
(c) any legal expenses . . . incurred by the taxpayer . . . in respect of any . . . dispute or action at law aris-
ing in the course of or by reason of the ordinary operations undertaken by him in the carrying on of
his trade:
Provided that the amount to be allowed under this paragraph in respect of any such expenses shall be lim-
ited to so much thereof as –
(i) is not of a capital nature;
[T]he question of whether or not the expenditure on legal fees was of a capital nature falls to be
decided against the background of, and in accordance with, the principles enunciated in the
16
following extracts from the judgment of Watermeyer CJ in New State Areas Ltd v CIR:
‘. . . [T]he true nature of each transaction must be enquired into in order to determine whether the expendi-
ture attached to it is capital or revenue expenditure. Its true nature is a matter of fact and the purpose of
the expenditure is an important factor; if it is incurred for the purpose of acquiring a capital asset for the
business, it is capital expenditure, even if it is paid in annual instalments; if, on the other hand, it is in
truth no more than part of the cost incidental to the performance of the income-producing operations, as
distinguished from the equipment of the income-producing machine, then it is revenue expenditure, even
if it is paid in a lump sum’ . . .
The approach taken by the learned Judge in the Special Court is with respect entirely correct.
When one is dealing with legal costs such as these, it is a question of whether or not they were
incurred in respect of an occurrence which was the realisation of a risk which was a necessary
concomitant of the respondent’s income-producing operations. The learned judge found that
the risk of poisoning was such a risk and there is simply no factual basis upon which to come to
any other conclusion. Just as the cost of the compressed air fed into the pipeline to the unfortu-
nate workers was a legitimate cost of the income-producing activity, so was the consequence of
the failure, or apparent failure, of the operational safety procedures of which that air and air-line
formed a part.
The argument for the appellant . . . was not aimed at displacing the obvious link between the
risk which eventuated and the income earning operations of the respondent, but rather to sug-
gest that, notwithstanding that link, the true or dominant motive for incurring the legal costs was
to protect the image, goodwill and reputation of the respondent. The appellant sought to estab-
lish a supervening connection between the legal costs and capital. Before us, Mr Aboobaker,
relying on Smith v SIR,17 submitted that the dominant purpose of the expenditure was to protect
its goodwill, to retain its client base and its existence as a chemical manufacturer.
. . . It is quite clear on the evidence that the legal fees were incurred to defend the respondent’s
stance that it had not been negligent and that it had not contravened regulations . . . The evi-
dence in my view excludes an argument that there was a supervening or dominant intention to
incur legal costs for the purposes of defending the respondent’s goodwill.
As Mr Olsen has pointed out the passages in the Smith judgment upon which Mr Aboobaker
relies are contained in the minority judgment. In the majority judgment Steyn CJ stated:
‘If . . . the purpose of the expenditure was also to defend the appellant’s goodwill . . . the question as to
the dominant purpose . . . would arise. In regard to that question I would have little doubt that the imme-
diate and dominant purpose would have been to prevent a conviction which would in all probability have
entailed a term of imprisonment and certainly lasting disgrace to him as a man. That, rather than the pos-
sible loss of goodwill, would, I consider, have been foremost in his mind. It follows from what has been
________________________

16 1946 AD 610.
17 1968 (2) SA 480 (A) at 493H and 494D.
 Statutory deductions and allowances 587

said above that I am unable to regard freedom from imprisonment and from such disgrace as capital assets
in the ordinary sense.’
. . . I am satisfied on the evidence that the possible loss of goodwill was not foremost in the
minds of the respondent’s officers.
Mr Aboobaker further submitted though that the Court a quo erred in concluding that the risk
of poisoning was a necessary concomitant of the tax-payers operations as it seldom occurred. It is
clear from the evidence that the risk of poisoning was present and it is no answer to say that
cases of poisoning seldom occurred.
Mr Aboobaker also submitted that it had been necessary for the respondent to establish that
poisoning could and did occur without negligence on its part. In the absence of such evidence,
the argument went, a sufficiently close connection between the risk of poisoning and the ordi-
nary trading operations was not established . . . [I]t is an argument without substance. . . The
proposition with respect has only to be stated to be rejected. It has to be borne in mind that we
are in this instance not dealing with a deduction in terms of s 11(a) but in terms of s 11(c). It is
furthermore of importance to bear in mind that the proper approach to the interpretation of
s 11(c) is that which was stated in SBI v Raubenheimer 18 in which it was held . . . that – [translation]
‘since the words “any costs . . . in respect of any dispute or action at law” in paragraph (c) . . . are amena-
ble to a narrow meaning as well as a wide one, they must be interpreted contra fiscum’.
. . . Mr Aboobaker also relied on the case of Joffe and Co (Pty) Ltd v CIR in which the taxpayer, an
engineer, sought to deduct damages that he had to pay for negligently causing the death of a
plumber who died when a cantilever designed by him collapsed on him. As was pointed out by
the learned judge in the court a quo there was nothing in the stated case in Joffe’s case which
suggested that the negligence with which that case was concerned was a concomitant of the
appellant’s trading operation whereas in this case the evidence was clear that the risk of pollu-
tion was a concomitant of the taxpayer’s operations.
The judgment in Joffe’s case is obviously no authority for the proposition that legal expenses
could only be deducted in terms of s 11(c)(i) if the respondent established that there had been
no negligence on its part.
The appeal is dismissed with costs.
HURT J and THERON J concurred.

Notes
In order to be deductible in terms of s 11(a), expenditure must have been incurred ‘in
the production of income’. The decision in Joffe 19 was concerned with the meaning of this
phrase and the judgment in that case is irrelevant to the interpretation of s 11(c). This is
because there is no requirement in s 11(c) that the expenditure must have been incurred
in the production of income; all that needs to be shown is that the expenditure on legal
costs was incurred ‘in respect of any . . . dispute or action at law arising in the course of or by
reason of the ordinary operations undertaken by him in the carrying on of his trade’, and that such
expenditure was not of a capital nature.
The debate in the judgment in the present case as to whether the legal expenses were
caused by ‘the realisation of a risk which was a necessary concomitant of the respond-
ent’s income-producing operations’ is, with respect, out of place. These are considera-
tions relevant to a claim for deduction in terms of s 11(a), such as in Joffe’s case and the
issue of whether the expenditure was incurred ‘in the production of income’.
In the context of s 11(c) the sole question is whether the legal expenditure was in-
curred ‘in respect of any claim, dispute or action at law arising in the course of or by
reason of the ordinary operations undertaken in the carrying on of trade’. The question
of what is and is not an inherent or concomitant risk is irrelevant.
________________________

18 1969 (4) SA 314 (A).

19 Joffe and Co (Pty) Ltd 1946 AD 157, 13 SATC 354.
588 Income Tax in South Africa: Cases and Materials

The court rejected the argument that legal expenses were deductible in terms of
s 11(c) only if the taxpayer’s conduct which gave rise to the expenses had not been
negligent.
On the facts of this case, it was clear that the dispute had arisen in the course of the
ordinary operations involved in the carrying on of his trade. The major issue was whether
the expenditure was of a capital nature.
In this context, as in many others, a taxpayer may incur expenditure for several pur-
poses. It was held in Smith v SIR 20 that, in such circumstances, the court will have regard
to the taxpayer’s dominant purpose.
If, in this case, the taxpayer company’s dominant purpose in incurring the legal expens-
es had been to protect its company’s goodwill or image, or to prevent its business from
being closed down, the expenditure would have been of a capital nature, since there is no
doubt that the expenses would then have been incurred to protect capital assets.
The court held that, on the evidence, there was no dominant purpose incurring the
legal costs in order to defend goodwill.
It was held, in Smith’s case that where a taxpayer incurs legal expenses in order to avoid
the ‘disgrace’ of a conviction, this would not make the expenditure ‘of a capital nature’,
as the court said that it was ‘unable to regard freedom from imprisonment and from
such disgrace as capital assets in the ordinary sense.’

§2.2 Repairs: section 11(d)

Section 11(d) permits the deduction of
‘expenditure actually incurred during the year of assessment on repairs of property occupied for the pur-
pose of trade or in respect of which income is receivable, including any expenditure so incurred on the
treatment against attack by beetles of any timber forming part of such property and sums expended for
the repair of machinery, implements, utensils and articles employed by the taxpayer for the purposes of
his trade.’
It used to be arguable that s 11(d) was at least partially redundant, in that the some
expenditure covered by it would be deductible in any event under s 11(a).21 The argu-
ment was based on the proposition that the question whether expenditure constitutes a
deductible ‘repair’ or a non-deductible ‘improvement, renewal or reconstruction’ sub-
stantially replicated the inquiry whether expenditure is of a revenue or a capital nature.
Certainly, s 11(a) is wider in scope than s 11(d) and expenditure which did not qualify
under the latter was sometimes permitted to qualify for deduction under the former –
see for example [308] ITC 605 where such a claim might have been successful.
However, the enactment of s 23B(3) has had the result that, as from 1 January 1990,
income which is deductible under s 11(d) cannot qualify for deduction under s 11(a).
Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal is reconstruc-
tion of the entirety or what is substantially the entirety.

[296]
Lurcott v Wakely and Wheeler
[1911] 1 KB 905
Fletcher Moulton: For my own part, when the word ‘repair’ is applied to a complex matter like a
house, I have no doubt that the repair includes the replacement of parts. Of course, if a house
had tumbled down, or was down, the word ‘repair’ could not be used to cover rebuilding. It
________________________

20 1968 (2) SA 480 (A) at 493H and 494D.

21 This has been explicitly recognised in Australia. See for example, Cooper G S, Krever, R E and Vann, R J,
Income Taxation, Commentary and Materials (Law Book Company, 1989) at 482.
 Statutory deductions and allowances 589

would not be apt to describe such an operation. But, so long as the house exists as a structure,
the question whether repair means replacement, or, to use the phrase so common in marine
cases, substituting new for old, does not seem to me to be at all material. Many, and in fact most,
repairs imply that some portion of the total fabric is renewed, that new is put in place of old.
Therefore, you have from time to time, as things need repair, to put new for old.’
Buckley LJ: ‘Repair’ and ‘renew’ are not words expressive of a clear contrast. Repair always in-
volves renewal; renewal of a part; of a subordinate part. A sky-light leaks; repair is effected by
hacking out the putties, putting in new ones, and renewing the paint. A roof falls out of repair;
the necessary work is to replace the decayed timbers by sound wood; to substitute sound tiles or
slates for those which are cracked, broken or missing; to make good the flashings, and the like.
Part of a garden wall tumbles down; repair is effected by building it up again with new mortar,
and, so far as necessary, new bricks or stone. Repair is restoration by renewal or replacement of
subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the en-
tirety, meaning by the entirety not necessarily the whole but substantially the whole subject-
matter under discussion. The question of repair is in every case one of degree, and the test is
whether the act to be done is one which in substance is the renewal or replacement of defective
parts, or the renewal or replacement of substantially the whole.

Notes
Buckley LJ’s dictum, that the difference between a ‘repair’ (expenditure on which is
deductible) and a ‘reconstruction or renewal’ (expenditure on which is not a ‘repair’
and is not deductible) does not depend on the nature of the work done, but on whether
the renewal or reconstruction was effected to ‘the entirety’ or a ‘subsidiary part’ has been
repeated in many subsequent decisions. The difficulty with this formulation is that it
merely exchanges one inquiry (is the work in question a repair?) for another (does the
work relate to the entirety or to a subordinate part?), which is no easier to answer. Nor
does this dictum give any guidance as to what principles are applied in determining what
is an ‘entirety’ and what ‘a subordinate part’. Moreover, even where the replacements
and renewals relate to a subsidiary part of the entirety, they will not necessarily constitute
‘repairs’ – see for example [300] Heron Investment.
The English courts have approached the question of what constitutes the ‘entirety’ by asking what
physically constitutes the structure on which the work has been done; the Scottish courts have adopted
the approach of an economist and have inquired – what is the profit-earning undertaking? The
English approach is to be preferred.

[297]
ITC 855
(1957) 22 SATC 195
The taxpayer, a railway company which operated over 316 miles of track, relaid some
three miles. When first constructed in 1934, the track had been laid with 40 lb rails.
These had deteriorated and it had become necessary to replace them. Meanwhile, the
company had decided to introduce 60 lb rails into its system, and to embark on a pro-
gram to relay 60 miles with these heavier rails, which would eventually be used through-
out its system. This formed part of a plan to modernise and increase efficiency by using
heavier engines which could haul heavier loads. The heavier rails required heavier
accessories, such as fish-plates, clips, sleepers, nuts and bolts. As a result, relaying with the
heavier rails necessitated new materials throughout.
Issue: on the facts, was the expenditure incurred on ‘repairs’ and therefore deductible?
Held: the expenditure constituted an ‘improvement’, not a repair’ and was not deduc-
tible.
Macdonald J: If the track had been replaced by the new before it was in need of repair and simp-
ly because of the desire to modernize in the interest of efficiency there could be no doubt that
590 Income Tax in South Africa: Cases and Materials

the whole of the expenditure would rank as capital expenditure. In this case, however, I have
found as a fact that the old track was in need of repair when it was replaced, and the question
which arises for decision is whether the expenditure ceases in part to be capital expenditure
because the implementation of a programme of improvement coincided with the need for re-
pair. [The judge here examined several cases and continued:]
. . . It will be seen that the weight of authority is very much against dividing expenditure actually
incurred on improvements into two amounts – one representing the estimated cost which would
have been incurred if repairs only had been carried out and the other the additional cost in fact
expended in order to carry out the actual work.
Mr Ettlinger submitted, however, that . . . it cannot be the law that because an element of improve-
ment is present the taxpayer is to be disqualified from obtaining a deduction. I agree . . . that the
existence of an element of improvement does not necessarily disqualify a taxpayer from obtain-
ing a deduction. The point at which work ceases to be repair and crosses the borderline into the
category of improvement is not always easy to determine.
If, notwithstanding the existence of an element of improvement, the work is held to constitute a
repair, then the total cost of the work is deductible and no adjustment should be made for the
estimated additional cost occasioned by the element of improvement; conversely, if the work is
held to be an improvement then the whole of the cost is to be regarded as capital and no deduc-
tion should be allowed in respect of any part of it on the basis that such part represents the cost
of the repair which would have been necessary if the work of improvement had not been done
instead.
The question whether in any particular case work constitutes repair or improvement is and must
always be a matter of degree . . . . In deciding whether a repair has been effected, recent cases
(see the judgments of Donovan J in Phillips v Whieldon Sanitary Potteries Ltd 22 and Ingram P in ITC
62623 emphasize that the various tests which have been suggested from time to time are not ex-
haustive and are merely of assistance in the general inquiry. The tendency in many English and
Scottish decisions to treat the two questions – What is the entirety? Has the entirety been recon-
structed? – not merely as guides but more in the nature of fixed rules of law has led to a wide
divergence of views between the various courts on the meaning of ‘repair’. The reason for this is
that for the difficult question – What is a ‘repair’? – has been substituted the even more difficult
question – What constitutes the ‘entirety’? A study of the English and Scottish cases discloses that
the English courts in considering what is the entirety have approached the problem very much
as an architect or builder would do and have inquired – What physically constitutes the separate
building or structure on which the work in question has been done? Scottish courts, on the oth-
er hand, have adopted more the approach of an economist and have inquired – what is the
commercial or industrial undertaking? Thus in Samuel Jones & Co Ltd v CIR 24 the following pas-
sage occurs:
‘It is quite impossible to describe this chimney as being in the words of Rowlatt J the “entirety” with which
we are concerned. It is doubtless an indispensable part of the factory, doubtless an integral part; but none
the less a subsidiary part, and one of many subsidiary parts, of a single industrial profit-earning undertaking.’
The word ‘repair’ in its ordinary sense has a physical connotation and it seems to me, with re-
spect, that the English approach is correct. To speak of the ‘repair’ of an industrial profit-
earning undertaking is to give that word a highly artificial meaning. I agree with Mr Rathouse that
the ‘entirety’ test is singularly unhelpful in the present case and it is necessary for me to decide
in all the circumstances whether the word ‘repair’ or the word ‘improvement’ is appropriate to
describe the work carried out by appellant.
I find that the whole of the cost was incurred in improving the track and that it does not assist
appellant that a substantial part of the same cost would have been incurred if a repair instead of
an improvement had been carried out. My finding that the work done constitutes an improve-
ment rests on the following facts which I find to be proved –
(i) The 3 1/4 miles of track relaid form part of a programme to re-lay 60 miles of track;
(ii) the 3 1/4 miles were relaid with new material as will the remaining 56 3/4 miles;
________________________

22 33 TC 213.
23 14 SATC 530.
24 32 TC 513 at 518.
 Statutory deductions and allowances 591

(iii) the new track is physically different from the old in that the rails weigh 50 per cent more
and the accessories are correspondingly heavier;
(iv) the new track will enable heavier engines to be used and heavier loads to be hauled;
(v) appellant regards 40 lb rails as obsolete and eventually 60 lb rails will be introduced
throughout appellant’s railway system.

[298]
B v COT Southern Rhodesia
1958 (1) SA 172 (SR), 21 SATC 353
Appellant, a medical practitioner, purchased in 1946 a certain property in partnership
with H, another medical practitioner. The premises, although originally designed as a
residence, were used by the partners as consulting-rooms. The price paid for the proper-
ty was £3 400. In 1950 a third medical practitioner was admitted to the partnership and
the property was transferred to the new partnership at the same figure. Shortly after-
wards the appellant purchased their interests in the property from his partners for the
sum of £3 500. During the period for which the property had been occupied by the
partnership, it had much deteriorated in condition, and at the time when appellant
acquired it as sole owner it was apparent that extensive repairs were required. An exam-
ination by an architect revealed that the walls were badly cracked, the flooring ant-eaten,
and the roof beams in need of replacing.
In view of the cost of effecting the necessary repairs, appellant decided upon a large
scheme of reconstruction, which converted the building from three suites of consulting-
rooms to five. In the course of these operations about half the original walls were pulled
down and rebuilt, many in positions other than they had originally occupied, while doors
and windows were placed in new positions. Only one room in the original building was
entirely unchanged. In addition the roof was reconstructed on a new plan and some
60 per cent of the timber replaced, a large portion of the flooring replaced and the
electric wiring entirely replaced as the old installation did not conform with existing
municipal regulations.
The total cost of the reconstruction was £12 184 and appellant claimed that of this
expenditure £2 000 could be allocated to necessary repairs of the original building which
should be allowed as a deduction in determining the taxable income derived by him
from the ownership of the building.
Issue: was the expenditure in question incurred in respect of ‘repairs’?
Held: in the engative. The expenditure was of a capital nature for substantially recon-
structing the whole building.
Beadle J: The law relating to this subject was clearly laid down as early as 1911 by Buckley, Lord
Justice, as he then was, in the case of Lurcott v Wakely and Wheeler.25 [The judge then quoted the
extract from the case, reproduced above, and continued:]
That is the law as I see it which is applicable to the facts of this particular case. This case can
therefore be approached from this angle. Did this operation which was undertaken by the appel-
lant, so far as it affected the old building, constitute a reconstruction of substantially the whole
of the old building? If it did, that ends the inquiry, the operation was one of a capital nature. If it
did not, then other issues fall for consideration.
It will be seen so far as this particular point is involved, the issue is purely one of fact, and to a
very large extent one of degree. To appreciate the extent of the alterations which were made to
the old building it is necessary to compare the plan of the old building as it existed before these
________________________

25 [1911] 1 KB 905 at 923.

592 Income Tax in South Africa: Cases and Materials

operations were carried out . . . with the plan of the finished building . . . [The learned judge
analysed the evidence in this regard.]
...
Some idea of the magnitude of the alterations that have been effected can be gained by some
comparison of the relative costs . . . There is some difference of opinion as to whether or not it
would have been cheaper to have demolished the old building entirely and reconstructed the
present building on its present plan and design . . . In my view of this evidence it is apparent that
it is very difficult to say whether any saving was effected or not. The probabilities seem to me to
be that there was very little in it indeed. It would have been almost as cheap, if not quite as
cheap, to have pulled down the whole of the old building and to have reconstructed the build-
ing exactly to the same design as it now is. The reason why this particular method of reconstruc-
tion was followed appears to be that at this time accommodation was very hard to come by, and
that the doctors then occupying the building wished to remain in occupation during the course
of reconstruction, and this necessitated leaving up portions of the old building in which they
could live while the major operation was being carried out.
Viewing this undertaking as a whole, as I think it should be viewed, I am satisfied that what has
been undertaken did involve a reconstruction of substantially the whole of the old building. Mr
Lewis has suggested that the money which has been expended on this operation might be divi-
ded up into sums which represent actual repairs to the old building and sums which did not
represent actual repairs, and he suggests that the amount of £2 000 falls into the category of
sums which might be isolated from the general expenditure and allocated to actual repairs. This
is an operation which as I have said should be viewed as a whole. The whole operation was clear-
ly one of complete reconstruction, and in these circumstances I do not think it is permissible to
isolate individual items of expenditure and attempt to allocate some to repairs to the old build-
ing. The old building was substantially reconstructed and renewed.
. . . On the authority of Buckley LJ in Lurcott’s case to which I have already referred, I am satisfied
that . . . the money outlaid by the appellant represents outlay of a capital nature, in substantially
reconstructing the whole building.

Notes
This decision lays down the important principle that the work must be viewed as a whole.
If, viewed as a whole, it constituted reconstruction, then none of the individual items of
expenditure can be claimed as a repair. Note also that it regards the concept of ‘recon-
struction’ as synonymous with expenditure ‘of a capital nature’.

[299]
CIR v African Products Manufacturing Co Ltd
1944 TPD 248, 13 SATC 164
The taxpayer company carried on the business of starch and glucose manufacturers. The
roof over the kilns at its factory was in a bad state of repair. The original roof was con-
structed of Baltic deal framed roof trusses, but the timber had been damaged by heat,
and the roof had become dangerous. The taxpayer decided to put a new roof over the
kilns.
The standard material for roofing was Baltic deal, but owing to the war this was unpro-
curable, and local timber was unsuitable because it was not seasoned and inclined to
warp. On the advice of the architect, the new roof was made of reinforced concrete,
supported by steel joists instead of wooden trusses. A wooden roof would in fact have
been preferable because the manufacturing process corroded concrete and metals. A
witness for the company was not prepared to say that the new roof was an improvement.
The expenditure on the new roof was £873. The taxpayer claimed to deduct £700,
which was the expenditure that would have been incurred if the roof had been replaced
 Statutory deductions and allowances 593

in its original form. The appellant conceded that the difference represented the value of
the improvement.
Issue: was the expenditure incurred by the taxpayer on installing the new roof at the
factory a ‘repair’?
Held: in the affirmative. On the facts, the taxpayer had restored the roof to its prior
condition, and the fact that different materials were used did not render the work an
‘improvement’.
Barry JP: The question of law to be considered by this Court is whether the facts found by the
Special Court are such as to bring the case within the meaning of ‘repairs’ in s 11(2)(c). [The
26
judge then quoted from the judgments in Lurcott v Wakely and Wheeler.]
...
. . . [A]lthough the Special Court has not found the extent to which the kilns are subsidiary to
the factory, the Court has found that the kilns form part of the factory. I think that it follows that
the erection of the roof with concrete over the kilns is not reconstruction of substantially the
whole of the factory or even of that portion containing the kilns . . .
...
Applying the principles above set out to the facts as found by the Special Court, the company was
restoring the roof to its original condition and the fact that it used other material than that orig-
inally used was not for the purpose of improvement but for the purpose of restoring the roof to
the condition in which it was originally.

Structural alterations to a rented building in order to meet the requirements of a tenant are of a
capital nature and are not deductible under s 11(a).

[300]
Heron Investments (Pty) Ltd v SIR
1971 (4) SA 201 (A), 33 SATC 181
The taxpayer, a private company, derived rental income from letting fixed property. It
owned a stand in central Johannesburg, on which Price Forbes House was erected in
1956. Price Forbes leased three floors of the building under a ten year lease. Two years
before the lease was to expire, Price Forbes asked the taxpayer to be released from the
contract. Anxious not to lose Price Forbes as a tenant, the taxpayer agreed to make
alterations to the building to suit Price Forbes, and a new lease was entered into for a
further ten years. The alterations consisted of the creation of larger and more modern
offices by removing certain of the brick inner walls and replacing them with demounta-
ble partitions. Changes were made to the electric lights, existing fittings were recon-
structed, and a new linoleum floor was installed. Double windows and air conditioning
units were installed, and executive offices were panelled. The taxpayer claimed the
expenditure as a deduction under s 11(a).
Issue: was the expenditure deductable under s 11(a)?
Held: in the negative. The expenditure was of a capital nature.
Ogilvie-Thompson CJ: In the course of delivering the Special Court’s judgment, . . . Galgut J
remarked that:
‘There is no doubt on all the evidence that the alterations in this building constitute an improvement,
even though they may not have added to the actual value of the building.’
The learned President also said the following:
‘The evidence indicates that it is quite a usual procedure for a building owner when erecting his building
to arrange the accommodation on certain floors to suit the prospective tenant . . .

________________________

26 [1911] 1 KB 905.
594 Income Tax in South Africa: Cases and Materials

The statement of case also contains the following passage, viz:

‘It is not unusual for a landlord to effect alterations to suit a tenant whom he may wish to have or retain.’
In support of the contention that the expenditure in issue was of a revenue character, counsel
for appellant stressed this last-cited passage in the stated case, and emphasised that . . . the alter-
ations, on the Special Court’s findings, neither increase the value of the building nor enhance its
income earning potential. These features, said counsel for appellant, show the expenditure in
question to be of a recurrent nature; and he went on to submit that the alterations in issue . . .
neither added anything to, nor equipped, appellant’s income earning structure, but was merely
incidental to the performance of appellant’s income producing operations. The expenditure, so
the submission concluded, did not bring into existence any asset or advantage for the enduring
benefit of appellant’s trade, but was incurred in working appellant’s source of profit.
I am unable to regard the above-cited passage, relied upon by counsel for appellant, as establish-
ing that it is a normal incident of the business of letting business premises for landlords to effect
alterations of the magnitude of those presently under consideration in order to acquire new, or
to placate existing tenants . . .
[C]ounsel for appellant argued that there had been no addition whatever to the structure of the
building. While this is in a sense quite true, the leased premises as thus newly equipped remain, of
course, in the ownership of appellant, and sight must not be lost of the modernisation aspect. If
and when Price Forbes vacate, there will presumably be tenants who require – as Price Forbes re-
quired – offices equipped in this manner . . . Nevertheless, assuming in favour of appellant that the
alterations in no respect whatever increased the value of the building or enhanced its income earn-
ing potential, that assumption is not, in my opinion, of any particular assistance to appellant. For it
is clear that appellant’s primary purpose in causing the alterations to be made was to retain, in the
tenants’ market then prevailing, Price Forbes as its lessee under the new lease for a further ten
years . . . The expenditure incurred by appellant in effecting the stipulated alterations was made
‘once and for all’, and there was a complete absence of any element of recurrence in relation to
this expenditure . . .
Under all the circumstances, the expenditure in issue cannot, in my opinion, rightly be said to
form part of the performance of appellant’s income earning operations. I can find no sufficient-
ly close link (see CIR v Genn & Co (Pty) Ltd)27 between that expenditure and such last-mentioned
operations as to render the expenditure part of the working of appellant’s source of profit. On
the contrary, the true view appears to me to be that appellant incurred the expenditure in ques-
tion in order to equip its income earning structure – the portion of the building leased to Price
Forbes – in order to obtain the rental income paid by Price Forbes for the substantial period of
the new lease.
. . . In my opinion, the advantage so sought and obtained by appellant was, in relation to appel-
lant’s business of letting this building, an ‘advantage for the enduring benefit of a trade’ within the
meaning of that oft-quoted expression as explained in SIR v John Cullum Construction Co (Pty) Ltd.28
The various considerations I have mentioned lead, in my opinion, irresistibly to the conclusion
that the expenditure incurred by appellant in making the alterations in issue was of a capital
nature.

Notes
The taxpayer in this case did not even attempt to argue that the alterations to the build-
ings were ‘repairs’ which qualified for deduction under s 11(d). Instead the taxpayer
claimed under s 11(a), with the result that deductibility turned on whether or not the
expenditure was of a capital nature. Why did the taxpayer conclude that the expenditure
was not a repair? After all, the work that was done related not to ‘the entirety’ (the
building), but to subsidiary parts – the inner walls, the air-conditioning, the floors, etc.
The reason is that the test propounded by Buckley LJ in [296] Lurcott v Wakely and
________________________

27 1955 (3) SA 293 (A) at 299.

28 1965 (4) SA 697 (A) at 712-714.
 Statutory deductions and allowances 595

Wheeler is incomplete; in addition to involving a subordinate part of a larger entirety,

‘repair’ presupposes a deterioration or dysfunction in the article in question. See for
example [301] ITC 626 and ITC 1264 39 SATC 133.

New work, which reinforces an unimpaired original structure is not a repair.

[301]
ITC 626
(1946) 14 SATC 530
The taxpayer owned a rent-producing block of flats. These were built on a steep slope and
there was a danger of landslides. The municipality drew to his attention that the existing
retaining walls were in a dangerous condition, and required him to rehabilitate them. This
he did by constructing a concrete beam across the face of the existing retaining wall,
supported at intervals by buttresses. He claimed a deduction for the expenditure incurred
on these works as a ‘repair’.
Issue: did the work in question constitute a ‘repair’?
Held: in the negative. It was new work, which was in addition to the pre-existing work,
not a repair thereof.
Ingram KC: On these facts it was contended on behalf of the appellant that the expenditure
incurred on this work should in terms of s 11(2)(c) rank for deduction as being expenditure
incurred on the repairs of property occupied by him for the purpose occupied by him for the
purpose of his trade.
It is clear that unless the expenditure falls within the provisions of that section the deduction is
inadmissible.
29
In Income Tax Case No 4052 the Court had occasion to investigate the principles governing the
right of deduction or otherwise of expenditure under the head of ‘Repairs’ in the light of the
decisions of the Superior Courts and of the English cases. In that case the Court stated these
principles as follows:
‘(1) Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal as distinguished
from repair is reconstruction of the entirety, meaning by the entirety not necessarily the whole but sub-
stantially the whole subject matter under discussion.
(2) In the case of repairs effected by renewal it is not necessary that the materials used shall be identical
with the materials replaced.
(3) Repairs are to be distinguished from improvements. The test for this purpose is – has a new asset been
created resulting in an increase in the income-earning capacity? Or does the work undertaken merely
represent the cost of restoring the asset to a state in which it will continue to earn income as before?’
These tests are however not exhaustive. They are merely of assistance to the general enquiry.
Thus under test (3) the fact that a new asset has been created, resulting in an increase in the
income-earning capacity may negative the conclusion that the work done constitutes repairs.
Similarly under test (2) the fact that different materials are used does not necessarily negative
that the work done may not figure under the head of repairs. In each case the Court must deter-
mine whether or not what has been done actually constitutes ‘repairs’ in the ordinary meaning
of the term, and the extent to which it falls under that head.
...
The first test laid down as above enunciates that ‘Repair is restoration by renewal or replacement
of subsidiary parts of a whole’. From the use of the words ‘restoration by renewal or replace-ment’
it is a necessary implication that the original structure has become impaired and that the work
done is to restore by repair that structure . . .
Now in the present case the object for which the walls were erected was to prevent the slipping
down or subsidence of the steep slope upon which the flats were situated. This objective had
________________________

29 Since reported as ITC 617 14 SATC 474.

596 Income Tax in South Africa: Cases and Materials

been achieved or had been attempted to be achieved by the erection of retaining walls which in
process of time no longer served their purpose. The walls were regarded by the Council as being
in danger of collapsing as not being strong enough to give the necessary support. They needed
to be strengthened. The taxpayer might have replaced them by new walls, possibly of different
materials. Instead of doing so on the advice of his architect he supported the walls themselves by
the addition of buttresses linked by additional beams. This was new work, not so much in substi-
tution for the old, but in addition thereto. There was no repair to the walls themselves but a
reinforcement of the original structure. In addition the embankment above the walls was cov-
ered with a stone-pitching to prevent erosion. This again was new work . . .
. . . The method adopted by the taxpayer to ‘rehabilitate’ the walls was not however one of repair-
ing them. They failed to fulfil the purpose for which they were erected, and the taxpayer em-
ployed other means to that end. The work done cannot be regarded as repairs to the original
work, which still remains in more or less the same condition as it was before the new work was
completed.
It was argued that there was no creation of a new asset resulting in an increase in the income-
earning capacity. This may not be the case, but as pointed out above this is merely a subsidiary
test and cannot transform into ‘repairs’ work which falls under another category.

The periodic renewal of materials as they wear out by use is deductible expenditure, both under the
general deduction formula and under the specific deduction for repairs.

[302]
Rhodesia Railways Ltd v Collector of Income Tax, Bechuanaland Protectorate
1933 AC 368 (PC), 6 SATC 225
The taxpayer owned a railway line, 588 miles long, which ran between Vryburg and
Bulawayo, thus partly in South Africa and partly in the Bechuanaland Protectorate.
During the tax year, the taxpayer claimed a deduction of £252 174, which the revenue
authorities disallowed. The track had been originally laid down in 1896 and was there-
after maintained. During the tax year in question, the revenue authorities did not con-
test the taxpayer’s claim to deduct £41 223 for normal maintenance, consisting of the
occasional replacement of a split rail or a bad sleeper. The revenue authorities however
disallowed the taxpayer’s claim for expenditure incurred where the track was in a worn
and dangerous state and required heavy repairs, beyond what could be dealt with by
routine maintenance. This work involved the laying of new sleepers, new rails and new
fastenings to 33 miles of track. On a further 40 miles of track, the old rails were relaid
but new sleepers were put in, some steel, some wooden. Of the 394 miles of track in the
Protectorate, 74 miles were thus treated. The taxpayer did not claim a deduction of the
cost of additional sleepers laid. The result of the renewals, apart from the additional
sleepers, was to bring the track back to normal condition, and the line as renewed was
not capable of giving more service than the original line.
Issue: was the expenditure on the non-routine maintenance deductible under the gen-
eral deduction formula or as a ‘repair’; alternatively, was it not deductible at all?
Held: the expenditure in question satisfied the tests for deductibility in both of these
provisions.
Lord Macmillan: In their Lordships’ opinion the sum in question was within the mean-ing of para
(a) an outgoing ‘not of a capital nature’ and was [in addition] ‘expended for the repairs of proper-
ty occupied for the purpose of trade or in respect of which income is receivable’ within the mean-
ing of para (b).30 As was pointed out by Buckley LJ (as he then was) in Lurcott v Wakely and Wheeler,31
‘repair’ and ‘renew’ are not words expressive of a clear contrast,’ and ‘repair is restoration by

________________________

30 Para (a) corresponded substantially to the present s 11(a) and para (b) to the present s 11(d) of the
Income Tax Act.
31 [1911] 1 KB 905, 923, 924.
 Statutory deductions and allowances 597

renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is

reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially
the whole subject-matter under discussion.’ The periodical renewal by sections of the rails and
sleepers of a railway line as they wear out by use is in no sense a reconstruction of the whole railway
and is an ordinary incident of railway administration. The fact that the wear, although continuous,
is not and cannot be made good annually, does not render the work of renewal when it comes to
be effected necessarily a capital charge. The expenditure here in question was incurred in conse-
quence of the rails having been worn out in earning the income of previous years on which tax had
been paid without deduction in respect of such wear, and represented the cost of restoring them to
a state in which they could continue to earn income. It did not result in the creation of any new
asset; it was incurred to maintain the appellants’ existing line in a state to earn revenue . . .
Nor do their Lordships agree that expenditure in order to form a permissible deduction must
have been incurred in the production of the actual year’s income which is the subject of the
assessment, if by this it is meant that the benefit of the expenditure must not extend beyond the
year of assessment, for very many repairs have the result of enabling income to be earned in
future years as well as in the year in which they are effected . . .
The appellants received no allowance for depreciation of their rails and sleepers under para (c),
and the Court below . . . held that they were not entitled to any such allowance, on the ground
that a railway line was a work of a permanent nature. Oddly enough, the inference was drawn
from this that what the appellants could not get by way of depreciation they cannot have been
intended to get by way of repairs. The inference, their Lordships would have thought, was rather
the other way – namely, that having been allowed a deduction in name of repairs the appellants
were not intended to get a deduction in name of depreciation in respect of the same permanent
structure.
Their Lordships find an excellent illustration of the accepted practice in such matters in the
United Kingdom . . . in the case of the Highland Ry Co v Special Commissioners of Income Tax.32 [The
judge here summarised and quoted from this decision.]
The contrast between the cost of relaying the line so as to restore it to its original condition and
the cost of relaying the line so as to improve it is well brought out in the passage just quoted, and
while the former is recognized as a legitimate charge against income, the extra cost incur-red in
the latter case in the improvement of the line is equally recognized as a proper charge against
capital. In the present instance the renewals effected constituted no improvement; they merely
made good the line so as to restore it to its original state. As such, in their Lordships’ opinion,
they were ‘repairs’ . . . and the cost of them did not constitute an outgoing of a capital nature . . .
It follows that the sum of £252 174 expended on this work by the appellants is deduc-tible form
their income for the purpose of ascertaining their taxable income.

Notes
This decision found that the expenditure in question satisfied both the general deduction
provision and the specific provision for the deduction of expenditure on repairs. Regrettably,
it did not examine the inter-relationship between the two. The decision also established the
important principle that expenditure on repairs is deductible in full in the year in which it is
incurred, even though the deterioration had accumulated over a number of years. Nor is
there any requirement that the expenditure must relate to the earning of income in the same
tax year.
The facts of this case neatly raise the metaphysical question whether there is some pre-
cise point at which the laying of one more replacement sleeper would change the work
from a (deductible) repair to a ‘subordinate part’ of the railway line, to a (non-deductible)
renewal of substantially ‘the entirety’. This scholastic approach is avoided by asking, as
Lord Macmillan did, whether what is involved is the ‘periodic renewal . . . of rails and
sleepers . . . as they wear out by use’. If so, the work constitutes an expense on revenue
________________________

32 16 R 950, 2 Tax Cas 485.

598 Income Tax in South Africa: Cases and Materials

account, deduc-tible under the general deduction formula. In other words, the issue is
more clearly delineated by asking the broad question whether the expenditure was of a
revenue or of a capital nature, than by asking the narrow question of whether it was a
‘repair’.
The decision also makes the useful point that expenditure which is of a capital nature
and hence not deductible under the general deduction formula or as a ‘repair’ will often
qualify for deduction in instalments under the allowance for wear and tear.

If the taxpayer elects to reconstruct, he cannot claim a deduction for what he would have expended
on a repair. If work constitutes reconstruction, none of the expenditure is deductible, even though
particular items might have involved a repair.

[303]
FCT v Western Suburbs Cinemas Ltd
(1952) 5 AITR 300 (High Court of Australia)
The taxpayer company owned theatres and carried on business as an exhibitor of motion
pictures. The ceilings in one of the theatres became dilapidated. The taxpayer’s architect
advised that repair was impracticable. The taxpayer therefore replaced the old ceiling
with a new one, using a different and better material, at a cost of over £3 000. The tax-
payer claimed a deduction, not for the cost of the new ceiling, but the sum of £603,
being either (a) an estimate of what repairs to the old ceiling would have cost, had such
repairs been done; or (b) an estimate of the cost of that part of the work involved in
replacing the old ceiling with the new one, which would have had been equally necessary
if the old ceiling had been repaired.
Issue: did the amounts claimed as a deduction constitute expenditure on ‘repairs’?
Held: in the negative. The new ceiling was a capital asset and its cost was expenditure
of a capital nature.
Kitto J: To decide whether a particular item of expenditure on business premises ought to be
charged to capital or revenue account is apt to be a matter of difficulty, though the difference
between the two accounts is clear enough as a matter of general statement: Sun Newspapers Ltd v
FCT.33 In this case, the work done consisted of the replacement of the entire ceiling, a major and
important part of the structure of the theatre, with a new and better ceiling. The operation
seems to me different, not only in degree, but in kind, from the type of repairs which are
properly allowed for in the working expenses of a theatre business. It did much more than meet
a need for restoration; it provided a ceiling having considerable advantages over the old one,
including the advantage that it reduced the likelihood of repair bills in the future. The case
resembles one of the illustrations given by Rowlatt J in Mitchell v B W Noble Ltd.34 As his Lordship
there observed, if you say, ‘I will not have a railing which perpetually falls down or wants repaint-
ing; I will abolish it and I will build a brick wall which will not fall down or will not want repaint-
ing,’ that is a capital expenditure. The truth is, I think, that the new ceiling was an improvement
to a fixed capital asset and that its cost was a capital charge.
I turn, therefore, to the ground stated in the objection. It is supported, as I understand the argu-
ment, by alternative propositions: first, that £603 would have been the cost of repair, if repair
had been decided upon, and that for that reason it is right that £603 should be treated as
chargeable to income account; and secondly, that if the work actually involved in the replace-
ment of the ceiling be considered in detail, it will be found that some things that were done
would have had to be done even for the purpose of repair, and accordingly when the amount
________________________

33 (1938) 61 CLR 337 at 360, 1 AITR 403.

34 (1927) 1 KB 719, 11 TC 372.
 Statutory deductions and allowances 599

that was expended is analysed it will be found to include some items which would have entered
into the cost of repair if the company had contented itself with repair.
The answer to the first proposition is that when a taxpayer has two courses open to him, one
involving an expenditure which will be an allowable deduction for income tax and the other
involving an expenditure which will not be an allowable deduction, and for his own reasons he
chooses the second course, he cannot have his income tax assessed as if he had exercised his
choice in the opposite way. Section 53 is concerned with expenditure which was in fact incurred,
not with expenditure which could have been incurred but was not.
...
The second proposition relates to some evidence given by Mr Roberts to the effect that if the
ceiling had been merely patched up some of the same items would have entered into the cost as
entered into the cost of the new ceiling.
But the capital or income character of expenditure actually incurred depends upon the nature
of the purpose for which it was incurred. If a total expenditure is of a capital nature, so is every
part of it; you cannot take a portion of the work done, such as the erection of a scaffolding and,
closing your eyes to the purpose for which it was in fact erected, attribute to the cost of that por-
tion an income nature for no better reason than that the same scaffolding would have been
erected in order to serve a purpose which, if it had existed, would have made the total expend-
iture an income charge.

Notes
In South Africa too, expenditure is deductible only if it is ‘actually incurred’, and is not
merely ’notional’, in other words, expenditure which could have been incurred but was
not. Thus, if a taxpayer has a choice between reconstruction and repair, he must accept
the income tax consequences of his choice; if he opts to reconstruct, he cannot claim for
what a repair would have cost, had he elected to repair.

[304]
ITC 133
(1928) 4 SATC 198
GJ Maritz KC: The appellant in this matter has a building from which he derives his income in the
form of rent. This building was erected some 20 years ago and for the convenience of the tenants
there are two lifts operating in the building. During the year of assessment under review it became
advisable to replace one of these lifts by a new lift. It was inadvisable to repair the old lift because
it was too dangerous. It had probably served its purpose and a new lift took its place Now, the
Commissioner for Inland Revenue allowed the taxpayer a certain amount under the provisions of
s 11(2)(d) for wear and tear of the new lift, regarding the lift as a portion of the machinery used by
the taxpayer in his trade. It is contended, however, on behalf of the appellant, that the lifts in the
building are not machinery in the true sense of the word, but that they form a portion of the struc-
ture and as such are of a permanent nature. If that contention is correct then the Department’s
allowance for wear and tear cannot stand, because no allowance can be made for the wear and tear
of a permanent structure. But in order to succeed in a claim for a deduction of the expenditure on
the new lift the onus is on the taxpayer to show that the sum was expended on the repair of a
property occupied for the purposes of trade. Now, we must take the word ‘repair’ in its ordinary
grammatical sense. The erection of a new lift in the place of an old one can never be a repair. It is a
replacement. On that simple ground, without deciding the point whether the lift is a work of a
permanent nature, we must decide against him, as there is nothing in the Act which allows for the
replacement value of an article as a deduction from revenue.

Notes
This unsatisfactory and unpersuasive decision relies on intuition rather than principle or
authority. It is obviously arguable that the building is the entirety and that the replace-
ment of a lift is the ‘repair’ of a subordinate part of that entirety. On the other hand, if
600 Income Tax in South Africa: Cases and Materials

the matter is approached by asking whether the expenditure was of a capital or of a

revenue nature, the question becomes whether the expenditure resulted in the acquisi-
tion of an asset of an enduring nature. Either way, the inquiry should proceed on the
basis of concepts, principles, and the doctrine of precedent. The bald proposition that
’the erection of a new lift in place of an old one can never be a repair’ is a mere asser-
tion, not a principle-based conclusion.

Expenditure which is part of the cost of acquisition of property is not a repair.

[305]
ITC 162
(1930) 5 SATC 76
Grindley-Ferris J: The appellant bought the premises, which included, in addition to the shop
which he occupied, certain other shops. He has sought to deduct an amount expended by him
on repairs to the premises.
...
The appellant has said that he realised at the time he purchased the property that he would have
had to expend a certain amount on repairs – in fact, that he intended to effect those repairs –
and in the opinion of the Court that amount would have been capital expenditure also. The
expenditure was incurred by the appellant because of a stipulation by the bondholder before he
would advance the desired amount to the appellant to enable him to effect the purchase. Those
are expenses incurred in order to acquire the premises, just as the cost of passing a bond would
be, and those expenses are not in reality expenses on repairs of property occupied for the purposes
of trade. They are more of the nature of expenses incurred in order to purchase and subse-
quently occupy the premises. Those expenses cannot be allowed; they are capital expenditure.

Expenditure incurred, after a lease is signed but before the tenant takes possession, can qualify for
deduction either under s 11(d) or under s 11(a).

[306]
ITC 163
(1930) 5 SATC 77
The taxpayer owned a large house which she occupied with her family. Finding the
premises too large, she rented it out during the year ending 30 June 1929. In her return
for that year she claimed a deduction for expenditure incurred, on the grounds that
such expenditure was on ‘repairs’ in terms of s 11(2)(c) of the Act (see now s 11(d)),
alternatively that it qualified for deduction under the general provisions of s 11(2)(a)
(see now s 11(a)), as having been incurred in the production of income.
Grindley-Ferris J: In July 1928, a written lease was drawn up by which the appellant leased the
premises as from the 1st October. The lessee stipulated, however, that the appellant should
spend a certain amount on repairs, and that this work should be done before he took possession.
This stipulation was complied with, and it was sought to deduct the amount of the expenditure
incurred.
It is clear, I think, that this amount could only be deducted if it fell within the provisions of sub-
sec 2(a) or 2(c) of s 11 and if the appellant can be said to be carrying on a trade. Section 7 in-
cludes under the definition of ‘trade’ the letting of any property, and it seems to me that as soon
as the appellant had signed the lease she was carrying on the trade of letting property, and thus,
at the time the repairs were executed, she was a trader. Can then the cost of such repairs be said
to be expenditure incurred in the production of income? One of the ordinary operations of this
trade is the keeping of the premises in repair, and the expenditure on such work is for the pur-
pose of producing income. Premises in need of repair will in all probability not produce the
same rental as premises in a good state of repair. In the present case the repairs were necessary
in order to produce the rentals, and to my mind it matters not that such repairs were executed
 Statutory deductions and allowances 601

before occupation of the premises was actually taken. I do not think that any distinction should
be drawn between the case where the lessee insists on repairs being executed during his tenancy,
and the case where a lessee insists on repairs being executed before he takes possession. But for
the undertaking to effect the repairs there may have been no lease at the rental agreed upon. A
distinction must clearly be drawn between the expenses incurred in order to put premises wholly
unfit to produce income in such a condition as to be able to earn income, and the facts of this
case. The premises in question here were occupied by the appellant and her family and merely
required certain repairs in order to earn the income stipulated for in the lease. The question
stated above should, therefore, I think, be answered in the affirmative.
But I also incline to the view that the expenditure falls within sub-sec 2(c) of s 11 as being a sum
‘expended for the repairs of property in respect of which income is receivable’. As soon as the
lease was signed income became receivable from the property from the date on which occu-
pation was to be given to the lessee; it then became a rent-producing asset.
For these reasons I think the appellant was entitled to deduct the sum claimed, and the appeal
accordingly succeeds.

[307]
ITC 561
(1944) 13 SATC 313
The taxpayers owned a large country residence and two farms. During the year of assess-
ment the taxpayers did not occupy the country residence, and made unsuccessful at-
tempts to find a tenant for it. They sought to deduct certain expenditure, inter alia on
repairs, incurred in respect of the country residence.
Issue: did the expenditure qualify for deduction under the general provisions of
s 11(a) or under s 11(d) as a ‘repair’?
Held: the expenditure was not deductible under either section; because the house was
not a lettable proposition, the taxpayer’s attempts to let it did not qualify as a ‘trade’.
Ingram KC: The sole question which arises in this appeal is whether the appellants have the right
to deduct the sum claimed from their incomes. The appellants say that such sum is lawfully de-
ductible in terms of s 11(2)(a) of the Act [see now s 11(a)], as being incurred in the production
of income, and secondly, they say that that sum is also deductible as being in connection with
income receivable from a trade.
Now, under s 11(2)(a) the expenditure which is deductible must be actually incurred in the
production of income. Only such expenditure can be deducted. The appellants say that, to de-
cide this question, one must look to the intention of the taxpayer in making the expenditure,
and it is said that it was for the purpose of letting the property that the expenditure was in-
curred, that the Commissioner has regarded the appellants as carrying on business of letting
property, and therefore they intended to let this property, and any steps they took in this con-
nection must be regarded, in so far as the relevant expenditure is concerned, as having been
incurred in the production of income. But that is not what the Act says. It does not say that ex-
penditure incurred in intending to let property or to produce income should be allowed, it is
expenditure incurred in the production of income that is deductible.
Now, what are the facts? In this case the facts are that the appellants inherited this property some
years ago. They only went out to the property on one or two occasions and ever since that time,
except for two short periods, the property has remained unlet. It was let on one occasion for
three or four months and on another occasion under an arrangement whereby the lessee was to
pay all the expenses in connection with the upkeep. The property itself is of such a character
that it is really impossible to find a lessee, whatever may be the efforts to do so.
Now, it may have been, that, as the appellant’s attorney pressed upon us, the appellants attempt-
ed to find a lessee, and that it was their intention to find a lessee for the property, but it does not
seem necessary to me to go very deeply into that aspect of the matter, because it appears that the
facts are that they never succeeded in fulfilling their intentions and there is no question that this
country residence has never produced any income during the last seven years or so from rental.
Now, when one is considering whether expenditure is incurred in the production of income one
of the tests is that the expenditure must be sufficiently connected with the income produced, it
602 Income Tax in South Africa: Cases and Materials

must not be too remote. In the present case it is not only a question of remoteness, but, in fact,
no income has been produced at all with which the expenditure can be connected. The objec-
tive must be with the hope of gain. What gain has there been under the present circumstances?
Even if a tenant is found and the property is let, it appears that there can be no gain.
There have been several cases dealing with the question where there is no prospect of any gain
and in all those cases a decision has been arrived at without any doubt. It seems to me, on the
evidence in the present matter, the only object was to minimise the loss as much as possible.
. . . Therefore, so far as s 11(2)(a) is concerned, we are of the opinion that the amount claimed
is not expenditure incurred in the production of income.
I now pass to the question of repairs. Under s 11(2)(c) [see now s 11(d)]expenditure is allowed
for repairs in connection with properties in respect of which income is receivable. Income receiv-
able, seems to me clearly to connect with income in connection with a lettable proposition. So if
a landlord sub-lets a warehouse and rent is received from that, that rent is taxable, and repairs in
connection with the property from which the income is received is allowable. But if the property
stands empty and no income is received from it, there is no income receivable in respect of it,
and in terms of the section, no deduction for repairs is allowable. In the present case no income
was receivable, therefore, as regards the repairs aspect of the matter, the expenditure on repairs
clearly cannot be allowed to be deducted.
. . . [T]he decision is based on the finding that it is not expenditure laid out in the production of
income and that the repairs are not in connection with a building in respect of which income is
receivable.

Notes
The taxpayers claimed the expenditure both under the general provisions of what is now
s 11(a) and as a deduction under what is now s 11(d). The court held that the expenditure
did not meet the requirements of either section and was therefore not deductible. It is
important to note that it is a pre-requisite for deductibility under both sections that the
taxpayer be ‘carrying on a trade’.
From this decision, it appears that the requirement that the taxpayer be carrying on a
trade requires that there be a reasonable prospect of income. The requirement in
s 11(d) that ‘income is receivable’ in relation to the property seems to replicate this test.

The taxpayer is entitled under s 11(d) to deduct expenditure on repairs only where he has a legal
right to use the property in question.

[308]
ITC 605
(1945) 14 SATC 361
When the taxpayer purchased a farm, an access road used by him which crossed an
adjoining farm was in a bad state of repair. This road had previously been laid with
concrete strips. The taxpayer had no legal right to use the road, but was about to acquire
a servitude in respect thereof. The taxpayer incurred expenditure in laying concrete
strips over this road, which he claimed to deduct under the statutory category of ‘re-
pairs’.
Issue: did the expenditure qualify for deduction as a ‘repair’?
Held: it did not qualify, because the taxpayer did not have a legal right to use the prop-
erty in question.
Ingram KC: As this expenditure consists of repairs of work that previously existed, in the ordi-
nary course an amount so expended would form a legitimate deduction under section 11(2)(c)
of the Act [see now s 11(d)]. But such expenditure to be allowed must fall within the provisions
of that section precisely and definitely. If we read the section we find that it provides:
 Statutory deductions and allowances 603

‘expenditure actually incurred during the year of assessment on the repairs of property occupied for the
purpose of trade or in respect of which income is receivable, and sums expended for the repair of machin-
ery, implements, utensils and other articles employed by the taxpayer for the purposes of his trade.’
And moreover the application of that section is further limited by the provision . . . of the nega-
tive s 12(b), which prohibits the deduction of domestic or private expenses, including the cost of
repairs in connection with any premises not occupied for the purposes of trade. The Act is em-
phatic that before a claim for repairs can be allowed it must be repairs to property occupied for
the purposes of trade.
Now the Court has already held in a previous case that when the words ‘occupied for the pur-
poses of trade’ are used, they mean property or premises occupied by the taxpayer by virtue of a
legal right. When one comes to the facts of this case it is apparent from the correspondence
which has been submitted, between the appellant and the Commissioner, that the repairs in
respect of which the claim is made were made in a cutting which is portion of the road which is
to be identified with property not owned or occupied by the taxpayer-appellant, but the road
which he uses over the farm of another person. It appears that he has no legal right to that user,
but from the correspondence it also appears that he is about to acquire a servitude in respect of
that right of the user. Whatever may be the result of his acquisition of such a right in the future,
as regards which the Court at present makes no ruling, at any rate it appears that at present he
has no right to occupy that road.
In these circumstances the Court is of the opinion that the appellant is not entitled to take
advantage of the section and claim the deduction.

Notes
The taxpayer here ought to have claimed, in the alternative, for a deduction in terms of
s 11(a), in which he may well have succeeded.

In order for expenditure to qualify for deduction under s 11(d), the taxpayer must have been trading
at the time the expenditure was incurred.

[309]
ITC 643
(1947) 15 SATC 243
The taxpayer owned a house which he had let for some years whilst away on active ser-
vice. In October 1945 he resumed occupation and found that considerable repairs were
necessary, due principally to the actions of his tenants. After reoccupying the house, he
had the repairs effected at a cost of £106. During the 1945 tax year he had received rent
of £31 100. He claimed a deduction from the rent of the expenditure he had incurred
on repairs.
Issue: did the expenditure qualify as a ‘repair’?
Held: the expenditure was not deductible as a repair, because at the time it was in-
curred, the taxpayer had ceased to carry on the trade.
Ingram KC: The appellant, who appeared in person, in his admirably presented argument,
founded his claim for deduction of the expenditure on the provisions of s 11(2)(c) [see now
s 11(d)] as being ‘expenditure actually incurred during the year of assessment on the repairs’ of
property occupied for the purposes of trade or ‘in respect of which income is receivable’, and as
not negatived by the provisions of s 12(b) and 12(g). He agreed that during the period in which
the repairs were effected the property was not occupied for the purposes of trade but he con-
tended that the deduction was admissible in that the expenditure was incurred in respect of
property ‘in respect of which income is receivable’ in terms of sub-sec (c). And on the facts he
argued that on the meaning of the term ‘receivable’ his case fell within the ambit of the sub-
section, in that rent had been receivable by him during the tax year. He supported his argument
by explaining that what the sub-section requires is that the expenditure must be incurred during
the year of assessment. Regarding the letting as a venture in terms of the Act he argued that the
604 Income Tax in South Africa: Cases and Materials

expenditure on repairs must be regarded as the final and culminating act of the venture.
The meaning of the phrase ‘in respect of which income is receivable’ was investigated in the case
of ITC 24335 where several dictionary meanings of the word ‘receivable’ were referred to. It was
said in the judgment in that case that the main meaning of ‘receivable’ is ‘capable of being re-
ceived’.
In the opinion of the Court the obstacle to a successful appeal in the present case lies in the
negativing provisions of s 12 and more particularly sub-section (g) [see now s 23(g)] Under that
section it is provided that no deduction shall in any case be made in respect of the following mat-
ters – ‘any moneys claimed as a deduction from income derived from trade which are not wholly
and exclusively laid out for the purpose of trade’. In the opinion of the Court what is envisaged
by these words is that in cases like the present, the moneys must be expended for the purpose of
restoring the income-producing asset to a condition that it will be capable of continuing to earn
income as previously. See Rhodesia Railways Limited v Bechuanaland Collector of Income Tax.36 Thus
the underlying objective is making the repairs for the purpose of carrying on the trade. Similarly
in harmony with the view so expressed the words ‘in respect of which income is receivable’ in
s 11(2)(c) must be taken to mean ‘receivable in the carrying on of the trade’ which appears to
have been the interpretation given to the phrase in the Rhodesia Railways Limited case, above.
In the present case it was admitted by the appellant that he had, on re-occupation of his proper-
ty, ceased to carry on the trade of letting, and that he had no intention of letting in the future.
Hence it is impossible to hold that the repairs were effected for the purposes of trade. In ITC
16337 the question was said to turn on whether the taxpayer was a ‘trader’ at the time the repairs
were effected. Here it is clear that such was not the case, the ‘trade’ had wholly ceased and the
repairs were effected in order that the appellant might enjoy the occupation of the property for
domestic purposes. Then also the expenditure may be regarded as ruled out under s 12(b).
...
The appeal must therefore fail.
In conclusion the case appears to be one which involves hardship in its results on the taxpayer
seeing that the Crown enjoys the benefit of the tax it derives on the income received by the tax-
payer by way of rent, yet in law he is denied the deduction of the expenditure which might not
have been incurred save for the letting of the property. This is however an aspect of the matter
which the Court is precluded from taking into consideration. Its duty is merely to apply the law
as enacted.
The appeal is dismissed and the assessment confirmed.

Notes
It seems that the expenditure would have been deductible if, at the time the taxpayer
incurred the expenditure, he had intended to continue letting the house. In that situa-
tion, the continuity of his trading activities would not have been broken.

Expenditure incurred in sinking a new borehole on a farm when the supply of water from an existing
borehole had decreased owing solely to inadequate underground water does not constitute expenditure
on ‘repairs’ for purposes of s 11(d), as there was nothing wrong with the original borehole.

[310]
Flemming v KBI
1995 (1) SA 574 (A)
The taxpayer was the usufructuary of a certain farm. On the farm there was an existing
borehole and a dam to provide water for the farming operations. The borehole yielded
________________________

35 6 SATC 370.
36 49 TLR 376 per Lord Macmillan at 378.
37 5 SATC 76.
 Statutory deductions and allowances 605

progressively less water – an inadequate amount for the farming operations. The taxpay-
er arranged for a new borehole to be drilled some distance from the first, and for the
erection of a windmill on this new borehole, the construction of a dam, and the instal-
lation of piping from that new borehole. The taxpayer claimed as a deduction under
s 11(d), the cost of drilling the new borehole, the erection of a windmill for this bore-
hole, the building of a dam, and the installation of piping from the new windmill.
The taxpayer contended that the farm was a capital structure; that the underlying
principle of s 11(d) was that a taxpayer is entitled to maintain the earning capacity of the
capital structure in its original condition; that the existing borehole and windmill on the
farm were a subordinate part of the farm and that ‘repairs of property’ in s 11(d) includ-
ed the replacement of a subordinate part of the property which had become defective.
Issue: was the cost of sinking a new borehole when the existing borehole gave an inad-
equate supply of water a ‘repair’ of a subordinate part of the farming property, and thus
deductible under s 11(d)?
Held: in the negative. Section 11(d) was not concerned with expenditure incurred on
maintaining the earning-capacity of property, but with repairs to the property itself.
There was nothing wrong with the borehole itself that required replacement thereof; the
expenditure incurred in sinking a new borehole was not expenditure incurred on ‘re-
pairs’. Hence, the expenditure was not deductible under s 11(d).
Joubert JA: [translated] Section 11(d) of the Act reads as follows:
‘General deductions allowed in determination of taxable income.
For the purpose of determining the taxable income derived by any person from carrying on any trade
within the Republic, there shall be allowed as deductions from the income of such person so derived –
(a) . . .
(b) . . .
(c) . . .
(d) expenditure actually incurred during the year of assessment on repairs of property occupied for the
purpose of trade or in respect of which income is receivable . . .’
The deductions for expenditure provided for in s 11(d) can be divided into three categories.
The first is expenditure incurred during the year of assessment on ‘repairs of property’ occupied
for purposes of trade or in respect of which income is receivable . . .
The words ‘repairs’, and ‘repair’ are not defined in the Act . . . It is the first category of expendi-
ture that is in issue in this appeal . . .
[The judge referred to several dictionary definition of the word ‘repair’ and proceeded:]
The common meaning of all these dictionary definitions of ‘repair ’is that they refer to the fix-
ing or repair of an object that, in comparison with its previous condition, has become defective
or faulty. From the context of s 11(d) it seems that that object is physical or concrete, such as
land and buildings, machinery, equipment, tools, etc, used by the taxpayer for the purpose of his
trade . . .
Mr Dercksen submitted on behalf of Mrs Flemming that the farm, Leeubosch is a capital struc-
ture. He contended that the underlying principle of s 11(d) is that a taxpayer is entitled to main-
tain the earning capacity of a capital structure in the condition it was when originally acquired
by the taxpayer. Where that earning capacity, with the passage of time, is weakened or dimin-
ished, as in the present case, in regard to the first borehole’s supply of water, a taxpayer ought to
be entitled, in terms of s 11(d), to a deduction for the expenditure necessary to reinstate or
maintain the earning capacity that the capital structure had when the taxpayer acquired rights
over it. On this basis, Mrs Flemming should be entitled to a deduction for the costs of R10 447 in
respect of the reinstatement of the earning capacity of the farm, Leeubosch, through the replen-
ishment of its water supply.
My problem with this submission is that it loses sight of the fact that s 11(d) is not directly con-
cerned with the costs incurred by a taxpayer in reinstating the earning capacity of property. Sec-
tion 11(d) applies to the costs of the of the repair of the property itself . . . In my opinion, this
submission is without merit . . .
606 Income Tax in South Africa: Cases and Materials

Our case law has thus far not succeeded in laying down exact guidelines to differentiate between
the concepts ‘repair’ and ‘improvement’ . . .
I will deal now with the application of the grammatical meaning of the words ‘repair’ and ‘re-
pairs’ in the case at hand. Mr Dercksen submitted that the first borehole and windmill must be
regarded as subordinate parts of the farm, and that ‘repairs to property’ in s 11(d) include the
replacement of a subordinate part of property which breaks down . . . The problem with this
submission is that it does not fit the facts of the case. Mrs Flemming did not prove that the first
borehole or windmill had broken down . . . According to the evidence, it must be accepted . . .
that the availability of water from the first borehole diminished purely as a result of the fact that
there was less underground water available at that place. On this basis, the new windmill cannot
be regarded as a repair by replacement of the first, as it was a replenishment of the farm’s water
supply . . .
Mrs Flemming did not expend the R10 447 on repairs to the first borehole as a subordinate part
of the farm. She expended this amount on a new borehole, not on ‘repairs’ to property as re-
quired by s 11(d). She expended the money on the improvement of the water supply that had
nothing to do with the ‘repairs of property’ . . .
The appeal is dismissed . . .
BOTHA JA, SMALBERGER JA, HARMS JA and NICHOLAS AJA concurred.

Notes
As a relatively recent Appellate Division decision, amongst a plethora of (rather dated)
South African and overseas case law on the meaning of ‘repair’ in the context of income
tax legislation, this case is an important statement on fundamental principles in this area
of tax law.
Nonetheless, it throws no new light on the generally accepted common law principle
that the ‘replacement’ of a subordinate part of a larger entirety constitutes a ‘repair’ for
purposes of income tax.38 Hypothetically, therefore, the replacement of the windscreen
of a car would qualify as a ‘repair’ of the car.
There is no definitive legal principle which articulates how to determine whether one
item of property is to be regarded as part of a larger entirety. For example, if the taxpay-
er owns a fleet of 50 taxis, and he discards one which is giving trouble and buys a new
one, is the cost of the new taxi deductible under s 11(d) as constituting a ‘repair’ of the
fleet? Instinct may suggest that the answer is negative, but there is sparse legal authority
on the criterion to be applied.
In this decision, counsel tried to argue that the old borehole was a subordinate part of
the farm, and therefore that the replacement of this borehole ought to qualify as ‘repair’
of the farm. On the particular facts of this matter, the flaw in the argument was that even
the replacement of the windscreen of a car would not be a ‘repair’ if the windscreen
itself was not faulty. In the present case there was nothing defective about the old bore-
hole – the fault lay in the inadequate underground water.
It is not possible to infer, unambiguously, from the reasoning of the court in this case
what its decision would have been if the first borehole had indeed been faulty and the
taxpayer had installed a new one. Would the old windmill have been regarded as a
subordinate part of a larger entirety, namely the farm, in which event the cost of the new
borehole would have constituted a ‘repair’ of the farm.
The judgment notes that, counsel for the taxpayer submitted that, ‘the first borehole
and the windmill on it must be regarded as subordinate parts of the farm and that “re-
pairs of property” in s 11(d) includes the replacement of a subordinate part of property
________________________

38 See for example Lurcott v Wakely and Wheeler [1911] 1 KB 905.

 Statutory deductions and allowances 607

which has become faulty, as for example appears from ITC 1264 (1977) 39 SATC 133 and
the authority there cited’. From this dictum it seems that the court does not disagree
with the proposition that the replacement of a subordinate part of a larger entirety
constitutes a ‘repair’. But whether the court was of the view that, in this case, the bore-
hole and windmill were a subordinate part of the farm is not clear.
The judgment does say in this regard that:39 ‘The R10 447 was not expended by Mrs
Flemming on the repair of the first borehole as a subordinate and indivisible part of the
farm. She spent this amount on the second and third boreholes and a new windmill, not
on “repairs of property” ’. It is possible to interpret this dictum as meaning that, if the
first borehole had been faulty and a new one had been installed in its place, that it would
indeed have constituted the replacement of a subordinate part of the farm and thus
qualified as a ‘repair’ of the farm. But would this still hold true even if – as in the present
case – the new borehole was installed at a different location from the old?
Counsel tried to paper over the weaknesses in the taxpayer’s case by arguing that the
underlying philosophy of s 11(d) is to permit the taxpayer to deduct the cost of maintain-
ing the ‘income-earning capacity’ of trading property. This was a speculative argument
for which there is no authority, and the words of s 11(d) do not lend any support to such
an underlying philosophy.

§2.3 Wear and tear or depreciation allowance: section 11(e)

Section 11(e) entitles the taxpayer to an allowance (except for the items relating to farm-
ing operations which are separately provided for in paragraph 12(2) of the First Sched-
ule) of such sum as the Commissioner may think just and reasonable, as representing the
amount by which the value of any machinery, plant, implements, utensils and articles
(other than machinery, plant, implements, utensils and articles in respect of which a
deduction may be granted under section 12B or 12C) used by the taxpayer for the pur-
poses of his trade has been diminished by reason of wear-and-tear or depreciation during
the year of assessment.
The general deduction formula in s 11(a) prohibits the deduction of expenditure of a
capital nature. But no asset used in the production of income lasts for ever; it either
wears out or becomes obsolete. In recognition of this, the general philosophy of the wear
and tear or depreciation allowance (in practice if not in theory)40 is to allow the taxpayer
to deduct the cost of qualifying capital assets in annual instalments spread over their
productive life.

‘Plant’ means the apparatus which is permanently employed in a business and which performs a
functional role in carrying on that business.

[311]
Blue Circle Cement Ltd v CIR
1984 (2) SA 764 (A)
The taxpayer company manufactured cement for which the basic raw material was lime-
stone. Its factory was in the Western Transvaal. In order to transport the quarried and
________________________

39 In the original Afrikaans, this passage reads: ‘Die R1 447 het mev Flemming nie as onkoste vir die herstel
van die eerste boorgat as ’n ondergeskikte en onafskeidelike deel van die plaas bestee nie. Sy het hierdie
bedrag bestee aan die tweede en derde boorgate met ’n nuwe windpomp en nie ‘on repairs of property’
soos art 11(d) vir ’n aftrekking vereis nie.’
40 According to the letter of s 11(e), the allowance is based on the diminution in value of the asset during the
year of assessment. In practice, the ‘value’ of the asset is ignored, and the allowance takes as its starting
point its historical cost to the taxpayer.
608 Income Tax in South Africa: Cases and Materials

crushed limestone to the factory, the taxpayer had constructed a railway line from the
quarry area to the factory. During the 1975 tax year appellant completed and brought
into use a 41 km extension of this railway line, whose purpose was to provide a railway
link between the factory and a new limestone quarry and crushing plant. The cost of
extension was R2 047 699, on which the taxpayer claimed an initial allowance of 25 per
cent viz R511 924, and an investment allowance of 30 per cent, viz R614 309, in respect of
the 1975 tax year.
Issue: The Commissioner conceded that the railway line was used directly in a process
of manufacture. The only issue was whether the railway line fell within the category of
‘plant or machinery’.
Held: ‘plant’ is not defined in the Act. In the context of plant used in manufacture, it
means the implements and apparatus used in carrying on any industrial process, which
perform a functional role in that process. Applying these tests to the facts, the railway
line was indeed ‘plant’.
Corbett JA: Before us appellant’s counsel conceded (rightly in my view) that it could not be
contended that the railway line constituted machinery. His submission, however, was that it did
not constitute plant. Respondent’s counsel argued to the contrary.
The word ‘plant’ is not defined in the Act and, so far as I am aware, its meaning in the context of
s 12 of the Act has never been dealt with by our Court. Certainly no relevant South African case
was quoted to us; and I have not been able to find any such case . . . ‘Plant’, as a noun, has a wide
variety of meanings . . . Obviously in s 12 one is concerned with plant used directly in a process
of manufacture, ie industrial plant. In this context the following relevant meanings are of assis-
tance:
‘The fixtures, implements, machinery, and apparatus used in carrying on any industrial process.’
(Oxford English Dictionary.)
. . . Having regard to the context of s 12, it seems to me that the first of these definitions is the
most helpful. Although it is not necessary to decide these points – and I do not do so – I doubt
whether ‘plant’ in s 12 would include a building which merely housed or contained industrial
equipment, etc used in an industrial operation . . . or the land upon which an industrial under-
taking was carried on . . . The enquiry is thus whether the items alleged to be ‘plant’ constituted
fixtures, implements, machinery or apparatus used in carrying on any industrial process . . .
In recent years there have been a number of decisions by the English Courts concerning the
meaning of the word ‘plant’, as it occurs in certain successive statutory provisions in English
fiscal legislation . . .
The starting point of these decisions has, almost without exception, been a dictum of Lindley LJ
in Yarmouth v France 41 a case concerned with the meaning of the word ‘plant’, as it occurred in
certain non-fiscal legislation, viz the Employers’ Liability Act 1880. In this connection Lindley LJ
stated:42
‘There is no definition of plant in the Act: but, in its ordinary sense, it includes whatever apparatus is used
by a businessman for carrying on his business – not his stock-in-trade which he buys or makes for sale; but
all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his
business.’
In the subsequent cases, dealing with fiscal legislation providing for capital allowances similar to
those contained in s 12 of the Act, the English Courts have placed emphasis upon the use which
was made of the item alleged to be plant and in this connection have evolved what is termed the
functional test. This test has been of particular value in applying the distinction which the Courts
have been constrained to draw between the ‘setting’ in which business is carried on and the ap-
paratus with which a business is carried on. The general approach has been described by Buckley
LJ in a judgment subsequently described by Lord Hailsham LC as ‘expository’ (see Cole Bros Ltd v
Phillips (Inspector of Taxes)43 as follows:
________________________

41 (1887) 19 QBD 647.

42 At 658.
43 [1982] 2 All ER 247 at 254b.
 Statutory deductions and allowances 609

‘. . . The building in which a business is carried on may accurately be described as ‘provided for the pur-
poses of the business’, but again admittedly is not for that reason alone to be held to be plant. A structure
44
attached to the soil may be plant. The dry dock in Inland Revenue Commissioners v Barclay Curle & Co was
45
such, as also were the pools in Cooke (Inspector of Taxes v Beach Station Caravans Ltd. On the other hand, a
structure of the nature of a building which was not attached to the soil was held not to be plant in St John’s
46
School (Mountford and Knibbs) v Ward (Inspector of Taxes).
The distinction, I think, is that in the one case the structure is something by means of which the business
activities are in part carried on; in the other case the structure plays no part in the carrying on of those ac-
tivities, but is merely the place within which they are carried on. So, in the case at any rate of a subject-
matter which is a building or some other kind of structure, regard must be paid to the way in which it is
used to discover whether it can or cannot be properly described a plant. This is what has been referred to
as the functional test. Indeed I think that this test is applicable to every kind of subject-matter . . . Is the
subject-matter the apparatus, or part of the apparatus, employed in carrying on the activities of the busi-
ness? If it is, it is no matter that it consists of some structure attached to the soil. If it is not part of the appar-
atus so employed, it is not plant, whatever its characteristics may be.’
(See Benson’s case supra.47) In addition, it has been held that the word ‘plant’ connotes some
degree of durability and would not include articles which are quickly consumed or worn out in
48
the course of a few operations (see Hinton (Inspector of Taxes) v Maden & Ireland Ltd .)
I think that this general approach and in particular the functional test can be fruitfully applied
in the interpretation of the word ‘plant’ as it occurs in s 12 of the Act . . .
The distinction alluded to in the English authorities between a building or structure by means of
which the taxpayer’s business activities are carried on and one which is merely the place within
which they are carried on has no particular relevance in the present case. Nevertheless, the func-
tional test, which poses the general question as to how the subject-matter of the enquiry is used
and whether it is employed to carry on or promote the taxpayer’s business activities, is a relevant
and useful yardstick to be applied to the issue in this appeal.
Adopting this general approach, I am of the view that the railway line constructed by appellant
did constitute ‘plant’ within the meaning of s 12. The trade being carried on by appellant is the
manufacture of cement. As the facts show – and as is conceded by respondent – the process of
manufacture commences at the appellant’s works at Springbokpan, where the limestone is quar-
ried, crushed and, after testing, separated into usable and non-usable material. The next stages
of the manufacturing process are necessarily performed at appellant’s factory in Lichtenburg,
some 40-odd kilometres away. Obviously this circumstance compels appellant to provide some
form of conveyance for the crushed limestone from Springbokpan to Lichtenburg. The form
chosen, as being the most economical alternative, is a railway line. The function performed by
the railway line and the rolling stock used thereon in conveying the material is, in my opinion,
part and parcel of appellant’s industrial process and I can see no reason why the railway line
should not be regarded as apparatus used in carrying on the industrial process of manufacturing
cement. Had the appellant decided to effect the conveyance by means of an immensely long
conveyor belt it could hardly be contended that this was not part of appellant’s plant. The rail-
way line, though needing periodic maintenance and repair, is durable and is intended to last the
life of the limestone deposits at Springbokpan. In my opinion, it has all the characteristics of plant.
In his heads of argument respondent’s counsel submitted that the word ‘plant’ should be restric-
tively interpreted so as to mean machinery or something akin to machinery. There is, in my view,
no warrant for such a restrictive interpretation, which would virtually render the word ‘plant’
tautologous, and counsel wisely did not press this submission in oral argument. Nor did he pur-
sue another contention which appeared to be made in his heads, viz that plant did not include
buildings and fixtures. In certain circumstances buildings and fixtures can clearly constitute plant.
In the end respondent’s counsel fell back on the argument that the railway line could not be
regarded as plant because of its length and the distance separating the Springbokpan works and
the factory at Lichtenburg . . . This argument cannot prevail. The size of a piece of apparatus
cannot per se prevent it constituting plant, if it otherwise possesses the characteristics of plant. . . .
________________________

44 [1969] 1 All ER 732.

45 [1974] 3 All ER 159.
46 [1974] STC 69.
47 At 342g -343d.
48 [1959] 3 All ER 356 (HL).
610 Income Tax in South Africa: Cases and Materials

As to the point that the distance involved had the effect of interrupting the process of manufac-
ture, this, as I understand it, amount to a contention that the conveyance on the railway line is
not part of the process of manufacture. This contention is in conflict with the concession made
that the railway line is used directly in the process of manufacture; and, in any event, I cannot
agree that the process of manufacture is interrupted, as suggested, or that the conveyance is not
part of the process of manufacture.
. . . In appellant’s case the works at Springbokpan and the factory are linked by a permanent
railway line constructed and operated by appellant at its own expense. It is laid along a route to
which appellant has servitutal rights. The line is used solely for the purpose of conveying
crushed limestone form Springbokpan to the factory. The line is like a very long conveyor belt
leading from the crushing plant to the factory.
For these reasons I am of the view that, contrary to the finding of the Special Court, the railway
line constructed by appellant did constitute ‘plant’ within the meaning of that term in ss 12(1)
and 12(2) and that, the other requisites of these subsections being satisfied, appellant was enti-
tled to an initial allowance and an investment allowance on the cost to appellant of the railway
line.
MILLER JA, NICHOLAS JA, GALGUT AJA and HOWARD AJA concurred.

Notes
In the United Kingdom and Australia, a building is ‘plant’ if it does not merely provide
shelter from the elements but plays a functional role in the taxpayer’s business.49 In South
Africa proviso (ii) to s 11(e) expressly provides that ‘in no case shall any allowance be made
for the depreciation of buildings or other structures or works of a permanent nature’.
Hence, no wear and tear or depreciation allowance is available under s 11(e), for buildings
and fixtures. The claim in Blue Circle Cement was for an allowance in terms of s 12(1) and
not s 11(e), and therefore buildings and fixtures could qualify as plant. Section 12(1) was
repealed in 1991. The current importance of Blue Circle Cement, as a relatively recent
Appellate Division decision, is its general observations on what constitutes ‘plant’, and in
particular its endorsement of the tests laid down by Lindley LJ in the United Kingdom
decision in Yarmouth v France and its endorsement of the ‘functional test’. Putting these
principles together (and applying the proviso in s 11(e) which excludes buildings and
fixtures) it may be said that plant means the apparatus, excluding land, buildings, fix-
tures and stock-in-trade, which is permanently employed by the taxpayer in carrying on a
business, and which performs a functional role in the carrying on of the business. Apply-
ing these principles to the facts, the Appellate Division held in Blue Circle that the railway
line which was used to convey the material as part of the taxpayer’s industrial process,
was indeed ‘plant’.

‘Articles’ are all those material things that are used by the taxpayer for the purpose of his trade. An
article will lose its identity as such if it has been physically and permanently integrated into a
building.

[312]
SIR v Charkay Properties (Pty) Ltd
1976 (4) SA 872 (A)
The taxpayer, a property-owning company, derived its income from rentals. It owned a
building in Johannesburg with business premises on the ground floor and offices on the
upper floors. Instead of brick internal walls, the upper floors had demountable parti-
tions. These had been installed after the building was completed. Their purpose was to
________________________

49 See for example IRC v Barclay Curle & Co Ltd [1969] 1 All ER 732 (HL).
 Statutory deductions and allowances 611

allow flexible divisions of the floor space to suit the particular requirements of individual
tenants. The partitions consisted of light-weight aluminium framework with panels of
gypsum and a surface of wood veneer or vinyl. In normal use, these partitions were
shifted around. The partitions could survive only three to six removals. Their life was
shorter than a brick wall and they were vulnerable to damage from the sun, from being
bumped by chairs etc and from staining.
Issue: were the demountable partitions ‘articles’ which qualified under s 11(e) for a
wear and tear or depreciation allowance; or had they become ‘a structure of a perma-
nent nature’?
Held: they were ‘articles’ and had not been incorporated into the building in a way
which caused them to lose their identity as such. Hence they qualified for a wear and tear
or depreciation allowance.
Trollip JA: This appeal concerns the question whether or not the taxpayer (respondent) was
entitled to deduct depreciation allowances under s 11(2) of the Income Tax Act 58 of 1962, as
amended, for the years of assessment ended 30 June 1970 and 1971, for demountable partitions
used as the inner walls of a building owned by respondent and let as offices . . .
Section 11(e) of the Act . . . allows a deduction to be made for depreciation from the income of a
taxpayer derived from carrying on a trade. The relevant part reads that there may be so deduct-
ed –
‘such sum as the Secretary may think just and reasonable as representing the amount by which the value of
any machinery, implements, utensils and articles used by the taxpayer for the purpose of his trade has
been diminished by reason of wear and tear during the year of assessment:
Provided that –
(i) . . .
(ii) in no case shall any allowance be made for the depreciation of buildings or other structures or
works of a permanent nature.’
...
First, as to the meaning of ‘articles’ in the phrase
‘machinery, implements, utensils and articles used by the taxpayer for the purpose of his trade’.
The word ‘article’ is of a wide and somewhat vague or indefinite connotation. Its ordinary mean-
ing, relevant here, is a material thing forming part of, or coming under the head of, any class . . .
The phrase quoted above itself identifies the particular class of things in question. ‘Articles’
there thus means the class of all those material things that are used by the taxpayer for the pur-
pose of his ‘trade’ . . .
Hence the class of things involved is of considerable amplitude. Apart from machinery, imple-
ments and utensils, the material things that are capable of being used in those multifarious activ-
ities, and which are subject to wear and tear through being so used, are infinite. Yet the Legisla-
ture must have intended (subject, of course, to the provisos to s 11(e)) that all those material
things so used should qualify for the depreciation allowance – no reason emerges from the Act
why some and not others should qualify; and, because of the difficulty or impracticability of de-
nominating all those things precisely, the Legislature probably used the compendious, albeit
somewhat vague, designation of ‘articles’ as a convenient and practical way of covering them all.
Moreover, the preceding words, ‘machinery, implements, utensils’, do not sufficiently clearly
point to any genus of material things that might otherwise, through the ejusdem generis rule, serve
to confine ‘articles’ to some species of that genus; so no reason exists for not giving that word the
ordinary, wide connotation canvassed above . . .
[C]onsidered in the abstract, the demountable partitions do undoubtedly constitute ‘articles’. As
Ramsbottom JA said in CIR v Le Sueur 50 – to be referred to more fully later:
‘Everything which goes into the erection of a building is originally simply an article.’
...

________________________

50 1960 (2) SA 708 (A) at 713H.

612 Income Tax in South Africa: Cases and Materials

I turn now to consider proviso (ii). It excludes the depreciation allowance if the ‘articles’ are
‘buildings or other structures or works of a permanent nature’. As a building can sometimes be a
movable or temporary structure . . . I think that ‘buildings’ in the proviso, like ‘structures or
works’, is also confined to buildings of a permanent nature . . . It was rightly common cause that
the word includes an integral part of such a building. Hence, if an article is so integrated into a
building as to become part of it in the way about to be canvassed, no allowance is claimable for
its depreciation. The reason is, not only because of the applicability of proviso (ii), but also be-
cause it loses its own identity and character and ordinarily ceases to be an ‘article’ under s 11(e).
. . . [H]ere . . . the issue is simply whether the demountable partitions, when positioned, became
to integrated with respondent’s building as to form part of it.
Le Sueur’s case51 dealt with a similar problem . . . The parts of and dicta in the judgments relating
to the present problems are the following:
52
1. Per Ramsbottom JA:
‘I think that one test – there may be others – of whether a thing is part of a building for the purpose of
para 17(1)(f) of Schedule 3 is whether it has become part of the fabric of the building . . . Things which
are brought into a building and which form no part of the fabric thereof, even though they may be fas-
tened to the floor or the walls, do not, in my opinion, form part of the building for the purpose of para
17(1)(f) of Schedule 3 . . .
2. Botha AJA also emphasised that, for the article to become part of the building, it is not sufficient that it is
merely attached thereto; it has to be so structurally integrated or otherwise physically incorporated into the
building that it loses its own separate identity and can no longer be detached from the building without do-
53
ing substantial injury to the article or the building.
3. As to the relevance of the permanency or otherwise of the attachment of the article to the building,
54
Ramsbottom JA said:
‘No doubt the fact that something has been permanently affixed to the building is relevant to the ques-
tion of whether or not it is part of the building, but it is by no means conclusive.’
55
Botha AJA indicated that, even if it is attached ‘in some permanent fashion to the building’, if it is never-
theless capable of being separated from it, it would not necessarily become part of the building.
56
4. As to the intention with which the article is attached, Ramsbottom JA said that it was ‘of much less im-
portance’ than the nature of the article and the manner of its attachment. On the other hand Botha AJA said
it was irrelevant, the question having to be determined objectively . . .
57
5. Per Botha AJA:
‘The word ‘building’ in para 17(1)(f) of the Third Schedule to the Act is not used in any technical
sense, and the question what appurtenances form part of a building for the purposes of that paragraph,
is a question of fact.’
. . . The requirement of permanency of the buildings, structures, and works underlies the whole
of proviso (ii), probably because buildings, etc., of that nature do not ordinarily suffer wear and
tear through use or not to such an extent that a depreciation allowance for them is warranted.
Hence, for an article to form part of such a building for the purpose of proviso (ii), I think that
it must have been permanently incorporated or integrated into it. (I use ‘permanently’ there in
its comparative or practical sense as meaning indefinitely or not temporarily). The issue of its
permanency or otherwise, will often also be objectively determined by applying the factors men-
tioned in paras 1 and 2 above – or other factors, for those were not intended to be exhaustive –
but if there is any uncertainty about whether the attachment is part of the building, I see no
reason why the subjective factor, the owner’s intention in attaching the article to the building,
should not also be taken into account.
To sum up: before an article attached to a building of a permanent nature can be said to form part
of it for the purposes of proviso (ii) to s 11(e) of the Act, it must have been structurally integrated
________________________

51 1960 (2) SA 708 (A).

52 At 713G-714D.
53 At 718C-719F.
54 At 712C.
55 At 718G.
56 At 713B.
57 At 718.
 Statutory deductions and allowances 613

or otherwise physically incorporated into the building permanently in such a way that it has lost
its own, separate identity and character; the question whether or not that has occurred is one of
fact.
The nature of respondent’s demountable partitions and the way in which they were mounted
and used in respondent’s building during the relevant years of assessment have been fully des-
cribed . . . I do not think that they were structurally integrated or otherwise physically incorpo-
rated into the building permanently in such a way that they lost their own, separate identity and
character, or, in the words used by Ramsbottom JA, that they were built into the fabric of re-
spondent’s building.
That, when in position, they were identical with ordinary built-in inner walls in rigidity, appear-
ance, use, and function or purpose, although perhaps relevant, is of little consequence, for that
is not the ultimate criterion . . .
The above decisions all demonstrate clearly how essentially the problem involved here is one of
fact . . . For reasons already given, I think . . . that they were not part of the building. However, it
is not an easy problem to resolve, as is evidenced by the division of views in the Special Court.
Hence, even if the majority erred, their conclusion was one of fact, with which, in the absence of
any of the recognised vitiating factors, we cannot interfere on appeal.
It follows that, even when the demountable partitions were positioned and used, they remained
‘articles’ within the meaning of s 11(e).

Notes
This case concerned the interpretation of the word ‘articles’ in the phrase used in
s 11(e), ‘machinery, implements, utensils and articles used by the taxpayer for the pur-
pose of his trade’. The court held that the word ‘articles’ had to be given a wide interpret-
ation, and could not be limited by the ejusdem generis rule because the preceding words
did not constitute a genus. Hence the word ‘article’ means a material thing (hence, it
does not include immaterial property such as copyright) used by the taxpayer for the
purpose of his trade (in other words, it must fulfil the ‘functional test’ endorsed by the
Appellate Division in [311] Blue Circle Cement). The broad meaning of the term ‘arti-
cles’ was however limited by the proviso to s 11(e) which excluded buildings and fixtures.
The issue in the matter before the court in Charkay Properties consequently narrowed
down to the question whether the demountable partitions which, the court said, in the
abstract undoubtedly constituted ‘articles’, had been so integrated into the building that
they had lost their character and separate identity as ‘articles’ and became part of the
building. This, said the court, was a question of fact; an article would become integrated
into the building if it had become permanently (ie indefinitely) incorporated or inte-
grated into it. This would often be determined by objective factors, but if the objective
inquiry led to uncertainty, the owner’s subjective intention could also be taken into
account. Applying these tests, the court held that the demountable partitions in question
had not been structurally integrated or incorporated into the building, and had not lost
their identity as ‘articles’. Hence, they qualified for a wear and tear or depreciation
allowance under s 11(e).

§2.4 Accelerated wear and tear or depreciation allowances: ss 12B and 12C
(assets used in a process of manufacture)
The general intent of the wear and tear or depreciation allowance is to enable the tax-
payer to deduct the acquisition cost of qualifying capital assets used in the production of
income in annual instalments over a period approximating to their productive life.
In certain circumstances, the Act allows a taxpayer an ‘accelerated wear and tear or
depreciation allowance, in other words an allowance that permits the taxpayer to write
off the cost of the asset over a period shorter than its expected productive life.
614 Income Tax in South Africa: Cases and Materials

Section 12B allowed the cost of qualifying capital assets used by the taxpayer to be writ-
ten off over a period of three years at the rate of 50% in the first year, 30% in the second
year and 20% in the third year (the so-called 50-30-20 allowance). Assets which qualified
for the s 12B allowance were machinery or plant that was on or after 1 January 1989 but
before 16 December 1989 brought into use by the taxpayer for the purposes of his trade
(other than mining or farming) and used by him directly in a process of manufacture
carried on by him or a process that in the opinion of the Commissioner was of a similar
nature, and certain other stipulated categories of assets.
After being in force for less than a year, s 12B was abruptly terminated and replaced by
s 12C, except in relation to qualifying assets of farmers, to which s 12B continues to
apply. Section 12B also continues to apply to qualifying assets that were brought into use
for the first time between the date when s 12B came into force and the date it was term-
inated.
Section 12C applies to qualifying assets brought into use after 15 December 1989, and
allows the cost (as defined) of the asset to be written off on a straight line basis over five
years at the rate of 20% per annum. Assets which qualify for this allowance are machinery
or plant (whether new or used) which was brought into use for the first time by the
taxpayer on or after 1 January 1989 for the purposes of his trade (other than mining or
farming) and were used by him directly in a process of manufacture carried on by him or
any other process that, in the opinion of the Commissioner was of a similar nature, and
certain other stipulated categories of assets.
The following cases deal with the question of what constitutes ‘a process of manufac-
ture’.

[313]
SIR v Hersamar (Pty) Ltd
1967 (3) SA 177 (A), 29 SATC 53
The taxpayer’s business consisted of buying scrap metal in three categories, namely very
light, light and heavy, and preparing and processing it into ‘steel scrap’ and selling it to
steel manufacturers who smelted it in furnaces and cast it into steel ingots. To convert
the scrap metal into the specifications of ‘steel scrap’ the very light scrap had to be
converted into ‘briquettes’. This was done by first putting all such material through a
‘mincing’ machine known as a ‘chipper’, then putting it into a pressing machine, known
as a briquetting press, which compacted the material into a solid cast iron or steel cylin-
der, weighing from 15 to 20 pounds. The light scrap material was first cleaned of all non-
ferrous matter, then cut to size with a machine termed a ‘cropper’ and fed into a ‘baling
press’. Heavy scrap metal was cut by machines to various sizes required by the foundries.
The briquettes and blocks produced by the respondent involved no metallurgical
change in the scrap metal. Its conversion into ‘steel scrap’ put it in a form in which it was
suitable for smelting and was more economically handled, stored and transported. The
briquettes and blocks had no other purpose than supply to steel foundries for smelting
and for that purpose they constituted a saleable commodity.
During the years 1957 to 1961 the taxpayer purchased four baling presses, three bri-
quetting presses, a chipper machine, a cropper machine, a compressor and a spiral rotor
lift for baling machines and claimed that, in respect of this machinery, it was entitled to
certain allowances or deductions under s 11(2)(d) bis(1)(a) and sept(1)(a) and s 50 of
Act 31 of 1941, as amended. The Commissioner contended that these machines were not
used ‘directly in a process of manufacture’ and hence did not qualify for these allowances.
Issue: did the taxpayer use the machinery in question ‘directly in a process of manufac-
ture’?
 Statutory deductions and allowances 615

Held: in the affirmative. The issue raised a question of law, not fact. Although the bri-
quettes were physically the same material, unaltered metallurgically, they were essentially
different from the steel scrap, and had been made so through a process of manufacture.
Williamson JA: Neither of the governing words in the phrase under consideration, viz ‘process’
and ‘manufacture’, are words of any exact significance . . . The word ‘process’ can cover an un-
limited multiplicity of types of operations; ‘manufacture’, in its widest sense, can be said to mean
the making of any sort of article by physical labour or mechanical power. Darling J in McNicol v
Finch 58 stated that
‘the essence of making or manufacturing is that what is made shall be a different thing from that out of
which it is made’.
Some judicial dicta seem to emphasise ‘a change of the character of the raw materials’ out of
which something is made. Others again state that the ‘difference’ must be ‘substantial’ or ‘essen-
tial’.
59
In ITC 1052 van Winsen J refers to some of these dicta and he concludes that
‘the article claimed to have resulted from a process of manufacture must be essentially different from the
article as it existed before it had undergone such process’.
With this statement I do not disagree. But it must be recognised that the term ‘essentially’ obvi-
ously imports an element of degree into the determination of the sufficiency of the change that
must be effected for a process to be one of ‘manufacture’ . . . There can be no fixed criteria as to
when any such change can be said to have effected an essential difference. It is a matter to be
decided on the particular facts of the case under consideration . . .
Although a briquette (or a block of light steel scrap) is physically the same material, unaltered
metallurgically, as the steel scrap of which it is made, it has become essentially something differ-
ent. It is now, not a shapeless quantity of loose steel scrap, but a definite article, formed to cer-
tain desired specifications and compressed to a great density, which has thereby acquired a
utility and a commercial purpose which it did not previously possess. This article has been
brought into existence by processing loose scrap steel with a machine for the purpose of the
respondent’s trade, as a metal merchant. The process involving the use of the machines was in
the circumstances, in my view, a process whereby this specific type of article was manufactured;
the machine was accordingly used in a process of manufacture . . .
...
The result is that the appeal must be dismissed with costs.
BEYERS JA, OGILVIE-THOMPSON JA and VAN WINSEN AJA concurred.

Notes
This was the first Appellate Division decision on the meaning of the phrase, ‘a process of
manufacture’. Counsel for the Commissioner argued that the policy behind the provi-
sions of the Act was that Parliament wished to encourage and assist the manufacturing
sector of the economy, but that it was not concerned to aid the middleman, such as the
taxpayer in this case, who performed acts preparatory to manufacturing. Regrettably, the
Appellate Division’s judgment contains no discussion of the economic purpose of the
statutory provisions and the judges seem to have regarded their task of interpreting the
phrase as a purely semantic exercise. This blinkered approach, it is submitted, led to the
economically bizarre result that fiscal benefits were granted to a fast food chain in [314]
Safranmark but were denied to a computer bureau in [315] Automated Business Sys-
tems.

________________________

58 (1906) 2 KB 352 at 361.

59 26 SATC 253 at 255.
616 Income Tax in South Africa: Cases and Materials

[314]
SIR v Safranmark (Pty) Ltd
1982 (1) SA 113 (A), 43 SATC 235
The respondent held a franchise from Kentucky Fried Chicken SA (Pty) Ltd (‘Ken-
tucky’) to prepare and sell fried chicken in a manner specified by Kentucky. For the
1974-76 years of assessment the respondent claimed the machinery initial allowance in
terms of s 12(1) and the machinery investment allowance in s 12(2) of the Act. These
allowances were available if, inter alia, the machinery or plant was used ‘directly in a
process of manufacture’ or ‘was in a process which in the opinion of the Secretary is of ‘a
similar nature’ to a process of manufacture.
The facts were that cases of chicken were supplied, by a single supplier, to each outlet.
Chickens of a standardised weight arrived at the outlet frozen and packed in polythene
bags. The number of chickens estimated to be required for the day were allowed to
defrost. Each piece of chicken was then treated and cleaned in a specific way, dipped in a
milk and egg ‘dip’, rolled in a ‘breading mix’ containing a secret blend of flour and
spices and then put in pots. The machinery included pots, a gas stove, a dump table, a
filtering screen and a baffle tank. The pots were ‘special patented Kentucky Fried Chick-
en pots’ and the cooking process was highly standardised. By adhering to the standard
procedures, the chickens produced by all outlets were the same as regards taste, tender-
ness and colour. This meant that no matter from which outlet a customer bought, he
would get a standardised product, namely ‘Kentucky Fried Chicken’.
Galgut AJA: [T]he sole issue before us is whether the operations conducted by Safranmark can
be said to have been a process of manufacture . . .
[After summarising the facts, the judge continued:] I turn now to discuss the import of the
phrase ‘process of manufacture’. As stated by Williamson JA in SIR v Hersamar (Pty) Ltd:60
‘Neither of the governing words in the phrase under consideration, viz ‘process’ and ‘manufacture’, are
words of any exact significance. Consequently the whole phrase, ‘a process of manufacture’, is one to
which it may be very difficult to assign a meaning expressed in terms which would properly distinguish be-
tween all cases which fall within the scope of the phrase and those which should fall outside its scope. The
word ‘process’ can cover an unlimited multiplicity of types of operations: ‘manufacture’, in its widest
sense, can be said to mean the making of any sort of article by physical labour or mechanical power.
61
Darling J in McNicol v Finch stated that
‘the essence of making or manufacturing is that what is made shall be a different thing from that out of
which it is made.’’
It appears from ITC 124762 that Miller J had occasion to examine several income tax cases, in-
cluding Hersamar’s case supra cit, in which the meaning of ‘process of manufacture’ was consid-
ered. I too have considered those cases. I am thus in full agreement with what Miller J says:
‘That the ordinary connotation of the term ‘process of manufacture’ is an action or series of actions
directed to the production of an object or thing which is different from the materials or components
which went into its making, appears to have been generally accepted. The emphasis has been laid on the
difference between the original material and the finished product.’
And:63
‘Invariably, in cases in which plant or machinery has been found to have been used in a process of manu-
facture, the result of such process has been the creation of a substance or an article which, although it
might have contained all the various components from which it evolved in the process of manufacture, be-
came upon completion an essentially different entity in its own right.’
...
I do not find the dictionary meanings helpful in resolving the issue before us.
________________________

60 1976 (3) SA 177 (A) at 186.

61 (1906) 2 KB 352 at 361.
62 (1977) 38 SATC 27 at 31.
63 At 32.
 Statutory deductions and allowances 617

...
The submissions made by counsel for the Secretary can be summarised. He urged that there had
not been any substantial or essential change in the main ingredient; that Kentucky Fried Chick-
en was still chicken; that one speaks of cooking or frying chicken and not of manufacturing fried
chicken; . . .
I pause to say that I do not find analogous cases helpful in deciding the issue before us. An examin-
ation of the procedures and operations carried on by Safranmark demonstrate:
(aa) that plant and machinery is used and which in some respects is specialised;
(bb) that the method of using the plant and machinery is standardised;
(cc) that human effort and labour are used;
(dd) that the volume of production is based on anticipated demand;
(ee) that the volume of production is large;
(ff) that the end product is different from the materials from which it is produced, not only in
nature but also in utility and value in that the ingredients of the milk and egg mixture and
of the breading mixture have ceased to exist and the inedible raw chicken has become an
edible product.
(gg) that all the above was done for the purpose of Safranmark’s trade.
The conclusion to be drawn from the above is that not only did each of the ingredients cease to
retain its individual qualities but upon completion of the process a different compound sub-
stance having a special quality as such, viz edibility and special taste, has been produced and
moreover produced in quantity for purposes of trade. If one adds to the above conclusion the
scale on which the operations were conducted and the large volume of sales which were effect, it
will be seen that the above submissions by counsel cannot be sustained.
. . . The detailed process evolved, prescribed and insisted upon Safranmark was calculated to
result in a new and distinctive product recognisable as such and the evidence shows that that has
been achieved. The circumstance that what is fundamentally involved in the production is the
cooking or frying of raw chicken is not a bar to acceptance of the process as one of manufacture.
In conclusion I wish to add that I find myself in respectful agreement with the following dicta of
the learned Judge of the Special Court:
‘Is this process one of ‘manufacture’? In answering this question in the circumstances of the present case
one should not, it seems to me, have regard only to the extent of the change which the appellant effects to
the materials or components used by it . . . The expression ‘a process of manufacture’ is not a term of art.
In its ordinary meaning there are features other than the difference between the original material and the
finished product which could in particular circumstances determine whether a process is one of ‘manufac-
ture’ or not. In the present case it seems relevant to me that a standardised product is produced on a large
scale by a continuous process utilising human effort and specialised equipment in an organised manner.
When to that is added the factor that the end product is, in terms of its nature, utility and value, essentially
different from its main component, the process must, it seems to me, be described as one of manufacture.’
In the result the appeal fails and is dismissed with costs.
JANSEN JA, MILLER JA and HOLMES AJA concurred in the judgment of GALGUT AJA.
Corbett JA: (dissenting) The simple issue in this case is whether during the relevant years of assess-
ment the operations of respondent, at its different outlets, in the production of what is known as
Kentucky Fried Chicken constituted a ‘process of manufacture’ within the meaning of that
phrase as used in s 12(1) and 12(2) of the Income Tax Act 58 of 1962 (‘the Act’). My Brother
Galgut has come to the conclusion that he did. I feel constrained to differ from that conclusion.
...
The meaning of the phrase ‘process of manufacture’ in the context of s 12 of the Act (or similar
statutory provisions in earlier legislation) has been considered in a number of cases in the In-
come Tax Special Courts and also by this Court in SIR v Hersamar (Pty) Ltd.64 . . . I think that from
these previous decisions certain general propositions may be derived. They are:
________________________

64 1967 (3) SA 177 (A).

618 Income Tax in South Africa: Cases and Materials

(1) The term ‘process of manufacture’, in the present context, denotes an action or series of
actions directed to the production of an object or thing which is essentially different from
the materials or components which went into its making.
(2) The requirement of ‘essential difference’ necessarily imports an element of degree; and
there are no fixed criteria – nor is there any precise universal test – whereby it can be deter-
mined whether or not a change in the materials or components wrought by the process, be
it as to the nature, form, shape or utility of the materials or components, has brought about
an essential difference. This must be decided on the individual facts of each case.
(3) When deciding whether a particular activity does or does not fall within the ambit of a ‘pro-
cess of manufacture’ the ordinary, natural meaning of that phrase in the English language
must not be lost sight of. And in this connection analogies can be misleading . . .
Basically the operation conducted at respondent’s outlets consists of cooking pieces of chicken
for the purpose of sale to the public. This entails storing the pieces of cut chicken with which
respondent is supplied, preparing them and cooking them. In my opinion, this operation or
process does not result in the production of an object of thing which is essentially different from
the materials or components which went into its making . . . I cannot . . . think that the cooking
of chicken at respondent’s outlets produces articles so different from the materials used as to
amount to a process of manufacture . . .
Nor do I think that this conclusion is affected by the fact that there are certain additives in the
cooking – the so-called ‘milk and egg dip’ and the ‘breading mix’, including the secret spice
mixture – or by the fact that a standardised product is produced or by the fact that Kentucky
Fried Chicken is produced and sold on a large scale. Cooking normally involves the introduction
of additives. And, if a particular operation does not constitute a process of manufacture, then I
do not see how it can become one merely by being conducted on a large scale or merely because
it results in a standardised product.
I would allow the appeal with costs . . .

[315]
Automated Business Systems (Pty) Ltd v CIR
1986 (2) SA 623 (T)
The taxpayer company operated a computer service bureau offering a wide range of
services in the field of electronic data processing. During the year of assessment in issue
the company acquired two Inforex data capturing systems (‘the machines’) at a cost of
R38 340 and R53 983 and put them to use in its trade. The company claimed the machin-
ery initial allowance and the machinery investment allowance, totalling R50 778, in terms
of s 12(1) and 12(2) of the Income Tax Act. The Commissioner disallowed these claims.
The company’s main activity was described in evidence as follows. The material to be
processed by the company consisted of handwritten documents, delivered to the compa-
ny by its clients. This was processed on computers in the following way: it was taken up in
the company’s data capture section, using the Inforex machines; the written material was
keyed into the machines, thereby being converted into electrical impulses through which
data was stored on magnetic tape or disc, and in this medium was conveyed to a comput-
er which manipulated or developed it in terms of a computer program. The final phase
was when the results of the development or manipulation phase were printed on blank
paper embossed with the client’s name and address. The results were printed invoices,
statements, trial balance sheets and similar documents.
The company operated on a large scale, its output being 50 million lines of print per
month, equivalent to 125 million pages. There was a staff of 95 and operations were
conducted on a 24 hour basis, seven days a week.
Issue: were the machines in question used ‘directly in a process of manufacture’ as re-
quired in terms of the statutory sections.
 Statutory deductions and allowances 619

Held: in the negative. The printing of computer-generated information onto blank

paper did not change the character of the paper substantially or essentially; moreover, it
was not a standardised product and hence did not involve a process of manufacture.
Ackermann J: The words ‘process’ and ‘manufacture’, which are the crucial words to be con-
strued in s 12(1) and (2) of the Act are notoriously difficult to define precisely in a manner ca-
pable of easy or consistent application to all factual situations . . . The expression ‘a process of
manufacture’ is not a term of art . . . Nevertheless one important criterion (but not the exclusive
one) which our Courts have emphasised is
‘that there must have been a ‘substantial or essential change of the character of the materials’ out of which
the ‘manufactured’ article is made’
but
‘there can be no fixed criteria as to when any such change can be said to have been effected’.
65
(Per Galgut AJA in Safranmark’s case.)
[Ackermann J quoted from Galgut AJA’s judgement in SIR v Safranmark and said with reference
to the latter’s seven points, numbered (aa) to (gg), that he could not have intended these to be a
comprehensive definition of universal application.]
In my view, and on the facts of this case, two important features to consider are whether there
was a substantial or essential change of the character of the materials out of which the alleged
manufactured articles were made, and whether it can be said that appellant’s operations pro-
duced a standardised product.
The material which had to be processed by appellant’s computer bureau consisted of handwrit-
ten documents, containing information, which were delivered to the bureau by its clients. The
information was processed, in the manner described, on the computers and manipulated in
terms of the computer programme which had been developed for this purpose. The results are
printed on paper and made available to the client. No new data is added to the data furnished by
the client. In essence the entire process is one of re-arranging given data in different ways and
for different purposes. Viewed from this perspective I agree with the finding of the Special Court
that the end product is, in terms of its nature, utility and value not essentially different from its
main component.
Viewed from another point of view, the process involves the printing of information onto paper
which was previously blank. Appellant contends that this amounts to blank paper, purchased in
bulk and having no value other than its intrinsic value as paper, being ‘rendered into cut and
printed documents which are capable of and are intended for use by the appellant’s customers’.
This is a somewhat tortured description of the reality of the process. Information supplied by the
client is manipulated by computer and the manipulated information printed onto paper. Can it
be said that the printing of manipulated information onto blank paper changes the character of
the paper substantially or essentially? I do not consider that it does.
The end product is only of value to the particular customer who has supplied the original data
which has been manipulated into the end product. It only has value in relation to that individual
enterprise or business. It is therefore not a standardised product and, for this reason too, I am of
the view that it lacks the essential characteristics of a manufactured product and that the process
giving rise to it is not a manufacturing process.
In my view the same conclusion must be reached when the problem is approached on the basis
of general impression and the common usage of ordinary language. It seems to me that the es-
sence of the process in the present case can easily become obscured by the fact that sophisticated
(at least in the eyes of the layman) computer, mechanical and other procedures are used. The
entire procedure could be carried out by an army of accountants, clerks and scribes, analysing
the information provided by the client and compiling it in the form required by him. This can-
not in common parlance be called manufacturing. In my view the service rendered by appellant
does not differ in principle at all from a very large typing agency. In the latter case the raw mate-
rial could come in by way of manuscript, tape recording or computer tape. It is typed or printed
onto paper by sophisticated electronic and computer typewriters which can even store the
________________________

65 1982 (1) SA 113 (A), 43 SATC 235 at 246.

620 Income Tax in South Africa: Cases and Materials

incoming information in their ‘memories’. This process of printing information onto paper
could never, in my view, be regarded as a process of manufacturing as that expression is com-
monly understood.
While appreciating that analogies are dangerous, I am fortified in the conclusion I have reached
by a number of decided cases.
66
In ITC 1101 the Rhodesian Special Court stated the following:
‘In its ordinary usage the verb ‘manufacture’ is not used to describe productive and constructional activi-
ties resulting in new roads, bridges, dams, houses, playing fields, airfield runways, or the preparation of a
site for building . . .’
In ITC 124767 Miller J (as he then was), after referring with approval to ITC 1101 said the follow-
68
ing:
‘If, for example . . . an irregular and wooded piece of ground were cleared of obstruction and appropriate-
ly levelled to the extent necessary to make it suitable for vehicular traffic, it would be inaccurate and unre-
alistic to say that the ground had undergone a process of manufacture . . .’
I agree with the submission advanced by respondent’s counsel that the learned Judge’s words in
the above passage could be adapted to the present matter in the following terms:
‘If figures and information are printed upon paper it is inaccurate to say that the piece of paper upon
which the printing occurs has undergone a process of manufacture. It remains essentially the same piece
of paper upon which something has been printed.’
In Case 58 69 the Commonwealth Taxation Board of Review decided that a control tape made by a
so-called Nova Central Processor together with a computer for use in the manufacture of certain
70
machinery, was itself not an item of manufactured goods. The Chairman stated the following:
‘. . . Primarily manufacture requires the use of physical labour, or that extension of the physical hand, me-
chanical power. The word ‘manufacture’ has at no stage been used in any sense to encompass the process
of reducing into written form the results of mental processes . . .’
He [thereafter] said the following:71
‘Whilst one would not dispute that ‘manufactured goods’ can be obtained from paper products, I think
that by merely punching a series of holes on a paper tape it cannot be said that any manufacturing process
has taken place . . .’
I am therefore in full agreement with the conclusion reached by the Court a quo that the activities
of the appellant during the financial year 1977 did not constitute a process of manufacturing. In
my view this is so because the end product does not differ essentially or substantially from the
original product; because, when regard is had to common usage of ordinary language, it would
be inaccurate and unrealistic to say that appellant’s activities constituted a manufacturing process.

[316]
National Co-operative Dairies Ltd v CIR
(1992) 54 SATC 1 (Appellate Division)
The taxpayer, a farmer’s co-operative company, conducted large-scale operations in the
dairy industry. Its activities included collecting milk from dairy farmers and conveying it
to depots. If milk is not cooled within four hours after the cow is milked, bacterial de-
generation ensues. Cooling materially delays such degeneration. Pasteurisation does the
same and also kills harmful bacteria. Pasteurisation is a process which involves heating
the milk for a short period, then cooling it again.
The taxpayer used two types of equipment. The first was a cooling unit, a tank, which
the taxpayer leased to farmers for installation in their dairies. The milk drawn from the
cow is transferred to the tank, and there it is cooled to between three and five degrees
________________________

66 29 SATC 23 at 27.
67 38 SATC 27.
68 At 32.
69 21 CTBR (NS) at 643.
70 At 647.
71 At 649.
 Statutory deductions and allowances 621

celsius. Every second day milk is collected from the farmers, and for this the taxpayer
used insulated tankers. The driver of the tank tests the temperature of the milk in the
tank and then pumps it into the tanker where its temperature remains constant. This
procedure is repeated at various dairy farms. Eventually, the milk so collected is conveyed
in the tanker to one of the taxpayer’s depots. Their the contents of the tanker are
pumped into a storage silo, from where it is either bottled to sent to industrial plants for
processing into butter, cheese and condensed milk.
The taxpayer sought a deduction for the cost of the tanks, tankers and trucks under
s 12(1)(a) and s 12(2)(a) (a machinery initial allowance and a machinery investment
allowance, respectively) alternatively under s 27(2)(d) and (e) (the special machinery
initial allowance). In the Appellate Division, the taxpayer conceded that the tanks did
not qualify for allowances under these provisions, but maintained that the tankers and
trucks did qualify.
Issue: did the cost of the tankers and trucks qualify for the statutory allowances on the
grounds that they were used by the taxpayer directly in a process of manufacture carried
on by it?
Held: in the negative; assuming that pasteurisation of milk is a process of manufacture,
the tankers and trucks were not used in that process; pasteurisation did not commence
when the milk was put into the tank. The cooling of the fresh milk did not change its
substance or chemical composition, and was not a process of manufacture.
Van Heerden JA: It was common cause that the deductions claimed by the appellant in respect
of the cost of the tankers and trucks qualified under s 12(1)(a) and s 12(2)(a) if they were used
by the appellant directly in a process of manufacture carried on by it. It was contended by the
appellant, and conceded by the respondent, that the pasteurisation of milk by the appellant
constitutes a process of manufacture, and I shall assume that the concession was rightly made.
On this assumption the cardinal question is whether the tankers and trucks are used by the
appellant directly in the process of pasteurisation. The answer depends on the solution of a
further question, viz, at what point does that process begin?
Counsel for the appellant sought to establish a link between the cooling of the milk in the tanks
and the eventual pasteurisation. His contention was that the process of manufacture com-
menced with the feeding of the milk into the tank. The cooled milk, so he submitted, is some-
thing essentially different from the fresh or raw milk extracted from the udder. This is not borne
out by the evidence. The only purpose of the cooling of milk is to preserve it, ie to inhibit bacterial
growth. Cooling does not change the substance or chemical composition of fresh milk. Indeed,
save for a change in temperature, there is no difference at all between fresh and cooled milk.
Hence there is no question of the milk being subjected to a series of operations, beginning with
the cooling thereof, which as a whole change the substance of the raw product. This is borne out
by the fact that milk not cooled in a tank can be pasteurised, as happens with milk collected in
cans. In the final analysis there is no difference between the cooling of milk in a tank and the cool-
ing thereof in a refrigerator. And the housewife who puts a jug of fresh milk in a refrigerator with
the intention of preserving it for later use as an ingredient in the baking of custard would surely be
surprised to hear that the baking commenced when she closed the door of the refrigerator.
In the alternative counsel for the appellant submitted that the tankers and trucks are in any
event used in the process of pasteurisation because they are utilised to convey the milk to the
depots where that process takes place. Whilst it is true that without such conveyance pasteur-
isation cannot take place, the tanks and trucks are clearly not used directly in a process of manu-
facture (pasteurisation). That process does not begin until, at the soonest, the raw product – the
milk – reaches the depot.
I turn to the provisions of s 27(2)(d) and (e) of the Act. In so far as it is material s 27(2)(d) reads:
‘(2) In the determination of the taxable income of any agricultural co-operative, there shall be allowed as
deductions from the income of such . . . co-operative . . . –
(d)(i) an allowance, to be known as the special machinery initial allowance, in respect of the cost to such
agricultural co-operative of any new or unused machinery or plant which . . . is used by it directly for storing
. . . pastoral, agricultural or other farm products of its members . . . or for subjecting such products to a primary process
. . .’ (my italics).
622 Income Tax in South Africa: Cases and Materials

It is unnecessary to set out the provisions of s 27(2)(e). It suffices to say that if plant or machin-
ery does not comply with the above underlined requirements, no allowance may be claimed
under s 27(2)(e). It follows that the appellant’s tankers and trucks do not fall within the ambit of
s 27(1)(d) and (e) unless (i) they are used directly for storing its members’ milk, or (ii) are so
used for subjecting such milk to a primary process.
...
On behalf of the appellant it was submitted, albeit faintly, that the tankers – but not the trucks –
are used for storing milk. There is no merit in this submission. The ordinary meaning of ‘store’
is to keep in store in reserve or for future use (cf the word ‘opberg’ in the Afrikaans text). By
contrast the tankers are used for the conveyance of milk and there is simply no question of a use
for storage whilst the milk is in transit from a dairy to one of the appellant’s depots.
The final argument of the appellant was that the tankers and trucks are used for subjecting the
milk to ‘a primary process’. That concept is defined in s 27(d). Applied to the facts of this appeal
it is the first process to which milk is subjected by the appellant in order to render it market-able or
to convert it into a marketable commodity. If the cooling of milk in a tank can be regarded as
such a first process it is, of course, the farmer and not the appellant who subjects the milk to that
process, even although some guidance is afforded to him by the appellant. The tankers collect
the milk after it has been cooled. No further cooling takes place whilst the milk is in transit.
Nothing further is done during the process of conveyance to render the milk market-able or to
convert it into a marketable product. Nor are the tankers – and the trucks – used directly in a
primary process to which the milk may be subjected after it is fed into a silo. The connection
between the use of the tankers – and obviously also the trucks – and the eventual process is simp-
ly to tenuous to qualify as a direct use for the later primary process.
The appeal is dismissed with costs . . .
CORBETT CJ, NIENABER JA, VAN DEN HEEVER JA and NICHOLAS AJA concurred.

§2.5 Lease premiums: section 11(f)

In terms of s 11(f) a taxpayer is entitled to an allowance in respect of ‘any premium or
consideration in the nature of a premium paid by a taxpayer for (inter alia) the right of
use or occupation of land or buildings used or occupied for the production of income or
from which income is derived, or the right of use of any plant or machinery used for the
production of income or from which income is derived’.
The lessee’s right in terms of s 11(f) to deduct a lease premium operates back-to-back
with the lessor’s assessability under para (h) of the definition of ‘gross income’ on the
amount of the lease premium that accrues to him.
For case law on what constitutes a ‘premium or consideration in the nature of a pre-
mium’ for the right of use or occupation of land or buildings, see the cases under lease
premiums in chapter 6, above.

§2.6 Leasehold improvements: s 11(g)

Section 11(g) provides for an allowance, subject to certain provisos, for expenditure
actually incurred by the taxpayer in pursuance of an obligation to effect improvements
on land or to buildings, incurred under an agreement whereby the right of use or occu-
pation of the land or buildings is granted by another person, where the land or buildings
are used or occupied for the production of income or income is derived therefrom.
The lessee’s deduction for leasehold improvements operates back-to-back with the in-
clusion in the lessor’s gross income of the value of the improvements under para (h) of
the definition of ‘gross income’. The philosophy of the Act is that if an amount qualifies
for deduction by the lessee, an equivalent amount is assessable in the hands of the lessor,
and conversely.72
________________________

72 Generally, see Broomberg, Tax Strategy, pp 94-95.

 Statutory deductions and allowances 623

The reported cases focus on whether, on a proper interpretation of the contract, the
lessor had the requisite ‘right’ to have the improvements effected and whether the lessee
had the requisite ‘obligation’ to effect them. This issue, which is central to the lessor’s
assessability and the lessee’s entitlement to a deduction is discussed in the cases on
leasehold improvements in chapter 6.

Where the contractual arrangements concerning the use and occupation of the premises and the
value of the improvements to be effected by the lessee are laid down in two separate documents, the
court will treat them as one if they constitute one indivisible transaction.

[317]
CIR v Carletonville Motors (Pty) Ltd
1962 (3) SA 581 (A), 26 SATC 195
The taxpayer company had, in terms of a lease (the ‘operating lease’) been granted the
right to occupy certain premises. In terms of a separate agreement (the ‘acknowledge-
ment of debt’) the taxpayer undertook to effect specified improvements on the property.
The taxpayer claimed a deduction for amounts expended on making the improvements.
The Commissioner disallowed these deductions on the grounds that the obligation to
effect the improvements did not arise out of agreement in which the right of use or
occupation had been granted.
Issue: was the taxpayer entitled to deduct the cost of improvements which were effected
in terms of an agreement which was separate from the lease in which the use and occu-
pation of the premises was granted?
Held: in the affirmative. In the circumstances the two agreements constituted one indi-
visible transaction; neither party would be entitled to exercise its rights under the one
agreement without performing its obligations under the other.
Beyers JA: In the Special Court it was contended on behalf of the Commissioner that the oper-
ating lease should be read independently of the acknowledgement of debt, and was the only
agreement to which reference could be made, for it was the only document between the compa-
ny and Caltex whereby the right of use or occupation of the erf and buildings thereon was
granted to the company; when so considered the amounts of £557 and £610 had correctly been
disallowed as not being expenditure incurred in pursuance of an obligation to effect improve-
ments on the erf, as the operating lease, read alone, imposed no obligation on the company to
effect any improvements on the erf.
The Special Court rejected the above contention and gave as its reasons for doing so the follow-
ing:
‘The court has come to the conclusion that the two documents must be read together . . .’
The Special Court found further support for the view that the two transactions were in fact one,
in the letter of 2 October 1957. Both propositions are embodied in this one letter, which was
written by Caltex and assented to by the company.
Counsel for the Commissioner . . . submitted . . . that although there was only one transaction,
that transaction contained two separate and independent covenants; and that while the obliga-
tion to effect improvements and the lease were part of one transaction, the obligation to effect
the improvements did not arise under the lease, as required by s 11(2)(e)bis.
I have set out the Special Court’s finding at some length because it seems to me that the Court
found not only that the two documents must be read as one transaction, but that the transaction
itself was one and indivisible. As the Court has pointed out:
‘In truth, neither agreement could have been enforced without the other.’
Neither party could claim to exercise its rights under the one covenant without at the same time
performing its obligations under the other covenant. It was the intention of the parties, as evi-
denced in the correspondence, and as found by the Special Court, that the company should rent
the erf with the buildings thereon, at a composite monthly rental of £77 15s. 8d. The splitting of
624 Income Tax in South Africa: Cases and Materials

the transaction, and the composite rental, into two parts, was in the circumstances a matter of
form merely, and not of substance. The two parts are complementary and, that being the case,
the finding of the Special Court that the obligation to effect the improvements on the land in
question was incurred under
‘an agreement whereby the right of use or occupation of the land or buildings is granted’
as required by s 11(2)(e)bis, is justified.
The appeal is dismissed with costs.
VAN BLERK JA, RUMPFF JA, VAN WYK JA and HOEXTER AJA concurred.

§2.7 Section 11(o) (the ‘scrapping allowance’)

It is necessary to distinguish in this context between –
(a) the ‘old’ section 11(o) scrapping allowance which applied where the taxpayer had
‘scrapped’ the qualifying depreciable asset; and
(b) the ‘new’ section 11(o) allowance which applies, at the election of the taxpayer, in
respect of any alienation, loss or destruction of a qualifying depreciable asset, where
the amount in respect of such alienation, loss or destruction is received or accrued
on or after 22 December 2003.73 In its new form s 11(o) does not refer to ‘scrapping’
and does not require that the taxpayer has ‘scrapped’ the asset.
The cases which follow are relevant only to the ‘old’ section 11(o) scrapping allowance
and focus on the meaning of ‘scrapping’ in the context of that provision.

To qualify for the scrapping allowance, the item must have been scrapped by the taxpayer

[318]
ITC 205
(1931) 6 SATC 42
The taxpayer company carried on business on a large scale as sugar farmers and millers.
It entered into an agreement with the manufacturers of a machine which treated shredded
cane, whereby the manufacturer would erect the machine at the taxpayer’s mill on an
experimental basis. The agreement provided that the taxpayer would pay half the cost of
the machine plus installation. If, after the experimental period, the machine was a suc-
cess the taxpayer would take over the machine at cost, less any payments already made.
Until then, the machine was to remain in the ownership of the manufacturers. If the
machine was not a success, it would be sold and the proceeds divided between the manu-
facturers and the taxpayer. The machine was duly installed, the taxpayer paid its half
share, but the machine was not successful, because it did not have the capacity to treat
the required quantity of shredded cane. The experiment was abandoned and, after
negotiation, the taxpayer purchased from the manufacturer the dismantled machine in
order to use the components in its mill. The taxpayer sought to recover its loss by claim-
ing that the machine had been ‘scrapped’ and that it was entitled to a scrapping allowance.
Issue: were the pre-requisites for the scrapping allowance satisfied?
Held: in the negative. The taxpayer was never the owner or part-owner of the plant,
and it had not effected the scrapping. Moreover (it seems) physical deterioration
through wear and tear is a prerequisite for the granting of a scrapping allowance.
Nathan KC: It does not seem necessary for us to decide what is meant by the word ‘scrapped’ in
paragraph (i) because in order to get the benefits of this section the article claimed for must
have been scrapped ‘by the taxpayer’.
________________________

73 The date of promulgation of the Revenue Laws Amendment Act 45 of 2003.

 Statutory deductions and allowances 625

...
At no time were the company owners or part owners of the plant prior to its being ‘scrapped’. It
was the sole property of the manufacturers.
Under these circumstances we are of opinion that the company is not entitled to any allowance.
The appeal will be dismissed and the assessment confirmed.
It may be added that even if the company be regarded as the owners of the plant in question,
then ‘scrapping’ as used in s 11(2)(i) can, in our view, only apply to machinery which has been
worn out or has suffered physical deterioration. Paragraph (i) is to be read in conjunction with
paragraph (d) for the purpose of arriving at the amount of the allowance to the taxpayer, and
paragraph (d) speaks only of diminution in the value of machinery ‘by reason of wear and tear
during the year of assessment.’ This wear and tear clearly refers to physical deterioration or
depreciation, and where it is not shown that machinery has undergone such wear and tear, it
does not appear to us that the taxpayer can take advantage of paragraph (i) . . . [I]t seems clear
that the words ‘other disposal’ do not cover a purchase by the taxpayer himself of part of the
machinery which has been abandoned. The words ‘or other disposal’ appear to be related to the
word ‘sale’, and to convey a disposition of the scrapped property by the taxpayer to some other
person. In our opinion they do not cover an acquisition by the taxpayer himself of the machin-
ery in question. However, as the plant, in accordance with what has been previously stated, was
the sole property of the manufacturers, that is sufficient to dispose of the matter.

‘Scrapping’ requires a decision to scrap, accompanied or followed by a cessation of use of the asset in
question; a subsequent disposal or perhaps valuation will determine the amount of the scrapping
allowance.

[319]
ITC 631
(1946) 15 SATC 100
The taxpayer claimed a scrapping allowance in respect of certain amounts written off in
its books in respect of certain fixtures and fittings when it closed down certain branches,
and consequently ceased to use those fixtures and fittings.
Issue: on the facts, had the fixtures and fittings been ‘scrapped’?
Held: in respect of the deduction claimed for the 1940 tax year, the evidence did not
show that the scrapping took place in that year, and no deduction could therefore be
granted; in the 1941 and 1943 tax years, the fixtures and fittings were, in the bona fide
opinion of the taxpayer, useless and unsuitable for further use, and there had been a
decision to scrap followed by a cesser of use, and therefore the taxpayer was entitled to a
scrapping allowance.
Walford Dowling KC: The issue here to be considered is that arising out of a claim for ‘scrapping
allowance’ under sec. 11(2)(j) of the Act. The amounts in issue are referred to in the letter of
objection dated the 4 October 1945 as:–
‘Loss Fixtures and Fittings closing down of Branches – £869 for year ending 30th June, 1943, £759 for year
ending 30th June, 1941, and £1 075 for year ending 30th June, 1940.’
...
All these deductions are challenged by the Commissioner on the ground that the circumstances
attending the disuse of the fixtures and fittings did not constitute a ‘scrapping’ within the mean-
ing of s 11(2)(j) of Act 31 of 1941, or 11(2)(i) of Act 40 of 1925.
The item of £1 075 for the year ending 30 June 1940 is challenged on the additional and special
ground that it has not been shown that the fixtures and fittings were scrapped (if they were
scrapped within the meaning of the relevant provisions) during the year of assessment.
The evidence in relation to this sum was that in February 1939, a branch was closed down. The
fixtures and fittings were very old, were transferred in the books to a ‘Fixtures and Fittings Man-
ufacturing Account’, and were sent to appellants’ own workshop for making and repairing
626 Income Tax in South Africa: Cases and Materials

fittings. Appellants used as much material as they could in their workshops and the balance of
£1 075 was useless and was written off.
Now for a ‘scrapping’ there must be a decision to scrap accompanied or followed by cesser of
user. When both these factors exist there has been a scrapping and subsequent disposal or per-
haps valuation will determine the amount that may be allowed.
It is clear that the evidence does not establish that the scrapping in fact took place during the
year of assessment and the deduction of £1 075 must accordingly be disallowed.
The deductions in respect of the tax years subsequent to the 30 June 1940, were not challenged
on the special ground mentioned and it is assumed that the Commissioner is satisfied that
the acts which are claimed to constitute scrapping were performed in the relative years of
assessment.
It remains to consider whether disuse and discarding of old and unsuitable fixtures and fittings
of the branches should be regarded as scrapping. In the retail trade the disuse of fixtures and
fittings described in evidence is, in the opinion of the Court, a ‘scrapping’. It was stated by the
public officer of appellant company that the fixtures and fittings in question were old – that
whenever any fixtures and fittings from closed down branches were serviceable and suitable for
use in other branches they were transferred to other branches. Only those that were definitely of
no use in the remaining branches were sold. It was admitted in cross-examination that if appel-
lants had carried on with the branches which were closed down they could have continued to
use the fixtures and fittings in the branches in question. The general impression created by the
evidence however was that the fixtures and fittings which were in fact discarded were in the bona
fide opinion of the appellant useless and unsuitable for further use. This in our opinion is suffi-
cient justification for the claim for the allowance made under s 11(2)(j) of Act 31 of 1941 and
11(2)(i) of Act 40 of 1925.
. . . So far as some degree of physical deterioration is necessary, the Court finds as a fact that this
was present. The figures of the allowances were not challenged.
Accordingly the scrapping allowances claimed, other than the amount of £1 075 for the year
ending 30 June 1940 should be conceded by the Commissioner and the Court orders accordingly.

[320]
ITC 657
(1948) 15 SATC 495
The taxpayer carried on the business of a cafe and, in adjacent premises, a licensed
restaurant. During the year of assessment, the taxpayer decided, because of losses sus-
tained in running the business, to abandon that business. The restaurant was accordingly
closed and the fixtures and fittings were sold by public auction, at a loss to the taxpayer
of £874. The taxpayer claimed to deduct this amount as a scrapping allowance:
Issue: on the facts, had the assets been ‘scrapped’?
Held: in the negative. The sale was no more than a disposal of capital assets, and the
loss was of a capital nature and therefore not deductible.
Beyers P: The appellant, in order to justify the deduction, must satisfy the Court (a) that the
articles disposed of were scrapped, and (b) that they were scrapped in the ordinary course of
business.
There is no definition of ‘scrapping’ in the Act. Ordinarily an article is scrapped when it is con-
signed to the scrap heap. The Afrikaans text refers to ‘artikels . . . wat deur die belastingpligtige
as uitgedien onttrek is’ ie withdrawn because they have served their purpose and are now useless
or worthless. In ITC 20074 the taxpayer closed down a branch office and sold the office furni-
ture. The Court expressed the view that ‘there was nothing to show that the furniture had be-
come useless for office purposes, and the sale cannot be regarded as a scrapping of such furni-
ture; that it is rather to be regarded as a disposal of a capital asset and a loss which is not
________________________

74 5 SATC 389.
 Statutory deductions and allowances 627

deductible’. And in ITC 20575 the Court decided that ‘scrapping’ as used in s 11(2)(i) can in our
view only apply to machinery which has been worn out or has suffered physical deterioration.
Para (i) is to be read in conjunction with (d) for the purpose of arriving at the amount of the
allowance to the taxpayer, and para (d) speaks only of diminution in the value of machinery ‘by
reason of wear and tear during the year of assessment’. This wear and tear clearly refers to physi-
cal deterioration or depreciation and where it is not shown that machinery has undergone such
wear and tear it does not appear to us that the taxpayer can take advantage of para (i).’
The decisions referred to merely illustrate that the question is one of degree. Thus in South
Metropolitan Gas Co v Dodd 76 Rowlatt J in dealing with the question of obsolescence, says:77 ‘It is
quite clearly a question of degree, and a question of fact, when machinery becomes obsolete.
This case is not to be taken as deciding that in order to be obsolete a thing must be worn out;
nor is it to be taken as deciding that a thing is not obsolete as long as it can be useful to other
people in the same business who are less progressive in their methods.’
We have found it difficult to reconcile the price realised for the fixtures and fittings with the
suggestion that they were no longer suitable for the purpose which they had served up to Decem-
ber 1945. We are not satisfied that the whole of the fixtures and fittings was fit for scrapping. the
tables and chairs, at the least, could not have deteriorated to that extent.
Mr Landau, who appeared for the appellant, relied strongly on ITC 631.78 The deduction there
claimed was in respect of fixtures and fittings scrapped and realised at a loss on the closing of
certain branch stores, such fixtures and fittings not being suitable for transfer to other branches.
The Court pointed out that ‘for a scrapping there must be a decision to scrap, accompanied or
followed by a cesser of user. When both these factors exist, there has been a scrapping, and sub-
sequent disposal or perhaps valuation will determine the amount that may be allowed’. The
fixtures and fittings were stated ‘to be old, that whenever any fixtures and fittings were servicea-
ble and suitable for use in other branches, they were transferred to other branches. Only those
that were definitely of no use in the remaining branches were sold’. The fixtures and fittings in
question belonged to this category and it seems to us that on the evidence the Court was justified
in sharing the view of the taxpayer that the fixtures and fittings which were in fact discarded
were useless and unsuitable for further use. The present case is, however, distinguishable be-
cause here there was no decision to scrap: it was a decision to dispose of certain articles, not
because they were useless or unsuitable, but because the business which they served was being
run at a loss.
We agree with the view frequently expressed in American decisions regarding ‘obsolescence’,
namely that ‘to warrant a deduction, it requires that the operative causes of the present and
growing uselessness arise from external forces which make it desirable or imperative that the
property be replaced, and it is not enough that the taxpayer has decided to abandon facilities or
discontinue their use’, cf Real Estate Land Co v United States.79
However, we have come to the conclusion that the appeal must fail for another reason, which is
that the scrapping, if scrapping there was, was not an act performed in the ordinary course of
business. The loss attendant thereon was incurred owing to a cessation of business rather than
on account of the business. Again the question is one of degree, depending on the nature and
extent of the business operations which have been curtailed. We have considered the evidence
and in our opinion the restaurant, with a liquor licence attached, was a separate branch of the
appellant’s business. It catered and provided meals and liquor for 160 to 180 customers at a time. it
employed additional staff. It represented in fact the most substantial portion of the business.
The closing down of the restaurant involved the surrender of a valuable asset, the liquor licence.
The sale of fixtures and fittings following on so radical a change in the scope of appellant’s busi-
ness cannot be regarded as an act performed in the ordinary course of business. In our opinion

________________________

75 6 SATC 42.
76 13 TC 211.
77 At 211.
78 15 SATC 100.
79 309 US 13 160 ALR Annotated at 1248.
628 Income Tax in South Africa: Cases and Materials

the sale was nothing more nor less than a disposal of capital assets. The loss was therefore of a
capital nature, and is not deductible.
The appeal is therefore dismissed . . .

[321]
ITC 754
(1952) 18 SATC 424
The taxpayer sold certain equipment for which a wear and tear allowance had been
granted in previous years, for £50 less than their value in the taxpayer’s books minus the
wear and tear allowances previously granted. The taxpayer ceased to carry on the trade in
which these assets had been used, but continued to carry on another trade. He sought to
deduct £165 as a scrapping allowance.
Issue: did the circumstances in which the taxpayer disposed of the assets in question
constitute ‘scrapping’, such as to entitle the taxpayer to a scrapping allowance?
Held: in the negative; the assets had not ceased to serve their purpose by becoming
useless or worn-out.
Ogilvie-Thompson J: In the well-reasoned argument contained in the statement handed in on
behalf of the appellant it is submitted that, on the facts of the case, the difference between the
book value and the actual realized value of these assets, properly falls to be regarded as ‘scrap-
ping’ within the meaning of s 11(2)(j), and it is specifically contended that the circumstance
that the appellant sold his general dealer’s business is not fatal to that submission. In this regard
it is submitted that, the business having been sold, the equipment in question was, so far as con-
cerned the appellant himself, of no value – it had for his purposes become obsolete – and that
inasmuch as he was continuing his operations as a building contractor, absorbing the carpentry
business, the appellant was continuing in business, and therefore was entitled to claim the
scrapping allowance. That is the essence of the submission made in the statement handed in.
Now, what are the facts of this case? The facts are that the equipment in issue related to the gen-
eral dealer’s business. It was used in that business; and upon that business – upon that portion of
the appellant’s activities – being sold, he also sold this equipment. There is no evidence to sup-
port the suggestion that this equipment was scrapped within the ordinary signification of that
word. The equipment had been used by the appellant himself up to the date of his selling the
general dealer’s business, and from that date it continued to be used by the purchaser. This is
hardly evidence to support the contention that the articles in question were scrapped within the
ordinary meaning of that English word, which latter derives considerable clarification from the
Afrikaans text of the Act which reads: ‘Artikels wat deur die belastingpligtige as uitgedien
onttrek is’: that is to say, articles withdrawn because they have served their purpose and are now
useless, or worn out.
It appears to the Court that the true factual position in the present case is that a particular portion
of the appellant’s business, namely the general dealer’s business – which, as the figures in the dos-
sier show, was itself a substantial portion of the appellant’s activities – was sold, and with it was sold
this equipment which appertained thereto. It is true that this equipment was sold for a sum less
than the book value of the equipment as that stood in the books of the appellant. But, in the view
of the Court, this resulted from the disposal of these capital assets – viz the equipment – at a loss.
. . . So far as concerns the arguments advanced by the compiler of the statement handed in on
behalf of the appellant, these arguments may constitute sound commercial practice; but, as is well
known, the Court is concerned with the provisions of the Act. As it was aptly put by President In-
gram in Income Tax Case No. 650, 15 S.A.T.C. at 367:
‘. . . it by no means follows that all expenditure which in the opinion of accountants should be taken into
account for the purposes of assessing the ‘profits’ can be deducted in terms of s 11(2)(a) and its sub-
paragraphs’.
. . . [T]he Court must, in deciding what constitutes scrapping, be guided by the provisions of the
Act.
In the result the appeal fails.
 Statutory deductions and allowances 629

[322]
ITC 1245
(1975) 38 SATC 13
The taxpayer company had for many years owned a block of stands, which included
stands 2106A and stand 2116A. On these stands it had erected buildings used for brew-
ing operations. These were ‘industrial buildings’ in terms of the Income Tax Act. In 1961
the taxpayer ceased to use the buildings on stand 2116A and leased them. In 1957 the
taxpayer decided to move its entire operation to a new area, and to erect new buildings
and new plant there. In August 1972 the taxpayer sold stand 2106A for $575 000 and
stand 2116A for $300 000. At the purchaser’s request, the purchase price was assigned to
the land alone. The written down values of the two stands at 1 April 1972 were $108 782
and $111 516 respectively. In the 1973 tax year the taxpayer claimed a scrapping allow-
ance equivalent to these written down values on the grounds that the buildings were
valueless and that it had received no consideration for them on the sale of the stands.
Issue: was the taxpayer entitled to a scrapping allowance in respect of the buildings on
the two stands?
Held: in the negative. There had been no decision to scrap, as distinct from a decision
to sell, nor had there been a cesser of use in the 1973 tax year.
Gubbay SC: I turn now to consider whether the buildings were scrapped during the year of
assessment in question. There is no definition of ‘scrapping’ in the Income Tax Act but a useful
test to be applied is that laid down by Dowling P in ITC 631:80
‘Now for a “scrapping” there must be a decision to scrap accompanied or followed by cesser of user. When
both these factors exist, there has been a scrapping, and subsequent disposal or perhaps valuation will de-
termine the amount that may be allowed.’
This test has been followed in this court in ITC 95581 and ITC 103182 and I propose to apply it. In
doing so I am mindful of the observation of Fieldsend P83 that:
‘. . . a limited and not an extensive construction must be put upon the word “scrapped”, for the allowance
granted, being in effect an allowance of a capital loss, is an anomalous one.’
84
(Compare ITC 1159.)
The two requirements envisaged, that of a decision to scrap and cesser of user, necessitate a
factual determination, but although cesser of user must occur during the year of assessment
under consideration, a decision to scrap need not occur during the currency of that year. In my
view it may be made at an earlier stage and be implemented during the requisite year. Common
sense dictates this to be so and none of the many cases to which I was referred in argument con-
flict with this view. Mr Whitaker, who appeared for the appellant, submitted that in ascer-taining
whether an article has been scrapped what must be looked to is whether the taxpayer bona fide
regards it as useless or unsuitable for further use. Support for this submission is to be found in
ITC 631 (supra),85 ITC 65786 and ITC 85287 and I accept it.
. . . There is nothing in the minutes recording the meetings of the appellant’s directors which
indicate that a decision to scrap the buildings, as distinct from the sale of the two improved
stands, was ever made . . .
Nor in my view is a recognition that the buildings were totally unusable or no longer fit for use
in the appellant’s business implicit in the decision to sell the two stands . . .
...
________________________

80 15 SATC 100 at 101.

81 24 SATC 631 at 632.
82 26 SATC 63 at 65.
83 ITC 955 24 SATC 631 at 632.
84 33 SATC 190 at 192.
85 At 102.
86 15 SATC 495 at 497.
87 22 SATC 187 at 190.
630 Income Tax in South Africa: Cases and Materials

I am not satisfied that on an overall enquiry the appellant has proved that there is to be inferred into
its decision to sell, a decision to scrap. Too many features, in my opinion, negative the implica-tion.
Even if I am in error in my view that no decision to scrap was made, the appellant has to satisfy
me of the further requirement that there was a definite cesser of user of the buildings during the
relevant year of assessment. Mr Andersen, who appeared for the respondent, relying on ITC 85288
and ITC 657 (supra)89 argued that the sale of the improved stands is not evidence of cesser of
user of the buildings. I agree. A sale or disposal of an article may well result from its disuse, ei-
ther because it is almost ready for the scrapheap or because it is of no further use to the taxpayer
in his business; but it seems to me to be of little value in determining whether there has been
cesser of user to look to the fact that a sale has occurred. The question is essentially a practical
one. An actual, and not a notional, cesser of user must be shown.
With regard to the buildings on Stand 2116A, I am quite unable to find that any cesser of user
occurred during the year in question. The appellant ceased its physical use of these buildings in
early 1961, and from then on the buildings were leased, first by it and, subsequently by the new
owner, to the same tenants. No change of user occurred.
...
Nor in my view is the appellant in any happier position in relation to the buildings on Stand
2106A . . . The fact that these different buildings may have been used for a purpose other than
that for which they were originally designated seems to me of no importance, for the appellant
continued to use them in the furtherance of its business.
In my view it is unrealistic to suggest that cesser of user of all the buildings occurred with their
dispostion, and that what the appellant did thereafter was to reacquire certain of the buildings as
a pure matter of commercial expediency. The significance is that those buildings which were
leased from the new owner were put to precisely the same use as before; as a matter of fact, the
appellant’s use of those buildings continued uninterruptedly.
...
In my opinion I would be doing an injustice to the restrictive interpretation to be placed on the
word ‘scrap’ were I to find that there was cesser of user of the buildings on Stand 2106A.
Accordingly, I find that the appellant has failed to discharge the onus of proving that it scrapped
buildings on Stands 2106A and 2116A during the year ended 31 March 1973.
The appeal is dismissed . . .

Notes
The observation of Fieldsend P, referred to in this judgment, that a limited meaning
must be given to the word ‘scrap’ because it is an allowance of a capital loss’ miscon-
strues, it is submitted, the whole purpose of the wear and tear allowance as this allowance
operates in conjunction with the scrapping allowance. The purpose of these two allow-
ances is precisely to allow a taxpayer to deduct, in instalments over their productive life,
the total cost of the category of capital assets identified in s 11(o). See the dicta to this
effect in [323] ITC 1380.
The word ‘scrap’ in s 11(o) means that the taxpayer must treat the item as suitable only for the
scrap-heap; scrapping may or may not be accompanied by disposal of the item by the taxpayer.
‘Scrapping’ requires a decision to scrap plus a cesser of use. The important factor is not whether the
item was in fact old or worn-out, but whether the taxpayer has treated it as such.

[323]
ITC 1380
(1983) 46 SATC 68
Friedman J: The word ‘scrap’ is not defined in the Act. The Shorter Oxford Dictionary ascribes
the following meaning to the word: ‘to break up into scrap-iron; to consign to the scrap-heap’. It
________________________

88 22 SATC 187 at 190.

89 At 497-498.
 Statutory deductions and allowances 631

seems clear, however, that the word ‘scrap’ is not to be construed in s 11(o) in such a narrow or
literal sense. Of far more value is the definition to be found in Webster’s Third New Interna-
tional Dictionary, to which we were referred by Mr Stevens, namely ‘to abandon or get rid of as
being no longer of any worth, merit, use or effectiveness to retain’. This meaning of the word
‘scrap’ seems to us to accord far more with the Afrikaans version of the Act in which the word
‘scrapped’ is translated ‘as uitgedien onttrek’; that is to say, to withdraw or abandon because the
thing in question has served its period of useful life (cf ITC 754).90 In other words, it seems to us
that in s 11(o) the word ‘scrapped’ must be given a figurative meaning, that is to say, that which
is ‘scrapped’ must be treated by the taxpayer as if it were from his point of view suitable only for
the scrap-heap. The scrapping of an article may or may not be accompanied by a disposal of it by
the taxpayer. Clearly, in our view, Dowling, President, in ITC 63191 is correct when he said, in a
passage which has often been referred to and followed subsequently:
‘Now for a “scrapping” there must be a decision to scrap accompanied or followed by cesser of user. When
both these factors exist there has been a scrapping and subsequent disposal or perhaps valuation will
determine the amount that may be allowed’.
...
Quite obviously, and save in exceptional cases only, the disposal of an article by a taxpayer will
itself involve, in so far as the taxpayer is concerned, a ‘cesser of user’. Whether or not such disposal
is, however, pursuant to an exercise by the taxpayer of a decision to scrap, is not, as we see it,
simply dependent upon the taxpayer’s ipse dixit to that effect. There are other circumstances
which may be relevant to determine whether or not the taxpayer ever decided to scrap the arti-
cle, or in determining whether or not the taxpayer is to be believed when he says that he decided
to scrap the article, as opposed to simply disposing of it in a manner falling short of scrapping it.
The price, if any, obtained by the taxpayer may be an indication of whether the taxpayer in dis-
posing of the article treated it as scrap. The price may also be some indication of whether or not
the article, to the taxpayer, had outlived its usefulness or effectiveness, or whether it still had
utilitarian qualities. In this regard, I might mention that it seems reasonably clear that whether
or not an article has outlived its usefulness and therefore, upon its cesser of user, or abandon-
ment or disposal, must be regarded as having been scrapped, is a question which must be looked
at from the point of view of the taxpayer, not from the point of view of the person acquiring the
article from the taxpayer. See, for example, ITC 322.92
In a number of early cases in the Special court, referred to by Mr Broomberg, it was held that before
the deduction envisaged by s 11(o) could be allowed, the plant and machinery in question must
either be old or worn out or have suffered physical deterioration. There is nothing in s 11(o) as
such, which in any way makes this the test of whether or not the allowance should be granted. What
is of importance is whether or not the taxpayer has ‘scrapped’ the article, and not whether or not
the article, viewed objectively, is correctly regarded as being in the nature of scrap. But here again,
if the article has in fact not lost its usefulness, or has in fact not become worthless or worn out, or
suffered from severe physical deterioration, it may be more difficult (but not necessarily impossi-
ble) to accept the word of the taxpayer when he says that he, in disposing of the article, had done
so pursuant to a decision on his part to scrap it.
Again, in a number of cases, it has been suggested that there must be a continuous business carried
on before the taxpayer can be allowed the allowance envisaged by s 11(o). In more recent years, how-
ever, and more particularly in the case of SIR v Kempton Furnishers (Pty) Ltd 93 94 the court, in an obiter
dictum, referred to the fact that the so-called tests applied by the courts regarding the continuation of
trade were nowhere to be found in the Act. Here again, it seems to us that there is no rule of law
which prescribes that for something to qualify for the scrapping allowance it must have been disposed
of during the course of business of the taxpayer. But where it is not so disposed of, it may often be
more difficult to conclude that the item has been scrapped as opposed to its having been disposed of
in the course of the taxpayer’s selling his business.

________________________

90 18 SATC 424 at 426.

91 15 SATC 100.
92 8 SATC 243.
93 36 SATC 67 at 70. The correct citation is Kempton Park Furnishers (Pty) Ltd.
94 1974 (3) SA 36 (A) at 42-43
632 Income Tax in South Africa: Cases and Materials

...
. . . As we see it, and indeed (this much appears to have been decided in ITC 1245)95 there is no
reason in principle why a decision to scrap cannot be taken in advance of the implementation of
that decision. In other words, it seems to us that there is no reason in principle why a taxpayer
cannot, at the commencement of the lease, say, because the items leased will be worthless or
valueless to it at the end of the lease, it is then and there determining to scrap them at the end
of the lease, and if at the termination of the lease they are disposed of in a way similar to con-
signing them to the scrap-heap, then it seems to us there will have been a scrapping of that ma-
chinery and plant. That, in effect, seems to us to have occurred in this case.
This result appears to accord with the general scheme of the Income Tax Act, and, in particular,
if one looks at s 11(o) in the light of s 11(e). The scheme of the Act, as Mr Broomberg correctly
points out, is to allow a taxpayer to deduct from his income the total cost of machinery and
plant. The cost is to be deducted initially over the period of the use of the machinery and plant,
and any amount thus unredeemed is to be allowed as a scrapping allowance at the end of the
period of use. The alternative would be to treat the subject-matter of the lease as trading stock in
the hands of the taxpayer – a treatment suggested by Silke on Income Tax.96
It remains, however, to deal with ITC 115997 – a decision which formed the corner-stone of Mr
Stevens’ argument – as to why, in this case, s 11(o) did not assist the appellant. In that case the
taxpayer had leased or chartered a certain fishing vessel. The charterer was given the right at any
time during the currency of the charter to purchase the vessel at a price of R12 000, in which
event all moneys paid in charter hire would be applied in reduction of the purchase price. In the
event of the option to purchase not being exercised, and the lease terminating in the normal
course, the charterer was required to restore the vessel to the appellant in ‘as good or better
condition in which it was received, normal wear and tear excepted’. The charterer elected, dur-
ing the currency of the charter, to exercise the option, influenced largely by the fact that it was,
in the final result, cheaper for it to buy the vessel than to restore it at the end of the charter, to
the condition in which it was at the commencement of the charter. Tebbutt AJ, President of the
Court, said98 with regard to the appellant’s suggestion that he was entitled to a deduction in
terms of s 11(o):
‘We are of the view that in this case appellant was never in a position either to make such a decision (ie a
decision to scrap) or to cease using the vessel and therefore could not, nor did, do so. At the time he en-
tered into the charter agreement he had not decided to scrap the vessel nor to cease using it. His own evi-
dence is to the contrary. At any time after the first three months of the charter the company could exercise
its option to purchase and appellant would then have been obliged to sell the vessel to it. Such sale, pro-
vided for in the charter agreement, therefore did not represent a scrapping of the vessel by appellant.
Appellant’s obligation to sell and the company’s right to buy at any time thereafter remained throughout
the charter period and any extension thereof. No matter what appellant’s intention were in relation to the
vessel or what its condition became, the right to buy the vessel remained with the . . . right to sell the
vessel; it was the company’s to buy it’.
There may well be passages in this judgment . . . which appear to afford the Commissioner some
joy in the present appeal. It seems to us, however, that the facts in ITC 1159 and the facts in the
present case differ substantially and in material respects, and accordingly what is said in the
judgment in that case is completely distinguishable from and has no application to the facts of
the present case.
In ITC 1159 the option to purchase operated throughout the currency of the lease. Whether or
not the vessel was disposed of depended upon an exercise by the charterer of the option to pur-
chase and not upon any decision by the taxpayer. Indeed, the giving of the option to purchase
during the currency of the charter was in many respects inconsistent with any question of scrap-
ping the vessel, since ex hypothesi, the exercise of the option to purchase during the currency of
the lease would ipso facto bring the lease to an end prematurely and at a time, when in the tax-
payer’s hands, the vessel still had usefulness, that is to say, the ability to produce for the taxpayer
rental for the remaining period of the lease.
________________________

95 38 SATC 13 at 17.
96 10 ed p 1151 para 17.18.
97 33 SATC 190.
98 At 191.
 Statutory deductions and allowances 633

In the present case the option to purchase arose, not during the currency of the lease, but at its
termination. The fact that the option was given at a nominal price is support of the fact which is,
in any event, agreed, namely, that the appellant considered that at the conclusion of the lease
the plant and machinery would be worn out or obsolete. The effect of giving this option to the
lessee at the conclusion of the lease is to indicate that as far as the taxpayer was concerned the
lessee could have the plant and machinery for a nominal value because as far as it, the lessor, was
concerned, it was, at the conclusion of the lease, fit only for the scrap-heap.
In the result, it seems to us that the appellant was entitled to the scrapping allowance . . .
The appeal is allowed . . .
 12
TRUSTS

§ Page
1 Introduction ............................................................................................................. 635
2 The conduit principle .............................................................................................. 635
[324] Armstrong v CIR ......................................................................................... 635
[325] SIR v Rosen.................................................................................................. 636
[326] Estate Dempers v SIR .................................................................................. 637
[327] SIR v Sidley .................................................................................................. 638
3 Income of minor child deemed to be parent’s income: s 7(3).............................. 638
4 Donee’s or beneficiary’s income deemed to be donor’s income: s 7(5) .............. 639
[328] Estate Dempers v SIR .................................................................................. 639
5 Report of the Davis Tax Committee (first interim report): Trusts ...................... 644

§1 Introduction
Trusts, trustees and trust beneficiaries are taxed in accordance with the general provi-
sions of the Act read together with s 25B, which was introduced at the same time as the
definition of ‘person’ in s 1 of the Act was amended to include a trust. Section 25B is
expressly made subject to the provisions of s 7 with the result that, in circumstances
where s 7 applies, the income of the trust is deemed to be the income of another person.

§2 The conduit principle

The ‘conduit principle’ applies to income which passes through a trust and is taxable in the hands of
the trust beneficiary. The conduit principle imports that income derived by a trust does not lose its
identity when it is received by the beneficiary. Thus for example, dividends derived by the trust are
taxed as dividends in the hands of the beneficiary.

[324]
Armstrong v CIR
1938 AD 343, 10 SATC 1
Under the will of the taxpayer’s late husband, she was entitled, for her life, to the whole
of the net income of the estate. Under a family arrangement, the taxpayer’s interest was
vested in trustees. It was agreed that the executors of the deceased estate would pay the
trust £2 000 per annum. The assets of the trust consisted of mortgage bonds, shares and
635
636 Income Tax in South Africa: Cases and Materials

fixed property. During the year of assessment, the gross receipts of the deceased estate
were £4 580 of which £2 773 came from dividends. The net income of £3 607 was paid to
the trustees who paid over £2 000 to the taxpayer and kept back £469 to pay tax levied on
the payment to the taxpayer. The taxpayer’s return disclosed an income of £2 469 of
which £1 405 was derived from dividends. The latter amount was calculated on the basis
of the ratio of dividends to other receipts derived by the estate.
Issue: was the sum of £1 405, derived by the taxpayer, exempt from tax in terms of the
Act on the grounds that it constituted a dividend?
Held: in the affirmative. The fact that a trustee, as a representative taxpayer, received
the dividends for the benefit of the taxpayer as the ultimate beneficiary, did not cause
the amount to lose its character as dividends when the trustee paid it to the taxpayer.
The trustee was a mere conduit pipe.
Stratford CJ: In the simple case I am now examining, that of a trio comprising a company, the
intervening trustee, and the beneficiary, it is manifest that in the truest sense the beneficiary
derives his income from the company, for that income fluctuates with the fortunes of the com-
pany and the trustee can neither increase or diminish it, he is a mere ‘conduit pipe’. This leads
on to the firm conclusion that the true test of exemption of the person beneficially entitled to
the income is not the right to sue the company but the derivation of the income. This conclu-
sion is strongly fortified by reference to the provisions relating to representative taxpayers. Un-
der the definition (s 48(c)) the trustee is to pay the tax ‘as if the income were income received
by . . . or in favour of him beneficially’ . . . Now we cannot suppose that the Legislature had in
mind two measures of taxable income, one when the Commissioner elected to tax the repre-
sentative and another if the beneficiary was taxed. So that in contemplation of the Act when the
beneficiary is taxed instead of the representative, it is on the basis of his receiving directly what
in fact he gets through the medium of the representative . . .
This conclusion disposes of the objection that the interposition of the trustee in this case is a bar
to the exemption claimed by the appellant . . .

[325]
SIR v Rosen
1971 (1) SA 173 (A), 32 SATC 249
The taxpayer had created a trust in which he donated to trustees a number of shares in
various companies and also a debt owed by one of these companies. The trust deed
provided that the trustees had to pay the beneficiary of the trust, his daughter, the sum
of £25 (R50) per month out of the dividends. The trustees had the power to increase this
amount. During the tax years in question, the trustees paid the daughter R600 plus an
additional sum of R6 600. It was common cause that the R600 was an annuity.
Issue: were the amounts paid to the beneficiary of the trust ‘dividends’ for the purposes
of the Act, and therefore entitled to the fiscal benefits attaching to dividends?
Held: in the affirmative.
Trollip JA: . . . Armstrong’s 1 case in my view authoritatively established the conduit principle for
general application in our system of taxation in appropriate circumstances. Mr O’Donovan con-
tended that, if Armstrong’s case did lay down such a general principle, it was wrongly decided and
should be overruled. I disagree. The principle rests upon sound and robust common sense; for,
by treating the intervening trustee as a mere administrative conduit-pipe, it has regard to the
substance rather than the form of the distribution and receipt of the dividends. Moreover, the
principle also seems to be recognised and applied in Australia and Canada.

________________________

1 Armstrong v CIR 1938 AD 343.

 Trusts 637

Now the 1962 Act, and especially the definitions of ‘dividend’ and ‘shareholder’, seem to have
accepted the decisions in Armstrong’s and Bell’s Trust cases. That reinforces, or at least facilitates,
the above construction of all the relevant provisions. Indeed, s 10(2)(b), excluding annuities
from the exemption, owes its origin directly to the decision in Armstrong’s case.
It follows that in my view the conduit principle operates for the purpose of s 10(1)(k)(ii) when
the beneficiary of the dividends is a deemed shareholder as defined in the Act, ie
‘entitled to all or part of the benefit of the rights of participation in the profits or income attaching to the
shares’
registered in the trustees’ name. It is that crucial phrase that can render a trustee under a trust
agreement a mere conduit-pipe in our present Act.
It is unnecessary to decide in the present appeal what limitation, if any, should be placed on the
wide language of that phrase, and to what extent it applies to cases other than trust cases. It suf-
fices to say that the trust deed may itself entitle or oblige the trustee to administer the dividends
in such a way that he is not a mere conduit-pipe for passing them on to the beneficiary, that in
his hands their source as dividends can no longer be identified or they otherwise lose their
character and identity as dividends, and that the beneficiary is thus entitled to receive mere trust
income in contradistinction to the benefit of the dividend rights in terms of the above crucial
phrase. Thus, a trust deed may endow the trustee with a discretion to pass on dividends to the
beneficiary or to retain and accumulate them. If he decides on the latter, I think (but express no
firm view) that the dividends might then lose their identity and character as dividends, so that, if
they are subsequently paid out to the beneficiary, they might possibly no longer be dividends in
his hands, for the conduit-pipe had turned itself off at the relevant time. But if he decides on the
former, i.e. to pass the dividends on to the beneficiary, the condition suspending the benefi-
ciary’s entitlement thereto is fulfilled, and they would constitute dividends in his hands in the
same way as if he had been originally entitled to them unconditionally under the trust deed, ie as
if the conduit-pipe had always open . . .

Notes
The decision in Rosen held that a trust deed may entitle or oblige the trustee to adminis-
ter the trust income in such a way that he is not a mere conduit for passing it on to the
beneficiary, and suggested that in this event, income of the trust may lose its character as
‘income’. The judge in Rosen raised, but left open, the question whether trust income
would change its character to capital where the trustee did not distribute such income
and accumulated it in the trust. The later decisions in [328] Estate Dempers and [327]
Sidley suggest that, if accumulated in this way, trust income retains its character as ‘in-
come’ but left open the question whether it would retain its character as such if it was
distributed in a later year.
Section 10(2)(b) negates the conduit principle in relation to income which is exempt un-
der s 10(1)(h) and (k). Section 19(6) negates the conduit principle where the trust receives
dividend income and distributes it in the form of an annuity.
Despite the fact that s 25B makes a trust a legal person and not a mere conduit, the
section implicitly seems to leave intact the conduit principle except in situations, such as
those mentioned above, where it is statutorily negated some of the trust which is not
distributed to beneficiaries but is accumulated in the trust and ‘capitalised’, retains its
character as income.

[326]
Estate Dempers v SIR
1977 (3) SA 410 (A), 39 SATC 95
The taxpayer (‘the donor’) had formed nine separate discretionary trusts, in identical
terms, in favour of his descendants. The trust deeds provided, inter alia, that it was a
638 Income Tax in South Africa: Cases and Materials

matter for the trustees’ discretion how much of the trusts’ annual income to pay to any
beneficiary, that the trustees were entitled to accumulate such income and that ‘any
income not paid out in any years shall become and form part of the capital of the trust’.
Corbett JA: The fact that the trust deed speaks of such accumulated income being capitalised
and added to the trust fund cannot alter its essential character, in the eye of the income tax law,
of being ‘income’.
WESSELS JA, TROLLIP JA, MILLER JA, and GALGUT AJA concurred.

Notes
This dictum suggests (cf the contrary view expressed in [325] Rosen) that, if income is
accumulated in the trust and is later paid to a trust beneficiary, it will still be income in
his hands. In other words, the implication is that the conduit principle applies even
where the trust does not in fact operate as a conduit, and trust income of a particular tax
year is accumulated and not paid immediately to a trust beneficiary. However, the court
did not expressly rule on whether trust income retains its character as such if it is distrib-
uted in a later tax year; this therefore remains an open question.

[327]
SIR v Sidley
1977 (4) SA 913 (A), 39 SATC 153
The taxpayer, a director of companies, created a trust for his three children, born in
1942, 1945 and 1947 respectively and settled R10 000 on the respective trustees. In each
case the taxpayer was the donor and the child was the donee. The trusts, which were on
identical terms, provided as follows in clause 25:
‘All nett income accruing from the assets in the trust from time to time shall be utilised and
devoted by the trustees for the maintenance, support, education and reasonable pleasures of the
donee or other beneficiary, but the trustees shall have the power, in their absolute discretion, to
withhold the whole or any portion of the income and such income or portion thereof shall be
added to the capital and reinvested.’
During the 1971 and 1972 years of assessment the trustees did not use the entire income
of the trusts for the purposes set out in clause 25, but withheld portion of the income
and reinvested it.
Kotze JA: Clauses 2, 3 and 4 of the trust deeds contain the stipulations or conditions subject to
which, in each case, the donee or other beneficiaries receive the trust fund. This fund, in terms
of clause 25, inter alia, embraces the income or the portion thereof withheld from the donee or
other beneficiaries. By being added to the capital and re-invested, as provided in clause 25, such
income does not lose its essential character of being income. (See the Dempers case2).

Notes
A similar view was expressed in [326] Estate Dempers and [327] Sidley, and a contrary
view in [325] Rosen.

§3 Income of minor child deemed to be parent’s income: s 7(3)

For a discussion of s 7(3), see Chapter 4 – RECEIPTS AND ACCRUALS.

________________________

2 At 424C-E.
 Trusts 639

§4 Donee’s or beneficiary’s income deemed to be donor’s income:

s 7(5)
For s 7(5) to be applicable to trust income, the trust deed must make the beneficiary’s right to receive
such income conditional; the further question then arises as to whether, in the absence of that condi-
tion, the trust income would have accrued to the beneficiary, and this involves a notional, hypothet-
ical inquiry which does not depend solely on whether the beneficiary’s right is vested or contingent.

[328]
Estate Dempers v SIR
1977 (3) SA 410 (A), 39 SATC 95
The taxpayer (‘the donor’) had formed nine separate discretionary trusts, the beneficiar-
ies of which were his two children and seven grandchildren, and their respective chil-
dren. The taxpayer donated R100 000 to each of the trusts. In terms of the deeds of trust,
the trustees had the discretion whether to pay the trust income to the respective benefi-
ciaries or to accumulate it in the trust. The trust fund was to be paid to the each of the
beneficiaries in instalments as each of them reached the ages of 25, 30 and 35 years,
whereupon the trust would terminate.
During the tax years in issue, the trusts for the benefit of the taxpayer’s grandchildren
received income of R257 906. The trustees decided to accumulate this income in the
trust and it was therefore not paid to the beneficiaries.
Issue: was the amount of R257 906, being income which the trust received during the
tax years in question which the trustees decided to accumulate in the trust and not to pay
to the beneficiaries, deemed to be income of the taxpayer in terms of s 9(5) of Ordi-
nance 10 of 1961? [Ordinance 10 was substantially identical to s 7(5) of the Income Tax
Act.]
Held: in the affirmative. The trust deeds stipulated that the beneficiaries’ right to the
trust fund (comprising both capital and accumulated income) was contingent on their
attaining the age of 25, 30 and 35 years, on each of which events they would be paid a
proportion of the trust fund. The right of the children of the beneficiaries to receive the
accumulated income was dependent on the predecease of the beneficiary. These stipu-
lations satisfied the requirements of s 9(5). In order to determine whether the income of
the trust was deemed to be the donor’s the further question to be asked was whether, in
the absence of these stipulations withholding trust income, the income would have
accrued to the beneficiary; this was a notional, hypothetical inquiry which did not de-
pend solely on whether the beneficiary’s right was vested or contingent; although the
donee did not have a vested right to the accumulated income during the years in ques-
tion, the donee was predominantly the subject of the taxpayer’s bounty; accordingly the
section was applicable.
Corbett JA: Section 9(5) of Ordinance 10 of 1961 . . . reads as follows:
‘If any person has made in any deed of donation, settlement or other disposition, a stipulation to the ef-
fect that the beneficiaries thereof, or some of them, shall not receive the income thereunder, or some por-
tion of the income, until the happening of some event, whether fixed or contingent, so much of any
income as would in consequence of the donation, settlement or other disposition, but for such stipulation,
be received by or accrued to or in favour of or be deemed to be received by or to accrue to or in favour of
the beneficiaries, shall, until the happening of that event, or the death of that person, whichever first takes
place, be deemed to be the income of that person.’
...
. . . As has been pointed out in many of the previous cases dealing with the South African legis-
lation, upon analysis s 9(5) first of all contemplates a hypothesis, and secondly provides for a
deemed devolution of income. In the case of donations, the hypothesis is that the deed of dona-
tion contains a stipulation to the effect that the beneficiaries thereof or some of them shall not
receive the income thereunder, or some portion thereof, until the happening of some event,
whether fixed or contingent. If it does, then (and here I ignore the case of income deemed to
640 Income Tax in South Africa: Cases and Materials

accrue or to be received) so much of any income as would in consequence of the donation, but
for the stipulation, be received by or accrue to or in favour of the beneficiaries is deemed to be
the income of the donor until the happening of the event or the death of the donor, whichever
first takes place. It would seem that the mischief which the sub-section is designed to combat is a
certain type of tax avoidance. Generally speaking, a taxpayer is perfectly entitled to reduce the
amount of his income, and thereby the income tax payable, by giving away income-producing
assets owned by him (see CIR v King).3 In s 9 of the Ordinance, however (as in the case of the
corresponding South African legislation), certain limitations are placed upon the right to avoid
in this way liability for the payment of tax. One is that a taxpayer cannot avoid such liability if he
makes his minor child the beneficiary of the income to be derived from the assets so donated
(s 9(3));4 nor can he avoid liability by achieving this in an indirect manner through the instrumen-
tality of a third party (s 9(4)).5 Another limitation is that he does not avoid liability where he
retains the right to revoke the right of the beneficiary to receive the income of the donated
assets or to confer the right upon someone else (s 9(6)).6 And finally there is the limitation con-
tained in the sub-section presently under consideration (s 9(5)),7 which seems to be aimed
generally at preventing the avoidance of tax liability where and so long as the donor does not
permit the beneficiary of the gift to enjoy immediately the income to be derived therefrom.
In each case avoidance is prevented by the income in question being deemed to be that of the
donor.
In determining the applicability of s 9(5) to the facts of the present case, the first question which
the Court is required to decide is whether the hypothesis is satisfied ie whether the trust deed,
which is undoubtedly a deed of donation, contains a stipulation to the effect that the beneficiar-
ies thereof shall not receive the income thereunder, or some portion thereof, until the happen-
ing of some event, whether fixed or contingent. An essential ingredient of such a stipulation is
an ‘event’ until the happening of which the beneficiaries of the trust shall not receive the in-
come thereof. In the case of the trust presently under consideration (and similar kinds of trust)
there appear to be two types of event which might possibly conform to the requirements of
s 9(5). They are:
(1) the exercise by the trustees of the discretionary power granted to them under clause 17 . . .
of the deed of trust to pay the income, or portion thereof, to the beneficiary; or, alternative-
ly,
(2) the attainment by the donee, successively, of the ages of 25, 30 and 35 years in terms of
clause 18 of the trust deed.
As regards the first of these, there are a number of cases in which the exercise of such a discre-
tionary power by a trustee has been regarded as being an event within the terms of s 9(5) (see eg
Hulett v CIR;8 ITC 775;9 ITC 1033.10) . . .
It was submitted by appellant’s counsel that, although the word ‘event’ (‘gebeurtenis’ in the
Afrikaans text) was in general of wide enough import to include the exercise of a discretion, in
the context of s 9(5) it could not be read to comprehend the exercise by a trustee of his discre-
tion to pay income to beneficiaries under the trust deed, such as the one presently under con-
sideration. In elaboration of this submission it was argued, in the first place, that the kind of
event contemplated by the sub-section was a single, once-and-for-all occurrence until the hap-
pening of which the beneficiary did not receive the income and after the happening of which he
did. Prior to the event the income was deemed, by way of a fiction, to be that of the donor. After
the event the fiction ceased and it became permanently that of the beneficiary. Counsel sought
to derive support for this submission from the anomalies which could arise if an occurrence such
as the exercise by a trustee of his discretion were regarded as an event. The example was cited of
a trustee with discretionary powers who decided on the last day of the financial and tax year to
________________________

3 1947 (2) SA 196 (A) at 208.

4 Cf s 7(3) of the Income Tax Act.
5 Cf s 7(4) of the Income Tax Act.
6 Cf s 7(6) of the Income Tax Act.
7 Cf s 7(5) of the Income Tax Act.
8 1944 NPD 263 at 269.
9 19 SATC 314.
10 26 SATC 73.
 Trusts 641

distribute to beneficiaries, income which had accrued to the trust, possibly at different times,
during the tax year. It was contended that, if this decision were regarded as an event, a literal
application of the whole of s 9(5), including the portion containing the deemed devolution,
would result in all the income which accrued during the year being deemed to be that of the
donor, despite the fact that on the last day of the year it was actually paid to, and received by, the
beneficiaries. This would seem to be quite contrary to the aim of the enactment which was to tax
the income of the trust in the hands of the donor only when it was not received by the benefi-
ciaries. The same or similar anomalies would arise were the trustee to decide several times dur-
ing the course of the year to distribute income to beneficiaries.
In the second place, counsel argued that, if the exercise of such a discretion were regarded as an
‘event’, it would mean that, once the trustee exercised his discretion, either against or in favour
of the beneficiaries, the tax liability of the donor would cease; because the question is not
whether the occurrence of the event in fact resulted in the beneficiaries receiving income but
whether the event before the occurrence of which they were not entitled to receive income, had
in fact occurred. This showed that the event contemplated by the section was one which would
finally vest the income in the beneficiaries.
There is undoubtedly some force in these arguments. It is not necessary, however, to pronounce
upon their correctness or to consider the counter arguments advanced by respondent’s counsel
because, even assuming that they are correct, it does not follow that s 9(5) has no application. I
say this because, in my view, there are other occurrences stipulated for in the deed of trust (ie
other than the exercise of the trustees’ discretion) which do constitute events in terms of s 9(5)
and which are not vulnerable to the above-mentioned, or other similar, arguments. [The judge
then referred to the terms of the trust deeds which provided that the trust was to terminate by
the beneficiary’s receiving the total trust fund in three successive stages, namely when he at-
tained the age of 25, 30 and 35 years respectively. As far as the donee’s children were concerned
there was a further stipulation that they would not receive the accumulated income until the
happening of a specified event, namely the predecease of the donee.] . . . Such stipulations ap-
pear to satisfy the requirements of s 9(5) and are not open to the objections (discussed above) to
treating the exercise of the trustee’s discretion as an event and to regarding the provision to the
effect that the beneficiary shall not receive income until the exercise of such discretion as a stip-
ulation under s 9(5). This analysis of the position finds support in three decisions of the Special
Court: ITC 673;11 ITC 823;12 and ITC 903.13
...
It was also submitted that s 9(5) could not be applicable because on the happening of the events
postulated (the attainment of the various ages) the donee would not receive any ‘income’ but
only capital, the accumulated income in the meanwhile having been capitalised. This argument
is unsound. Assuming that it is implicit in the sub-section that upon the happening of the event
the beneficiary should receive the income that has hitherto been withheld, it is clear to me that
this is precisely what would happen under clauses 17 and 18 . . . Counsel sought to reinforce his
argument that the accumulated income could not be regarded as income in the hands of the
donee, when ultimately received by him under clause 18, and generally that s 9(5) could not
apply to this situation, by contending that, if the accumulated income were so regarded and
s 9(5) applied, double taxation would result; the donee would be taxable on the accumulated
income when he received it and the donor will have been taxed thereon from time to time in
the tax years in which it originally accrued. The answer to this contention is that once this in-
come has been deemed under s 9(5) to be that of the donor, it is so deemed for all time and
there is no room for any finding that subsequently it accrued to the donee as income.
To sum up the position thus far, the conclusion to which I come is that the requirements of the
first portion of s 9(5), the hypothesis, are satisfied. The trust deed, clearly a deed of donation,
contains, in clauses 17 and 18, a stipulation to the effect that until the happening of an event, viz
the termination of the trust by the attainment by the donee of the ages stated in clause 18(i), or

________________________

11 16 SATC 230.
12 21 SATC 77.
13 23 SATC 516.
642 Income Tax in South Africa: Cases and Materials

the predecease of the donee, causing a devolution upon his issue in terms of clause 18(ii), the
beneficiaries under the trust shall not receive so much of the income of the trust as the trustees
decide not to pay them and to accumulate in the trust fund. Excluded from this amount of in-
come would be the sums actually paid out by the trustees to either the donee or his issue or to
any charitable, ecclesiastical or educational institution under the original clause 17 or to the
donee or his issue under the amended clause 17.
The next question is whether the devolutionary portion of the subsection can be applied to trust
provisions such as those contained in clauses 17 and 18. The relevant words of this portion read:
‘. . . so much of any income as would in consequence of the donation . . ., but for such stipulation, be re-
ceived by or accrue to or in favour of . . . the beneficiaries, shall until the happening of that event be
deemed to be the income of [the donor]’.
Appellant’s counsel submitted that these provisions were inapplicable in this case that it could
not be said that, but for the stipulation, the income withheld in terms of the stipulation would
have been received by or accrue to or in favour of the donee during the tax year under review.
Two reasons were advanced in substantiation of this submission:
(a) that the devolutionary portion of s 9(5) can only apply where the beneficiaries have vested
rights to the accumulated income and in the instant case they do not; and
(b) that it cannot be said that, if the provision of the deed in its original form giving the trus-
tees a discretion to pay out income to the beneficiaries or withhold it from them be ignored
or notionally deleted, the income withheld would have been received by or have accrued to
the beneficiaries, since the trustees had the power to apply any portion of the income to
donations to charitable, ecclesiastical and/or educational institutions . . .
The argument that s 9(5) applies only where the beneficiaries have vested rights to the accumu-
lated income finds support in ITC 77514 but it would seem that that decision went off on the
particular facts of the case and should not be pressed further as an authority (see ITC 823,
supra). In other cases the ‘vested rights’ argument has not found favour (see ITC 903 supra;
ITC 97415).
In my view, in the application of s 9(5), a vested right to the accumulated income is not a sine
qua non. Naturally, if the beneficiaries have vested rights, then this would be a strong, possibly
decisive, factor leading to the conclusion that, but for the stipulation withholding the income, it
would have been received by them. That s 9(5) is not confined in its application to instances
where the beneficiary has a vested right to the income which is to be withheld, is indicated, in
my view, by the use of the words ‘fixed or contingent’ in denoting the event until the happening
of which he is not to receive the income. A ‘contingent event’ (Afrikaans text: ‘ongewisse
gebeurtenis’) is an event which may or may not happen. A ‘fixed event’ (Afrikaans: ‘gewisse
gebeurtenis’) is the converse: it is an event which will certainly and inevitably happen. The word
‘contingent’ is also used to describe a right which is conditional and uncertain, as opposed to a
vested right which is certain, unconditional and immediately acquired, even though in some
instances enjoyment of the right may be postponed (Jewish Colonial Trust v Estate Nathan;16 Durban
17
City Council v Association of Building Societies ). A right under a will or contract may be contingent
in the sense that, though imperfect at the time of its creation, it is capable of becoming perfect
on the happening of some uncertain, future event (Durban City Council case).18 On the other
hand, a right under a will or contract may be vested though its enjoyment be postponed until
the happening of some certain future event. Applying these concepts to s 9(5) and postulating
the case where the donor has stipulated that the beneficiary shall not receive the income until
the happening of some contingent event, it is difficult to see how the beneficiary’s right to the
income could be anything but contingent, ie not vested. At any rate, these considerations show
that the case of a beneficiary who in terms of the stipulation has only a contingent right to the
income falls within the intended scope of the sub-section.

________________________

14 19 SATC 314.
15 24 SATC 802.
16 1940 AD 163 at 175-6.
17 1942 AD 27 at 33-34.
18 1942 AD 27 at 33
 Trusts 643

...
In truth the application of the devolutionary portion of the sub-section involves a hypothetical,
notional enquiry which cannot be directed solely to questions such as whether the beneficiary’s
right to income is vested or contingent. The question which the Court must ask itself is whether,
in the absence of the stipulation withholding trust income, this income would have been re-
ceived by or have accrued to the beneficiary. In answering this question regard must be had to
the terms of the instrument generally, the donor’s general benevolent intention, as evinced by
the terms of the instrument, and all the relevant circumstances. In this enquiry the fact that in
terms of the instrument as a whole the beneficiary has a vested right to the income would, as I
have indicated, be an important factor but it would not be the sole touchstone.
I shall accept for the purposes of this case that appellant’s counsel is correct when he says that
the donee (John van Zyl) did not have vested rights to the accumulated income during the tax
years in question. That, as I have indicated, does not, however, conclude the enquiry. A reading
of the deed as a whole convinces me that John was dominantly the object of the appellant’s
bounty . . . Nor do I think that this overriding intent to benefit John is detracted from to any
material degree by the substitution of John’s issue in the relatively unlikely event of his prede-
ceasing the termination of the trust or by the power conferred on the trustees to benefit charit-
able and other institutions (a power which incidentally was not exercised in the first five years of
the existence of the trust or, indeed, in the case of any of the other trusts in favour of the grand
children).
This brings me to argument (b) above. It does not appear to me to be of substance. Ex hypothesis
what is being considered is the accumulated income ie that which has not been distributed to
either the donee or to charitable or other institutions. In the notional enquiry as to who would
have been the recipient of such income, but for the stipulation, I think that the charitable and
other institutions can justifiably be ignored.
Viewing the matter in its totality, I am of the view that, but for the stipulation in this case, the
income of the trust under consideration would have accrued to and been received by the donee.
The conclusion, therefore, is that both the hypothesis and the devolutionary portion of s 9(5)
apply to the trust income which is the subject-matter of objection and appeal. In terms of s 9(5),
therefore, it must be deemed to be that of the donor, the appellant.
Finally, I would simply add that any other conclusion would lead to the somewhat curious result
that while s 9(5) would clearly apply to a trust whereunder the trust income was absolutely with-
held from the ultimate beneficiaries and accumulated for a defined period, it would not apply,
generally speaking, to a trust in terms of which, again for a defined period, the trustees were
empowered, at their discretion, either to withhold and accumulate the income or to pay it to the
beneficiaries. While each case must obviously be considered on its individual merits, the latter is
a form of trust which frequently occurs and, having regard to the general object of the enact-
ment, it seems unlikely that the Legislature would have intended to exclude such a transaction
from the operation of s 9(5).
...
The appeal is dismissed with costs . . .
WESSELS JA, TROLLIP JA, MILLER JA, and GALGUT AJA concurred.

Notes
The judgment in Estate Dempers left open the question whether the exercise of a trustee’s
discretion in terms of a trust is an ‘event’ within the meaning of s 7(5). Counsel ad-
dressed argument on this issue, but the court found it unnecessary to decide the point
because it found that the stipulations, which provided that the beneficiaries were not to
receive the income of the trust until they reached a specified age, were such ‘events’ in
their own right. This element of s 7(5) was therefore satisfied quite apart from the exer-
cise of the trustee’s discretion.
Estate Dempers held that, for s 7(5) to apply, it was not a sine qua non that the beneficiary
should have a vested right to the income. In other words, the section could apply wheth-
er the right was vested or contingent. It is clear that, if s 7(5) applies in a situation where
644 Income Tax in South Africa: Cases and Materials

the beneficiary’s right to the income is contingent, the income will be deemed to be the
donor’s (as was held to be the case in Estate Dempers).
But what about the situation where s 7(5) applies in circumstances where the benefi-
ciary has a vested right to the income, but it is not distributed to him? In whose hands will
the income in question be taxed? If a beneficiary has a vested right to trust income but
the income is not actually paid over to him then, if s 7(5) did not exist, the income
would be deemed to accrue to the beneficiary in terms of s 7(1); in accordance with that
provision, this income would then be taxed in the beneficiary’s hands. Where the deeming
provision of s 7(5) applies, the relevant income is deemed to be the donor’s and is taxed
in the donor’s hands. Hence, where the trust beneficiary has a vested right to income but
it is not actually paid over to him, both s 7(1) and s 7(5)19 potentially apply, and it is
therefore important to decide which of these two sections takes precedence over the
other.
The weight of opinion is that the specific provisions of s 7(5) take precedence over the
general provisions of s 7(1),20 in other words, the income is deemed to be the donor’s
and is taxed in his hands. Where a beneficiary acquires a vested right to trust income in
consequence of a discretionary decision by the trustee, then s 25B(2) lays down that such
income is, for the purposes of that subsection, deemed to have been derived for the
benefit of such beneficiary; hence it is deemed to have accrued to the beneficiary.
Estate Dempers also laid down the important principle that if income is deemed to be
the donor’s and is taxed in his hands, it will not be taxed again in the beneficiary’s hands
when it is distributed to him. Section 25B – which was enacted after that judgment – is
silent on this point, but the principle laid down in Estate Dempers is regarded as being
applicable.

§5 Report of the Davis Tax Committee (first interim report)

On 17 July 2013 the Minister of Finance announced the names of the members of the David Tax
Committee and its terms of reference.
The terms of reference of the Committee are to inquire into the role of the tax system in the promo-
tion of inclusive economic growth, employment creation, development, and fiscal sustainability. The
Committee is to take into account recent domestic and global developments and, in particular, the
long term objectives of the National Development Plan.
The Committee will make recommendations to the Minister of Finance. Any tax proposals arising
from the recommendations will be announced as part of the usual budget and legislative processes.
As with all tax policy proposals, they will be subject to the usual consultation and Parliamentary
oversight.
The Committee will also evaluate the South African tax system against the international tax
trends, principles and practices, as well as recent international initiatives to improve tax compliance
and will deal with tax base erosion
Davis Tax Committee
First Interim Report on Estate Duty – a discussion document
January 2015
________________________

19 The reason that s 7(5) will definitely apply is that, where the beneficiary has a vested right, the ‘hypothet-
ical, notional inquiry’, delineated by Corbett CJ in Estate Dempers 1977 (3) SA 410 at 426C-E will inevitably
lead to the conclusion that the income would have been received by the beneficiary; there would be no-
one else who could receive it.
20 Swersksy, ‘Vested and contingent rights and s 7(5)’, 20 Income Tax Reporter 252 at 258; Silke §12.20.
 Trusts 645

Chapter 4 – Trusts
It is perhaps trite to commence with the observation that there remains a large number
of legitimate reasons to form trusts, other than the pursuit of estate duty savings. Howev-
er, the use of trust structures in their various forms causes the growth of the underlying
investments to fall outside of the donor, settlor or beneficiary’s estate for purposes of the
estate duty computation.
In the absence of specific anti-avoidance provisions within the Estate Duty Act, there is
little to prevent South Africans from using trusts as effective estate duty saving mecha-
nisms. Currently trusts are taxed at a flat rate of tax of 40% for income and 26,64% for
capital income. Thus it would appear that significant arbitrages exist between trust tax
rates and personal income tax rates:
• the CGT rate for trusts is double the maximum personal income tax rate; and
• trust tax rates exceed the personal tax rate where taxable income is below the current
maximum marginal tax rate threshold of R673 100 per annum.
However, the provisions of sections 7 and 25B of the Income Tax Act allow the trustees
of the trust to cause the trust income to vest and be taxed in the hands of a beneficiary.
This is known as the “attribution principle.”
The attribution rules in section 7 were originally intended as an anti-avoidance measure
aimed at preventing a trust from being used as an income-splitting device. Prior to years
of assessment, commencing on or after 1 March 1998, trusts were taxed on a sliding scale
with the same maximum marginal rate as individuals, but without the rebates.
It would therefore have been a simple matter to place income-generating investments
in a number of trusts in order to take advantage of the trust’s sliding tax scale. The need
for section 7 in those years will be appreciated if regard is had to the extremely high
individual tax rates that prevailed at the time. For example, in 1972, the maximum
marginal rate of tax for an individual was 66% (inclusive of a surcharge) plus a loan levy
of 12% which increased the rate to 78%. From the 1999 to 2002 years of assessment,
trusts were taxed at a dual rate of tax. For example, in the 1999 year of assessment the
first R100 000 of taxable income was taxed at 35% and above that level at 45%, the latter
being equal to the maximum marginal rate of an individual.
The dual rate prompted some taxpayers to form multiple investment trusts to take ad-
vantage of the 35% rate, including the questionable practice of forming multiple “pour
over” trusts. Thus Trust 1 would retain R100 000 and distribute the balance of its income
to Trust 2 which in turn would distribute the excess above R100 000 to Trust 3 and so on.
Even at this point, attribution to a donor made sense because it would have the effect of
taxing the donor at 45% instead of 35%. For the 2003 and subsequent years of assess-
ment trusts have been taxed at a flat rate of tax of 40%. They have an inclusion rate of
66,6% for capital gains, giving an effective rate of 26,64% (66,6% × 40%).
When CGT was introduced in 2001, the “attribution back to donor” rules in para-
graphs 68 to 73 of the Eighth Schedule merely followed the same rules as in section 7.
Because of the flat rate of tax of 40% and effective flat rate for CGT purposes of
26,64% the attribution rules no longer serve their purpose as an anti-avoidance provi-
sion; the opposite is true. They now represent a concession to high net worth individuals.
At best, income will be taxed at the same rate of 40% but it could be taxed at anything
from 0% to 40%, depending on the level of taxable income of the donor. Thus, the
attribution rules can be, and are now, employed to avoid tax, thereby subverting the very
purpose for which they were introduced. For CGT purposes, there is a definite benefit to
a donor who is a natural person, with capital gains being taxed at between 0% and
13,32% instead of at 26,64%.
646 Income Tax in South Africa: Cases and Materials

A further aberration from the fiscus’ standpoint is that attribution to a donor of in-
come has no effect on the donor’s estate for estate duty purposes, since the assets derived
from the deemed income are in reality held by the trust. To make matters worse for the
fiscus, a donor has the right to recover the tax on the deemed income from the assets of
the trust under section 91.
However, few donors would exercise that right since it would be better for them to pay
the tax themselves, thus diminishing the value of their estates even further. In summary,
the attribution principle was established at a time when personal income tax rates were
substantially higher than trust tax rates.
This has now reversed, particularly in regard to capital tax rates where the highest rate
of CGT for personal income tax (13,32%) is now half the rate of trusts (26,64%).
Further benefits can be gained if trust income is taxed in the hands of the individual
receiving income below the maximum marginal rate of 40% attained at taxable income
level of R673 100 per annum.
Interest Free Loans
In order to avoid the donations tax implications of implementing an inter vivos trust
arrangement, many assets are transferred into trusts, allowing the transfer consideration
to remain outstanding by way of an interest-free loan account. These amounts are then
gradually repaid as and when cash becomes available to the trust. This effectively results
in the gradual dissipation of a taxpayer’s estate over a prolonged period, in turn ulti-
mately dissipating the taxpayer’s estate prior to death. The transfer pricing provisions of
section 31 are not of application to loans between South African resident taxpayers. In
reality, this results in the donations tax provisions of the Income Tax Act being largely
ineffective when assets are transferred into trusts.
The decision in CSARS v Brummeria Renaissance (Pty) Ltd 2007 (6) SA 601 (SCA)
demonstrated that, in certain circumstances, a deemed return can be imputed on an
interest-free loan between resident South Africans.
However, this judgment can only be applied in very specific circumstances and cannot
address the widespread range of interest-free loans used in estate planning today.
Recommendations: income tax
The attribution principle fundamentally undermines the present policy of the South
African tax system towards trusts. Taxpayers are currently almost in a position to freely
divert income (both capital and revenue in nature) away from trusts, to be taxed in the
hands of beneficiaries with lower effective rates of tax. Given the various forms of trust
arrangements, it is impossible to prescribe universal anti-avoidance provisions to stem
the loss.
The DTC recommends that many of the deficiencies of the current estate duty system
be addressed by way of the following simple yet fundamental amendments to the existing
legislation:
• the flat rate of tax for trusts should be maintained at its existing levels;
• the deeming provisions of section 7 and 25B insofar as they apply to RSA resident
trust arrangements should be repealed;
• the deeming provisions of section 7 and 25B insofar as they apply to non-resident
trust arrangements should be retained;
• trusts should be taxed as separate taxpayers;
• the only relief to the rule should be the “special trust definition” contained in section
1 to the Income Tax Act which allows a trust to be taxed at personal income tax rates
in limited special circumstances. The definition should be re-visited by National
Treasury so as to make provision for the inclusion of selected trusts used in Broad
Based Black Economic Empowerment Structures;
 Trusts 647

• no attempt should be made to implement transfer pricing adjustments in the event of

financial assistance or interest-free loans being advanced to trusts. Taxpayers must be
allowed to make use of trusts when it makes sound sense to do so in the pursuit of a
commercial justification or benefit, as opposed to an estate duty benefit. However, as
is the case with present company tax rates today, the taxpayer must accept any poten-
tial adverse tax consequences.
The DTC acknowledges that the repeal of the attribution provisions will have diverse and
far-reaching implications. Thus, it would be in the interests of equity that the repeal of
the attribution provisions be announced in the 2015 National Budget Speech but only
implemented with effect from 1 March 2016.
An extensive consultative process will have to follow during the 2015 legislative cycle,
so as to identify and address the many issues involved. There would be numerous com-
plexities associated with implementing a form of transfer pricing adjustment to deem a
return on interest-free loans between SA registered trusts and SA taxpayers. The DTC
concurs with the recommendations of the Katz Commission that this be avoided.
 13
FARMING

§ Page
1 Introduction ............................................................................................................. 649
2 The nature of ‘farming operations’ ........................................................................ 650
[329] Kluh Investments v CSARS ......................................................................... 650
[330] ITC 166 ........................................................................................................ 650
[331] ITC 732 ........................................................................................................ 651
[332] Bryant v Minister of Labour and Minister of Justice ................................. 653
[333] Buglers Post (Pty) Ltd v SIR ....................................................................... 654
[334] R v Giesken and Giesken ............................................................................ 655
[335] ITC 586 ........................................................................................................ 657
[336] KWV Bpk v Industrial Council for the Building Industry......................... 658
[337] ITC 1548 ...................................................................................................... 660
[338] Rex v Porterville Ko-op Landbou Maatskappy Bpk................................... 661
[339] Practice Note 32 .......................................................................................... 662
2.1 Does the question whether the taxpayer is carrying on farming operations
involve a subjective or an objective test? ........................................................ 663
[340] ITC 1319 .............................................................................................. 663
[341] ITC 1424 .............................................................................................. 664
[342] CIR v Smith .......................................................................................... 667
3 Plantation Farming .................................................................................................. 671
[343] Kluh Investments (Pty) Ltd v CSARS............................................................. 672
4 Expenditure incurred after the cessation of farming operations is not
deductible in terms of the First Schedule .............................................................. 675
[344] ITC 1135 ...................................................................................................... 675
5 Horse-racing and breeding ...................................................................................... 678
[345] ITC 1285 ...................................................................................................... 678
[346] ITC 639 ........................................................................................................ 679
[347] J v COT ........................................................................................................ 680
[348] ITC 1373 ...................................................................................................... 682

§1 Introduction
Income which is derived from the carrying on of ‘pastoral, agricultural or other farming
operations’ is taxed in accordance with the general provisions of the Act, read together
with the First Schedule.
649
650 Income Tax in South Africa: Cases and Materials

§2 The nature of ‘farming operations’

Farming operations involve the performance of a range of physical activities associated with the land
with a view to profit. The cultivation, maintenance and harvesting of timber with a view to profit
plainly constitute farming operations. Farming operations in the form of plantation operations
would typically involve the harvesting of trees from year to year.

[329]
Kluh Investments (Pty) Ltd v CSARS
[2014] ZAWCHC 141
Section 26(1) of the Income Tax Act provides that:
‘The taxable income of any person carrying on pastoral, agricultural or other farming
operations shall, in so far as it is derived from such operations, be determined in accord-
ance with the provisions of this Act but subject to the provisions of the First Schedule.’
Rogers J:
[5] The First Schedule uses the word ‘farmer’. This is clearly a short-hand reference to the ex-
pression ‘any person carrying on pastoral, agricultural or other farming operations’ in s 26(1).
...
[63] Farming operations involve the performance of a range of physical activities associated with
the land with a view to profit . . .
[64] The cultivation, maintenance and harvesting of timber with a view to profit plainly consti-
tute farming operations. Farming operations in the form of plantation operations would typically
involve the harvesting of trees from year to year. The proceeds from the annual sale of timber
constitutes gross income of a revenue nature. The farmer would typically undertake the planta-
tion operations with a view to his revenue from timber sales exceeding his operating expendi-
ture, that is with a view to profit.

Where the taxpayer leases his farm for a fixed rental, the rent is not income from farming operations
even though the lessee carries on farming operations. But where the taxpayer leases his farm to a
colonus partiarius who pays the taxpayer a percentage of the proceeds of the crops, the amount paid
to the taxpayer is income from farming operations.

[330]
ITC 166
(1930) 5 SATC 85
The taxpayer was the owner of a certain farm. Two portions of the farm were let to
lessees at fixed rentals, and the third portion was worked by a tenant who paid the tax-
payer a half share of the proceeds of the crops, in lieu of rent. During the year of assess-
ment ended 30 June 1929, the taxpayer incurred expenditure of £171 in planting vines
on his farm, and £143 in constructing a dam on the farm. He claimed a deduction of
these amounts. The Commissioner disallowed the claim.
Issue: was the taxpayer engaged in farming operations?
Held: the fixed rental the taxpayer derived from leasing one portion of the farm was
not income from farming operations; but his entitlement to a share of the crops in
respect of the portion of the farm leased to a colonus partiarius was income from farming
operations. In respect of the latter income, he was therefore entitled to the deductions
available in respect of income from farming operations.
Davis KC: [T]he first question which we have to consider is whether this is income derived by
the appellant from pastoral, agricultural or other farming operations. Now, so far as the two
portions of the farm let to the lessees at fixed rentals are concerned, it has already been held by
this Court that his income in such a case is not derived from farming operations but is derived
 Farming 651

from letting his farm, in the same way as any other landlord would let fixed property owned by
him, at a fixed rental. The fact that the rental is indirectly derived from farming does not affect
the matter. The persons who actually carry on the farming operations are the lessees and not the
lessor. His income springs simply from the fact that he is a landlord and not a farmer. Therefore,
so far as those two portions are concerned, the appellant cannot obtain any relief.
The third portion, however, which is let on the basis of a half share of the proceeds of the crops,
has to be dealt with in a different manner. The occupant is legally a colonus partiarius, and in the
case of Oosthuizen v Estate Oosthuizen 1 a son was placed in possession of a house and land by his
father, and it was a condition that the son had to pay the father a percentage of the crops.
Therefore, the contract was similar to the contract in this case, and Innes CJ2 said: ‘The fixed
amount of produce payable yearly would represent the rent. But this position was really that of a
colonus partiarius, that is an occupier who pays a certain portion of the yield varying as the crops
vary – a position somewhat between that of a lessee and a partner.’ In the case of Blumberg &
Sulski v Brown & Freitas 3 in connection with a similar contract, Mr Justice Wessels went into the
legal position again, and he said:4 ‘I think the view of Sir James Rose-Innes is the correct one,
that it is a contract sui generis partaking in some respects of a lease and in other respects of a
partnership.’ Here the landlord has a direct interest in the farming operations because he has
the right to a proportion of the proceeds of the crops grown thereon, therefore, in our opinion,
he is a person who derives his income from farming operations within the meaning of s 15(1) of
the Act. Under these circumstances, so far as the portion worked on shares is concerned, the
appellant is entitled to a deduction of that portion of the capital expenses which have been ex-
pended on that particular portion of the farm.

[331]
ITC 732
(1951) 18 SATC 108
The taxpayer owned a farm. He carried on farming operations on a portion, and let the
remaining portion for £300 per annum to a tenant who carried on farming operations
for his own account. The taxpayer sought to include the rental of £300 as income
from farming operations in order to avail himself of the right, under the Act, to deduct
certain expenditure up to a specified percentage of gross income derived from farming
operations.
Issue: was the rental derived by the taxpayer from leasing the farm income derived
from farming operations?
Held: in the negative. Such income was derived from ownership of the land, not from
farming operations.
Newton Thompson J: It is clear from the dossier, which is part of the record, that the rent re-
ceived is in respect of portion of the taxpayer’s farm which he does not himself farm, but which
he lets to another by whom it is used for certain farming operations in connection with their
servants. The whole question for discussion is whether this £300 was received by the taxpayer as a
farming operation. He himself contends that all his income is derived from the same farm and
the fact that he lets a portion of it should not take the rent which he receives therefor out of the
heading of income received from farming operations, because, he urges, you cannot differen-
tiate between money received from the same farm.
‘The portion of the Act which is relevant is firstly section 14 which says:
‘The taxable income of any person carrying on pastoral, agricultural or other farming operations shall, in
so far as it is derived from such operations, be determined in accordance with the provisions of this Act
but subject to the Third Schedule thereto.’

________________________

1 1903 TS 688.
2 At 692.
3 (1922) TPD 130.
4 At 136.
652 Income Tax in South Africa: Cases and Materials

The key words there therefore are ‘income derived by him from farming operations’, and the
simple question is whether it is a farming operation to let a portion of your farm to somebody
else for him to farm upon. Taken grammatically – and reference may be had to dictionaries,
such as the Shorter Oxford or others, on which I shall not go into detail – it seems to me that the
words ‘farming operations’ do not cover an act like letting a portion of your farm at a fixed rent-
al of, as here, £300 per annum. If I had to decide it on the grammatical meaning alone that is
what I should decide, but the matter does not end there because we have the opinion of
accepted text-writers to the same effect – I quote from Barnes’s Income Tax Handbook 5 and Ingram
on The Law of Income Tax in South Africa. Mr Ingram was a former President of this Court and at
p 168 of his book dealing with the meaning of the phrase ‘income derived from farming oper-
ations’ he said:
‘To come within the section the income must be directly derived from farming operations. Where income
is only indirectly derived from farming operations, eg where a landlord derives rent from the lease of a
farm, such interest is not sufficiently direct to bring the rent within the description.’
If that statement is correct then the matter must go against the taxpayer, and in view of the high
authority of the writer it is strong persuasive authority that the statement is correct. But there are
decided cases in our Court which point to the same conclusion. I will content myself with quo-
6
ting from two of them; the first is ITC 166 which is a case decided by Mr A Davis KC, who was
the acting President of the Income Tax Special Court at the time. There appellant, who owned a
farm, let a portion of it to tenants at fixed money rentals.
‘Held, that as regards the portions let for a fixed money rental the taxable income derived therefrom was
not derived from farming operations, but from the ownership of land.’
That is an authority which is directly in point in this case. Then there is also ITC 639.7 That is a
case decided by Mr Ingram, KC, then President of this Court, in connection with a claim by the
appellant, who was a farmer engaged in the breeding of cattle and poultry and thoroughbred
horses. Appellant contended that the breeding of race-horses was part of his farming operations
and that his winnings obtained in racing those horses should be counted as income from his
farming operations. It was contended that the racing was an integral portion of his farming oper-
a-tions, incidental thereto, and that the stake money was income from the farming operations
against which he was entitled to the allowances such as we are dealing with here. The Court dis-
missed his appeal and held, on the facts, that he ‘was carrying on two businesses, one the industry
of breeding livestock and the other the business of the racing of horses, from which latter was
derived income in stakes, and it was impossible to accept that the income so derived was income
derived from farming operations.’
It seems to me that income derived from racing horses which the taxpayer actually bred himself
was much more nearly related to farming operations than income derived from letting some of
the land which he owned as a farmer. That being so, that case is also strong authority against the
taxpayer in his contentions here.
There are a number of other cases which are not so clearly in point. There is the statement by
8
Steyn J, in the case of Barron v Sachar, where he says, in considering a case under War Measure
59 of 1946:
‘Premises cannot be a “farm” unless used for farming purposes and in terms of the definition a “farm”
must be deemed to be something distinct from the connotation of “business premises”, and to be premises
where farming and not other mercantile operations are primarily conducted. If dual operations are con-
ducted on farm property it may well be that a portion of such property must be regarded as a “farm”, and
the rest as “business premises” . . .’
That statement, of course, was not dealing with the term ‘farming operations’ which appears in
the Income Tax Act with which we are concerned, but it follows along the line of reasoning of
the cases which I have already quoted, and it confirms me in the conclusion . . . that the taxpay-
er’s contention cannot be upheld in this matter. What he has done in letting the portion of his
farm for which he gets £300 a year rent, is not a farming operation.

________________________

5 6 ed at 182.
6 5 SATC 85.
7 14 SATC 227.
8 1947 (2) SA 1049 at 1053.
 Farming 653

The carrying on of farming operations is a ‘trade’. Hence, an enterprise which does not constitute a
‘farming operation’ may nevertheless be a ‘trade’. Merely because the agricultural produce is sold
directly to the public does not preclude the taxpayer’s enterprise from being a farming operation.
Whether a person is employed in farming operations does not depend on the nature of the work they
do, but on the nature of the enterprise.

[332]
Bryant v Minister of Labour and Minister of Justice
[1943] TPD 205
Determination no 97 under the Wage Act of 1937 applied to all employers engaged in
the dairy trade and to their employees in defined areas, but the Act did not apply to per-
sons employed in farming operations.
Issue: were certain employees of the taxpayer employed in ‘farming operations’, thus
falling outside of the wage determination provisions of the Wage Act?
Held: the fact that the produce was sold to the public did not prevent the enterprise
from being a farming operation.
Millin J: The applicants’ case is that the servants in question, 35 in number, although engaged in
the distribution of milk on his behalf in the magisterial districts of Johannesburg and Germiston,
carry out this work as part of the applicant’s farming operations: and reliance is placed on s 2(2)
of the Wage Act which says that ‘this Act shall not apply to persons in respect of their employment
in farming operations.’ . . . [I]t is agreed that for the purpose of the decision in this case it will
be sufficient to declare whether or not the 35 natives are, on the evidence, employed in farming
operations.
...
In determining whether the employment of these 35 natives, or any of them, is employment in
farming operations, regard must be had not to the special nature of the work they are doing but
to the nature of the enterprise in which they and their employer are associated for a common
purpose . . . The carrying on of farming operations is a trade within the definition of ‘trade’ in
s 1 of the Act. Section 2(1) says that, subject to s 2(2), the Act is to apply to every trade or section
of a trade; and s 2(2) in effect excludes from the operation of the Act that species of trade which
consists of carrying on farming operations . . .
As a matter of common sense there is no reason why . . . the disposal of farm produce should
cease to be a farming operation merely because the method of disposal brings the producer into
direct contact with the consumer. Whether the elimination of the middleman results in more
profit to the producer or in a more favourable price to the consumer or in both seems to be
quite immaterial. If it is material to enquire whether the applicant’s is a usual method of dispo-
sing of milk produced on a farm, there is nothing in the evidence to induce one to take the view
that it is unusual.
In the course of the argument the applicant’s employees were spoken of as hawking milk about
the streets of Johannesburg and Germiston and it was asked what was the difference between
that and a farmer setting up a shop in one of those cities from which to sell his milk. It may be
that there is no difference and that either procedure might be held not to be an operation of
farming, but to amount to the running of a business distinct from farming. It is not necessary to
decide the point . . . The sole test to be applied is that of the enterprise in which employer and
employees are associated for a common purpose. If that test is applied the employment of all
these persons is seen to be employment in farming operations. We declare accordingly.

GREENBERG JP concurred.

The provisions of the First Schedule which entitle farmers to deduct certain capital expenditure,
involve the granting of a class privilege and must therefore be narrowly interpreted.
654 Income Tax in South Africa: Cases and Materials

[333]
Buglers Post (Pty) Ltd v SIR
1974 (3) SA 28 (A)
The taxpayer company carried on fruit farming operations in partnership. It purchased,
for R600 000, a servitude entitling it to take 40 million gallons of water out of the Boes-
mans River. The total cost of obtaining the servitude, including registration costs and
interest on the purchase price, was R39 636 and the servitude was obtained solely for
improving the farming operations carried on by the partnership. The partnership laid
another pipeline, adjoining the existing one, which conveyed four million gallons of
water per annum to Buglers Post. New pump houses, switchboards, electric motors land
pumps were installed in place of the old ones at a cost of R10 143. The partnership
claimed a deduction of R10 143 (which the Commissioner allowed) and R39 636 (which
the Commissioner disallowed). The taxpayer company appealed against the disallowance
of the latter amount on the grounds that the First Schedule to the Income Tax Act
permitted the deduction of expenditure incurred ‘in respect of . . . irrigation schemes’.
Issue: did the expenditure on the acquisition of the servitude qualify for deduction as
developmental expenditure ‘in respect of . . . irrigation schemes’ under para 12(1)(d) of
the First Schedule?
Held: water obtained by servitude from outside the farm is not an integral part of the
improvements envisaged in that provision and therefore does not qualify for deduction.
Rumpff ACJ: Section 26 of the Income Tax Act, 1962, reads as follows:
‘The taxable income of any person carrying on pastoral, agricultural or other farming operations shall, in
so far as it is derived from such operations, be determined in accordance with the provisions of this Act
but subject to the provisions of the First Schedule.’
Para 12(1) of the First Schedule contains the following provisions:
‘Subject to the provisions of sub-paras (2) to (6), inclusive, there shall be allowable as deductions in the
determination of the taxable income derived by any farmer the expenditure incurred by him during the
year of assessment in respect of -
...
(d) dams, irrigation schemes, boreholes and pumping plants;
. . .’
I have quoted the whole of this sub-paragraph because it illustrates the possibility of the words
‘in respect of’ having a narrow or a wide meaning depending on the context in which the words
are used . . .
Assuming, as one must, that the words ‘in respect of’ have a certain elastic quality, it is necessary
in the present case to ascertain the context in which these words are used, and to consider what
was said by this court in Ernst v CIR.9 In dealing with the corresponding section of the then Act,
Centlivres CJ, who wrote the judgment of the court, stated as follows:
‘The general rule is that expenditure of a capital nature cannot be deducted for the purpose of determin-
ing the taxable income of a taxpayer. See s 11(2)(a) of the Act. In para 17 of the Third Schedule an ex-
ception is made in the case of farmers who are allowed to deduct the capital expenditure therein
specified. To this extent farmers are, as a class, placed in a favourable position but there is no justification
10
in the paragraph for extending this exception. Craies on Statute Law says:
“The Courts, in dealing with taxing Acts, will not presume in favour of any special privilege of exemp-
tion from taxation.”
11
Said Lord Young in Hogg v Parochial Board of Auchtermuchty:
“I think it proper to say that, in dubio, I should deem it the duty of the Court to reject any construction
of a modern statute which implied the extension of a class privilege of exemption from taxation, pro-
vided the language reasonably admitted of another interpretation.”’

________________________

9 1954 (1) SA 318 (A) at 323.

10 At 109.
11 7 Rettie 986.
 Farming 655

In Ellert v CIR 12 there was a minority judgment by Centlivres CJ who referred to the Ernst case as
follows:13
‘As the appellant claims exemption from taxation the onus rests on him to show that he is entitled to the
14
exemption. See Ernst v CIR.’
The majority judgment written by Hoexter JA approached the issue in the same way. It is stated:15
‘It would seem that the onus is on the appellant to show that the business which he carried on falls within
16
the exemption (Ernst v CIR). . . .’
Having regard to s 26 of the Act and para 12 of Schedule 1, it seems clear that the intention of
the Legislature was to encourage a farmer to improve his farm so as to increase its productivity
and to allow a farmer the deduction of expenses incurred in the improvement of his farm, such
expenses to include the costs of certain capital works erected on his farm. The improvements set
out in para 12(1)(d) are of a particular nature. They deal with means or methods by which
water, the availability of which is reasonably anticipated, may be used. To that extent they consti-
tute a genus, I think, from which may be inferred that, under the eiusdem generis rule, an
irrigation scheme is a species of improvement by which land can be irrigated with water, if its
availability is reasonably anticipated. Water as such, obtained by servitude from outside the farm,
although necessary for an irrigation scheme, sets the irrigation scheme in motion or permits it to
operate, but it is not an integral part of the improvement such as is envisaged in para 12(1)(d),
in the same sense as water itself cannot be regarded as an integral part of a borehole or dam.
...
It was conceded on behalf of appellant that, if the argument advanced on behalf of it is correct,
the owner of a farm who purchased an adjoining farm for the sole purpose of acquiring a source
of water to be used on his own farm through an irrigation scheme, would be entitled to deduct
the whole of the purchase price of such farm as expenditure in regard to an irrigation scheme
under para 12(1)(d). I take it the same consideration would apply if the adjoining farm is pur-
chased so that its source of water could fill a dam built on the purchaser’s farm. I do not think
that that could ever have been the intention of the Legislature.
...
It was contended on behalf of appellant that even under the old Act the expenditure in acquir-
ing a servitude of water would be an expenditure ‘in respect of’ a water-furrow. That, I think,
would stretch the meaning of ‘in respect of’ in this context far beyond what was intended by the
Legislature . . .
For the reasons set out above, the appeal is dismissed with costs.
BOTHA JA, JANSEN JA, RABIE JA and CORBETT AJA concurred.

A taxpayer can be simultaneously engaged in two separate enterprises, one of them a farming opera-
tion, and the other a trade of a different kind. The purchase and resale of farm produce is not a
farming operation.

[334]
Rex v Giesken and Giesken
1947 (4) SA 561 (A)
The taxpayers were convicted in the magistrate’s court of contravening the provisions
of an arbitration award relating to the dairy trade, and of contravening certain War
Measure regulations. The taxpayers argued that, because the definition of ‘dairy trade’ in
the award excluded farming operations, they did not fall within its provisions. It was
common cause that, if this argument was upheld, they were similarly exempted from the
provisions of the War Measure regulations.
________________________

12 1957 (1) SA 483 (A).

13 At 490.
14 1954 (1) SA 318 (A) at 323.
15 At 491.
16 1954 (1) SA 318 (A) at 323.
656 Income Tax in South Africa: Cases and Materials

Issue: did the taxpayer’s activities of buying milk and reselling it and of producing milk
for resale constitute ‘farming operations’?
Held: the purchase and re-sale of milk is not a farming operation.
Greenberg JA: It was held in Bryant v Minister of Labour and Minister of Justice 17 in the case of a
dairy farmer who sells and distributes direct to customers milk produced by him on his dairy
farm, that his employees who are engaged primarily in the delivery of milk, are engaged in farm-
ing operations within the meaning of s 2(2) of Act 44 of 1937. The correctness of this decision was
not questioned in argu-ment before us, and it can be assumed in favour of the appellants that it
was rightly decided. Nor was it disputed and it can be assumed that it was correctly held in Rex v
Sidersky 18 that the character of a trade or industry is determined, not by the kind of occupation in
which the employees in that trade or industry are engaged, but by the nature of the enterprise in
which employers and employees are engaged for a common purpose, and that, once its charac-
ter is determined, all the employees are engaged in that trade or industry, whatever the actual
work may be which the employer allots to them. But there is nothing in the decision of Rex v
Sidersky or the other cases to which we were referred that is inconsistent with the conclusion, on an
appropriate set of facts, that an employer and his employees may be engaged on two enterprises,
each of which is to be treated as a separate trade or industry. In the present case, during the
period in issue, the appellants’ activities involved the daily purchase and resale of 1 000 to 2 000
gallons of milk per day and the production and sale of 500 to 870 gallons per day. If there had
been no exemption in the award in regard to farming operations, and if Bryant’s case (supra) is
correctly decided, I think it would be clear that the appellants and the employees concerned
would have been treated as being engaged both in the dairy trade, as defined, and in farming
operations. The fact that they were engaged in the latter operations would of course be irrele-
vant, in the absence of the exemption, to the question whether the employer was governed by
the award, but this does not affect the conclusion as to the common dual purpose of the
employer and his employees.
If I am right in this view, then it appears to me to be decisive of the question in issue. The enter-
prise of selling and distributing milk which is conducted by the appellants is a trade which falls
within the definition of ‘dairy trade’, and if the appellants use the employees in carrying out this
enterprise, then they are bound by the award unless the sale and distribution is part of a farming
operation. The exemption does not exclude farmers or their employees, but farming operations.
If Bryant’s case is correctly decided, it would be a part of such operations if the milk sold and
distributed were milk produced by the appellants’ own farming operations. The result is that
they would only be exempted from the award in respect of milk so produced and only in respect
of those employees engaged solely in regard to such milk. Once they are engaged in respect of
milk which is not the product of the appellants’ farming operations, whether it be mixed with
such product or not, the exemption no longer applies. The sale or distribution of milk obtained
from other sources by purchase is not a farming operation, even if milk produced by the seller is
added. The position is that, though they are engaged in farming operations, the sale and distrib-
ution of the milk is not a farming operation, and this is the case whether what is being delivered
consists of 70 per cent of milk purchased and 30 per cent of milk produced by their farming
operations, or vice versa.
It is unnecessary to express any opinion on what the position would be if the addition of milk
purchased elsewhere were an isolated incident . . . or if the addition was of such a small quantity
as to be insignificant.
For these reasons I have come to the conclusion that the judgments in the Courts below are
correct and that the appeal must be dismissed.
WATERMEYER CJ, TINDALL JA, CENTLIVRES JA and SCHREINER JA concurred.

Income derived from speculating in cattle is not income from farming operations. However, a tax-
payer who acquires cattle, improves them, and realises them at a profit is not a speculator, but is
engaged in the business of farming.
________________________

17 [1943] TPD 205.

18 (1928) TPD 109.
 Farming 657

[335]
ITC 586
14 SATC 123
The taxpayer company, which had hitherto carried on the business of livestock auc-
tioneers, leased a farm and embarked on other activities, including the acquisition of a
type of cattle known as store cattle, grazing them on the farm for between six weeks and
six months, then selling them. The question was whether the taxable income of the
taxpayer should be determined in accordance with s 14 of the Act which applied to
pastoral, agricultural or other farming operations.
Issue: was the taxpayer’s income, derived from acquiring store cattle, grazing them for
a few months, and then selling them, income from ‘farming operations’?
Held: in the affirmative. These activities differed essentially from speculation in cattle,
and constituted farming operations.
C J Ingram KC: The question raised is purely a question of fact, and the answer of it depends on
the enquiry, first of all on the meaning of ‘farmer’ under s 14(1), and secondly whether the
appellant company’s activities are to be considered the activities of a farmer.
There is no definition supplied by the Act as to what is a farmer under the Act, so we have to go
on the evidence which has been put before us as to what constitutes farming and also we have
some little guide accorded us by the English authorities.
...
I now come to Mr Lambert’s contentions on behalf of the Commissioner. His contentions were
that . . . one of the objects of the business was that of a speculator . . . [I]n this case we have the
evidence of a witness who has been a farmer since 1912 and must be regarded as knowing what is
comprised under the heading of farming. He has given us various instances as to what is usually
regarded as farming. From those instances it will be concluded that farming is not necessarily
restricted to the breeding of animals or providing them with artificial feeds or doing agriculture
in conjunction with animal husbandry. He has given evidence to show that people who farm with
pigs do not necessarily breed pigs and people who farm with sheep do not necessarily breed
them. It is apparent that the term farmer is a comprehensive term, it seems to me to include any
activity carried on on the land. Mr Lambert’s contention is that what the appellant has really been
doing is really the business of a speculator because it carried on the business of auctioneers
and it is an easy transition from that business to carry on the business of a speculator in livestock
...
We also have the evidence of another witness who distinguished between what is done by a spec-
ulator and what is done by a farmer – a speculator is really concerned with the marketing of
animals, he does not usually retain those animals for a long time, and so far as it appears from
the evidence, he certainly does not do anything to improve the quality of those animals. A specu-
lator, in livestock, as I apprehend, is like a speculator in any other commodity. He buys and
passes it on as quickly as he can to cut his losses. He does not try to work up the raw material into
some other product. The transformation of products from one state to another is emphatically
the business of the farmer. Thus he acquires a product in one stage and transforms it to a better
product and resells it. That is what has happened in the present case. The appellant company
embarked on this business which consists of buying what is known as store cattle. It bought a
particular type of beast, a beast which was capable of improvement – this being in the nature of
the raw product which will be worked upon and improved. For the purpose of creating that
improvement the appellant company acquired the lease of a farm which had still four years to
run, . . . The size of the farm was such as to provide good grazing for all the stock. This is not a
case of the appellant company acquiring a place merely for the storage of the stock. They ran
there for periods varying between six weeks and six months and after that time the cattle might
be sold. During the time they were there the appellant company would have to exercise a certain
amount of skill on the cattle so acquired by weeding out the undesirable cattle which would not
show any improvement by grazing. Therefore it seems to me that, in what the appellant was do-
ing, it differs essentially from what a speculator would do. In other words, the appellant company
was using its skill to acquire a particular asset, to work on that asset and through farming methods
658 Income Tax in South Africa: Cases and Materials

to realise it at a profit. Accordingly, in the Court’s opinion, the appellant company was carrying
on the business of farming and I think this conclusion applies equally to a transaction it did in
connection with another farm. There also the transaction was similar, except that a large num-
ber of cattle were bought in partnership with another firm, and in that transaction the appellant
company acquired a twenty-third share, with that other firm. I see no distinction between that
transaction and the transactions on the farm leased by the appellant, save that this transaction
was carried out in partnership.
For these reasons, this question being one of fact, we have come to the conclusion that the busi-
ness carried on by the appellant company was the business of a farmer . . . and the assessments
must be amended accordingly.

An operation when performed by or on behalf of a farmer may be a farming operation, but when the
same operation is performed by or on behalf of a person who is not a farmer, that operation is not a
farming operation.

[336]
Ko-öperatiewe Wynbouwers Vereniging van Zuid-Afrika Bpk
v Industrial Council for the Building Industry
1949 (2) SA 600 (A)
In 1946 the Minister of Labour, acting in terms of Act 36 of 1937, declared in the Govern-
ment Gazette that an Agreement relating to the building industry was binding on the
employers and employees who were members of the employers’ organisation and on the
trade unions which entered into the Agreement. The Act stipulated that it did not apply
to persons in respect of their employment in farming operations.
The taxpayer, a co-operative agricultural company, claimed that it was engaged in wine
farming, and that the Agreement was not binding upon it in relation to those of its
employees who were engaged in constructing, altering, repairing or maintaining its wine
cellars, tanks, stores, concrete furrows, drains, concrete floors and similar structures
required for the operations carried on by it, on the grounds that these constituted farm-
ing operations.
Issue: was the construction of the wine cellars, tanks, etc by the taxpayer a ‘farming
operation’?
Held: the wine-receiving tanks etc were not being constructed by or on behalf of a
farmer, but on behalf of a co-operative agricultural company, which was a separate legal
persona from its members, and was not a farmer. Therefore, such work was not a ‘farm-
ing operation’.
Centlivres JA: The applicant is a co-operative agricultural company which, in terms of s 90 of the
Co-operative Societies Act, 1939, is deemed to be duly registered under that Act. Its memoran-
dum of association sets forth its objects. The first two objects mentioned are
(1) ‘so to direct, control and regulate the sale and disposal of the produce of its members, in so far as it is
the products of the vine, as to secure or tend to secure to them a continuously adequate return for
such products of the vine’,
and
(2) ‘so to direct, control and regulate by all lawful ways and means the wine industry generally as to secure
or tend to secure the said continuing adequate return.’
Another object is
‘to construct, maintain or alter any building or works which may seem necessary or convenient for the
purpose of the company’.
The membership of the applicant company is limited to bona fide wine farmers carrying on wine
farming operations for their own benefit and Co-operative Wine Societies and Companies . . .
 Farming 659

I shall now proceed to consider the applicant’s first contention, viz that the employees con-
cerned fall under the provisions of s 2(2) of Act 36 of 1937 which . . . says that the Act shall not
apply to persons in respect of their employment in farming operations.
...
Mr Beyers prefaced his argument on the point now under consideration by submitting that
whether a person is employed in ‘farming operations’ turns, not upon the nature of a joint enter-
prise in which the performer of the operations and his employees are engaged, but upon the
nature of the operations performed. In substituting the exemption in s 2(2) of Act 36 of 1937 for
that in s 1 of Act 11 of 1924, the Legislature intended to broaden the scope of the exemption in
that it no longer made it dependent upon the fact of the employer being a farmer. Any acts by
or for whomsoever performed would place the performer outside the Act as long as what he did
constituted ‘farming operations’. Counsel illustrated his point by submitting that if a farmer
engaged the services of an independent contractor to plough his farm, the independent con-
tractor and his servants would be engaged in farming operations and consequently they would
not be bound by the terms of any agreement promulgated under the Industrial Conciliation Act.
For the purposes of this case it may be assumed that this is a correct statement of the law.
Developing his argument, counsel contended that the undisputed facts show that wine farmers
ordinarily provide, as part of their farming operations, storage tanks for their wine coops and
that consequently persons constructing such tanks are employed in farming operations. Here
again it may be conceded for the purposes of this case that when storage tanks are constructed
on a farm, whether by the farmer himself or by an independent contractor, the persons em-
ployed in such construction are engaged in farming operations. But counsel went further and
contended that, as the construction by it of storage tanks must be regarded in the same light as if
these tanks were constructed by its members. If I understand counsel correctly, he did not con-
tend that the construction of wine-receiving tanks by anyone, eg, a wine merchant, would consti-
tute farming operations: he stressed the fact that membership of the appellant company is
confined to those interested in wine farming and contended that the appellant, being an agri-
cultural co-operative company, its activities must be regarded as the activities of each of its mem-
bers. This contention, however, overlooks the fact that applicant is a persona distinct from that of
its members. It is deemed to have been registered under Act 29 of 1939 and under that Act it is
clear that the applicant is a company with limited liability, its activities being its own activities
and not those of its individual members. A wine farmer produces grapes and converts them into
wine and brandy: there is no allegation that the applicant produces any grapes. The applicant
alleges in its affidavit that it is engaged in wine farming. In my opinion, as it does not produce
any grapes, it cannot be said that it is engaged in wine farming. Wine farming consists of a num-
ber of different operations, such as cultivation of vineyards, pruning of the grape vines, render-
ing the vines free from disease, gathering the crop, pressing the grapes into wine and probably
delivering the finished product to the ‘first buyer’. Cf Bryant v Minister of Labour and Minister of
Justice 19 and Rex v Giesken and Giesken.20 To say that a person who receives grapes from farmers for
conversion into wine or brandy, or who receives distilling wine from farmers, and deals with the
grapes and distilling wine as he thinks fit, is a wine farmer, is a misuse of language. An operation
when performed by or on behalf of a farmer may be a farming operation, but when the same
operation is performed by or on behalf of a person who is not a farmer, that operation cannot,
in my view, be regarded as a farming operation. The construction of wine-receiving tanks in the
present case is not being performed by or on behalf of a farmer: it is being performed by a co-
operative agricultural company which is not a farmer.
TINDALL JA, GREENBERG JA, SCHREINER JA and HOEXTER AJA concurred.

Notes
The court assumed, for the purposes of the case but did not decide, that an independent
contractor who ploughs a farmer’s fields is himself engaged in farming operations. This
assumption is inconsistent with the decision in [337] ITC 1548.
________________________

19 [1943] TPD 205 at 211.

20 1947 (4) SA 561 (A).
660 Income Tax in South Africa: Cases and Materials

In deciding whether the taxpayer’s activities qualify for the benefits of the First Schedule, the court
should look to the narrower meaning of a ‘boerdery’ rather than the wider meaning of ‘farming
operations’. In order to constitute ‘farming operations’ under this narrower meaning, the taxpayer
need not be the owner of the land, but he must have a right to it and to its produce.

[337]
ITC 1548
(1993) 55 SATC 26
The taxpayer was a farmer. During the tax years in issue he supplemented the income
from his own farm by purchasing a shearing machine with which six expert shearers
could shear simultaneously. His own sheep farm was not extensive enough to justify the
purchase of such equipment, so he undertook the shearing of other farmers’ sheep. He
did the same with a harvesting machine. He did likewise with transportation, by trans-
porting other farmers’ wool together with his own. The taxpayer claimed that the activi-
ties of shearing, harvesting and transportation which he carried out for other farmers
were ‘farming operations’ and that his equipment qualified for the capital allowances
under the First Schedule. The taxpayer’s own farming income was not sufficient to off-set
these capital allowances, and he sought to deduct the allowances from the income he
derived from the above-mentioned activities he carried out on behalf of other farmers.
Issue: when the taxpayer was engaged in shearing, harvesting and transportation for
other farmers, was he engaged in ‘farming operations’; in the Afrikaans text of the Act,
did he carry on a ‘boerdery’?
Held: in the negative. Although such operations might be ‘farming operations’ they
could not be regarded as a ‘boerdery’. Because of the ‘class privilege’ which the Act
extended to farming operations, where there was doubt on the interpretation of the
provisions of the Act in relation to that class privilege, the narrower interpretation ought
to be adopted.
Conradie J: Mnr Clegg . . . het gesteun op die Engelse bewoording van art 26(1). Dit lees soos volg:
‘The taxable income of any person carrying on pastoral, agricultural or other farming operations shall, in
so far as it is derived from such operations, be determined in accordance with the provisions of this Act
but subject to the provisions of the First Schedule’.
Die uitdrukking vir ‘farming operations’ in die Afrikaans weergawe is ‘boerdery’. Mnr Clegg se
betoog was dat stroop en skeer (hoewel miskien nie vervoer nie) onteenseglik boerderybedry-
wighede is as hulle deur ’n boer op sy eie grond verrig word. As dieselfde aktiwiteite nou namens
’n ander op ’n ander se grond verrig word, behou hulle hul karakter, se hy, as boerderybedry-
wighede. Dit maak immers nie saak, dui die betoog verder, of ’n boer sy inkomste verdien deur
self te plant of te saai of vee to teel en of hy deur ander boere vergoed word om dieselfde
werksaamhede namens hulle te verrig nie. Mens kan nog skeer of stroop sien as ‘farming opera-
tions’. Mens kan hulle egter nie sien as ’n boerdery nie. ’n Boer wat vir ’n ander stroop of skeer,
bedryf nie ’n boerdery nie. (Vergelyk Ernst v CIR.21)
Dit is geoorloof om die betekenis van ’n uitdrukking in die getekende weergawe in casu, die
Englelse weergawe, van ’n wet uit te lê aan die hand van ’n egter betekenis in die ongetekende
weergawe. New Union Gold Fields Ltd v CIR.22 ‘Farming operations’ binne die betekenis van die
Wet is by ’n enger uitleg slegs bedrywighede wat verband hou met wat ’n boer uit sy grond ver-
dien. Hy hoef natuurlik nie eienaar van die grond wees nie, maar hy moet ’n reg hê op die
grond en op die opbrengs daarvan. Dan alleen is hy vir die doeleindes van die Eerste Bylae ’n
boer. Nie algar wat boerdery bedrywighede beoefen is vir die doeleindes van die Inkomstewet
boere nie.
...

________________________

21 1954 (1) SA 318 (A) 322H-323A, 19 SATC 1 at 7-8.

22 1950 (3) SA 392 (A) at 406G-H.
 Farming 661

. . . Die mening wat ek met betrekking tot die uitleg van die woord ‘boerdery’ of ‘farming opera-
tions’ in art 26(1) huldig word na my oordeel ook versterk deur die oorweging dat uitsonderings
in ’n belastingstatuut streng vertolk word . . .

Notes
This decision lays down that the question whether a person is or is not carrying on ‘farm-
ing operations’ is not decided merely by looking at the nature of the operations them-
selves. The court said that not everyone who carries out farming operations is a farmer
for the purposes of the Income Tax Act. Because of the ‘class privilege’ which the Act
extends to the taxation of income from ‘farming operations’, that phrase, said the court,
must be narrowly interpreted, to mean only activities which are connected with what a
farmer earns from the soil. To qualify as ‘farming operations’, the taxpayer need not be
the owner of the land, but he must have a legal right to the land and to its produce.
In reaching this conclusion, the court had regard to the narrower meaning of ‘boer-
dery’ in the Afrikaans version of the Act, rather than the words ‘farming operations’ in
the English version.
Consequently, the activities in question, had they been carried out by the owner or
lessor of the farm, would have been ‘farming operations’ or a ‘boerdery’, but those
activities were not ‘farming operations’ when carried out by an independent contractor,
such as the taxpayer.

The receiving and storing of farm produce by someone other than the producer does not constitute a
‘farming operation’.

[338]
Rex v Porterville Ko-op Landbou Maatskappy Bpk
1952 (1) SA 44 (C)
The taxpayer company was convicted of an offence under Act 30 of 1928 in that he
gave tots of wine to certain coloured persons in his employ. Section 96(2) of the Act
permitted alcohol to be given to adult males who were ‘vir boerderywerk bona fide in
diens’.
Issue: was the taxpayer, a farming co-operative, engaged in farming operations when it
received, stored and disposed of the farm produce of its members’ farming operations?
Held: in the negative. If these same activities had been engaged in by the taxpayer’s
members, who were farmers in their own right, the activities would have been farming
operations. But the taxpayer was a separate legal persona, and its activities were not the
activities of its members, but of an agricultural co-operative which was not a farmer.
Van Winsen J: Dit is gemene saak dat appellant wel drank aan ’n aantal kleurlinge in sy diens
verskaf het. Die vraag is of appellant die voordeel van art 96(2) al dan nie, geniet. Die magistraat
het gevind dat aangesien appellant die genoemde kleurlinge nie ‘vir boerderywerk bona fide in
diens’ gehad het nie, hy nie deur art 96(2) vrygestel word nie. Die enigste grond van appel is
dan juis dat die bevinding van die magistraat met die getuienis strydig is. Die feite waarop die
magistraat tot sy bevinding geraak het, word nie betwis nie.
Appellant is ’n ko-öperasie wat onder Wet 29 van 1939 geregistreer is, en lede daarvan is beperk
tot boere. Dit is ’n regspersoon . . .
Die vraag ontstaan nou of appellant die kleurlinge ‘vir boerderywerk bona fide in diens het’ . . .
Daar is verwys na die saak van Bryant v Minister of Labour and Minister of Justice 23 ter stawing van die
betoog dat die verkoop van plaasprodukte aan die eerste koper deel uitmaak van boerderywerk

________________________

23 [1943] TPD 205.

662 Income Tax in South Africa: Cases and Materials

(farming operations). Mnr Wessels, wat namens die appellant opgetree het, het aangevoer dat
daar nie gelet moet word na waar of deur wie die werk verrig word nie, maar daar moet slegs op
die aard van die werk gelet word om vas te stel of dit boerderywerk is al dan nie.
Appellant is nie ’n boer nie en is nie besig om te boer nie. Die boerdery-produkte wat hy hanteer
is nie produkte wat hy deur te boer geproduseer het nie. Die werk van die appellant bestaan uit
die in ontvangsneming, storing en van die hand sit van boerderyprodukte, meesal graan, wat die
opbrengs is van die lede se boerdery bedrywighede. Deur dit te doen word hy nie ’n graanboer
nie, en dit kan ewe min met reg gesê word dat hy daardeur graanboerdery beoefen. Waar art 96(2)
van boerderywerk (farming operations) melding maak, verwys dit myns insiens in die eerste instan-
sie na werk op ’n plaas verrig met die bedoeling om te produseer. Die begrip ‘boerderywerk’ kan
egter ’n wye betekenis he en ook werk dek deur ’n boer of sy werknemers verrig in die produksie of
verkoop van plaasprodukte, afgesien van waar dit verrig word. Ek is egter die mening toegedaan
dat die begrip nie in so ’n wye sin toegepas kan word nie om werk te dek in verband met
plaasprodukte wat verrig word na die produksie daarvan en wel deur iemand anders as die pro-
dusent. In die eersgenoemde geval is die persone wat die werk verrig besig om van en uit ’n
plaas te produseer, en in laasgenoemde geval nie. Die onderskeid dien myns insiens as grondslag
vir beslissings soos Rex v Kobersohn & Silverman 24 en Rex v Giesken and Giesken.25 Appellant is nie ’n
produsent nie, en is myns insiens in dieselfde posisie as enige makelaar wat op kommissie basis
die boer se produkte van die hand sit. Die feit dat sy lede boere is, en as dit nie vir die optrede
van appellant was nie sou die boere self hul produkte van die hand moes sit, is nie ter sake nie.
Appellant is ’n regspersoon wat ’n identiteit afsonderlik van sy lede besit. Sy optrede is nie die
optrede van sy lede nie – (KWV v Industrial Council for the Building Industry).26 Die feit dat waar sy
lede hul plaasprodukte self verkoop, dit boerderywerk is, bring nog nie mee dat as hy, appellant,
dieselfde werk verrig dit boerderywerk uitmaak nie. As ’n boer myns insiens hom sou besig hou
met die verkoop op kommissie basis van produkte deur sy buurman geproduseer, sou hy nie
besig wees met boerderywerk nie. Sien Giesken se saak.27 Net so min is na my mening appellant
besig om boerderywerk te verrig waar hy sy lede se produkte stoor en verkoop. Vir hierdie stel-
ling is steun te vind in die KWV saak, supra . . . Die uitspraak lui voorts –
‘An operation when performed by or on behalf of a farmer may be a farming operation, but when the
same operation is performed by or on behalf of a person who is not a farmer, that operation cannot, in my
view, be regarded as a farming operation. The construction of wine-receiving tanks in the present case is
not being performed by or on behalf of a farming operation. The construction of wine-receiving tanks in
the present case is not being performed by or on behalf of a farmer: it is being performed by a co-
operative agricultural company which is not a farmer.’
Die beginsel in daardie saak bevestig is hier van toepassing. Die werk wat appellant in verband
met die stoor en verkoop van sy lede se graan verrig is nie die werk van sy lede nie – maar die
werk van ’n landbou kooperasie wat nie ’n boer is nie.
Die gevolgtrekking waartoe ek raak is dus dat appellant se kleurling werknemers aan wie hy wyn
verskaf nie vir boerderywerk in diens is nie, en derhalwe dat appellant art 164(d) van Wet 30 van
1928, oortree het deur aan hul die wyn te verskaf.
NEWTON THOMPSON J concurred.

[339]
Practice Note 32
7 October 1994
Income tax: valuation of stock: nurserymen
1. Persons conducting the business of a nursery in the course of which plants are grown are
regarded as carrying on farming operations. Section 26 of the Income Tax Act (the Act) pro-
vides that the taxable income of persons carrying on farming operations shall, in so far as
such income is derived from such operations, be determined in accordance with the provi-
sions of the Act, but subject to the provisions of the First Schedule thereto.
________________________

24 1936 CPD 556 at 560.

25 1947 (4) SA 561 (A) at 567.
26 1949 (2) SA 600 (A) at 613.
27 Loc cit.
 Farming 663

2. In terms of paragraph 2 of the First schedule to the Act a farmer is required to include in his
income tax return the value of all produce held and not disposed of by him at the beginning
and end of each year of assessment. Furthermore, paragraph 9 of the Schedule provides that
the value to be placed on such produce shall be such fair and reasonable value as the Com-
missioner may fix. The value of standing crops (in the case of nurserymen, plants which are
not yet ready for sale) must, however, not be included in the valuation.
3. With regard to the valuation of the produce held and not disposed of, a fair value is consid-
ered to be the lower of production cost or market value. It is the responsibility of each nurse-
ryman to decide which of his plants are ready for sale and to value them on this basis. Plants
purchased from outside sources are well as fertiliser and other trading stock offered for sale
must be included in the stock valuation at the lower of cost price or market value.

§2.1 Does the question whether the taxpayer is carrying on farming operations
involve a subjective or an objective test?
Before a person can be said to carry on farming operations, there must be (subjectively) a genuine
intention to farm, and in addition an (objectively) reasonable prospect that an ultimate profit will be
derived.

[340]
ITC 1319
(1980) 42 SATC 263
The taxpayer, a medical specialist, purchased a 30 hectare property some 18 kilometres
from the centre of the city where he had his practice. At the time of purchase, the prop-
erty was heavily bushed, virgin coastal land. The taxpayer said that he intended to farm
with pedigreed Jersey cattle and goats. To this end, he commenced clearing the bush for
stock farming. From the beginning there were problems. He was unable to sell his regis-
tered Jersey bulls because there was no demand for them, and deficiencies in the soil
made it impracticable to farm with small stock. During the tax years 1969 – 1971 he
made substantial net farming losses. In 1972 the position deteriorated further when the
council constructed a road through the property, bisecting it. In October 1972 the taxpay-
er wrote to the divisional council saying that the property was no longer viable agricultural
land, and requesting council support for its subdivision into two morgen lots.
The taxpayer claimed farming losses for the years 1972 – 1975 of between R3 146 and
R7 763. During 1976 – 1977 (the tax years in issue) the taxpayer purchased no stock and
sold only one head of cattle for R203. Nothing was done in those years to improve the
property.
The taxpayer claimed that during the years in issue he was genuinely engaged in farm-
ing and that, despite past losses, the injection of additional capital would make the prop-
erty a viable farming venture.
Issue: was the taxpayer, during the tax year in issue, engaged in farming operations?
Held: in the negative, on the grounds that ‘farming operations’ require that there be a
reasonable prospect of an ultimate profit. This element was lacking in the present case.
Smalberger J: The appellant is a medical specialist. He lives on a smallholding approximately 30
hectares in extent, situated some 18 kilometres from the centre of the city. He claims to conduct
farming operations on this property. For the tax years 1976 and 1977 he reflected net farming
losses of R7 809 and R7 558 respectively. He sought to set off these losses against his professional
and other income during the tax years in question. The Commissioner for Inland Revenue disal-
lowed these losses and it is this decision against which the appellant appeals.
In terms of the relevant provisions of the Income Tax Act 58 of 1962, a loss from farming opera-
tions may be set off against other sources of income. Farming operations are not defined in the
664 Income Tax in South Africa: Cases and Materials

Act and whether or not a person carries on farming operations is a question of fact. In this re-
gard Silke on South African Income Tax 28 says:
‘There is no provision in the Act that a person must occupy lands of a certain size or extent before he can
be regarded as carrying on farming operations. As long as there is a genuine intention to develop land as a
farming proposition in the hope that an ultimate profit will be derived, this, it is submitted, constitutes the
carrying on of a farming operation.’
29 30
The latter statement is based on the decision in ITC 208 and see also ITC 937.
In so far as the test propounded by Silke purports to be an entirely subjective one, I do not agree
with it. It seems to me that before a person can be said to carry on farming operations there
must be a genuine intention to farm, coupled with a reasonable prospect that an ultimate profit
will be derived, thereby incorporating an objective element into the test . . .
[The judge analysed the evidence and observed that the taxpayer’s letter to the council in 1972
appeared to mark a change of intention by him.]
In all the circumstances the indications are that in 1976 and 1977 the appellant, despite his ipse
dixit to the contrary, had no genuine intention of farming and was, at best, merely marking time
until he could subdivide and dispose of the bulk of his property. It is, however, not necessary to
come to any firm decision on this point as it appears in any event that at the relevant time (and
we are not concerned with any other time) the appellant had no reasonable prospects of ulti-
mately farming on a profitable basis. There is nothing to show that the property initially was an
economic farming unit which could sustain a profitable farming venture. If anything, the indica-
tions are to the contrary. The appellant experienced a number of problems in farming the
property and in 1972, whatever the position may have been before, he no longer regarded the
property as viable agricultural ground. He claims that with the injection of sufficient capital it
can become a viable farming proposition, but we are not satisfied that this has proved to be the
case. In any event, at the time under consideration, he had no capital to put into the farm, nor
any prospect of obtaining capital for that purpose. Bearing in mind the losses he suffered over
the years, the problems he encountered, the limited scope for farming provided by the property,
the apparent lack of facilities and development on the property, and the limited extent of his
farming activities, the appellant has not shown that he had reasonable prospects of ultimately
deriving a farming profit from the property.
In all the circumstances the appellant has not persuaded us that he carried out, over the relevant
period, farming operations as envisaged by the Act. The appellant’s appeal is accordingly
dismissed.

Notes
This decision should be compared with [341] ITC 1424. Note also that the view that
there must be a ‘reasonable prospect of profit’ connotes a prospect of an ‘ultimate’
profit, not a profit in the same year as the expenditure or loss in issue was incurred.

A genuine intention to develop land as a farming proposition in the hope that an ultimate profit
will be derived constitutes the carrying on of a farming operation. This hope must be based on
reasonable grounds.

[341]
ITC 1424
(1987) 49 SATC 99 (Zimbabwe Special Court)
The taxpayer, an agricultural engineer, bought a 40 hectare farm outside Harare for
$37 000, for which he paid cash of $10 000 and took a bond for the remainder. His inten-
tion was to produce eggs and poultry and to grow vegetables. To this end he resigned his
________________________

28 9 ed at 814.
29 6 SATC 55.
30 24 SATC 374.
 Farming 665

job in September 1980, and used part of his commuted pension to pay the $10 000
deposit on the farm and buy capital assets and livestock for the farm. He commenced
farming operations in August 1980 and by 1982 he was employing nine full-time labour-
ers and four casuals. Although he had taken advice before embarking on the farming
enterprise, he soon ran into difficulties. Inter alia, the project was grossly under-
capitalised, and the cash-flow problems were exacerbated by a drought. In an attempt to
meet his financial problems, the taxpayer went back to work for his previous employer
on a flexitime basis which enabled him to continue the farming project, and he re-
mained so employed at all times relevant to the case. At the same time his wife took part-
time work which enabled her to live on the farm and thus exercise some supervision over
the labour force. The taxpayer ploughed much of his earnings into the farming venture.
During the tax year ending on 31 March 1981 the taxpayer’s income from the sale of
eggs and vegetables was $4 861, but he made an overall loss of $3 370. The following year
the gross income from the sale of poultry and eggs was $15 696 and from the sale of
vegetables it was $2 884, but again there was an overall loss. In 1983 the nett loss was
$14 948.
The taxpayer’s income tax returns for 1981 and 1982, reflecting overall losses, were
accepted by the Commissioner. For 1983, the Commissioner disallowed a variety of
expenses claimed as deductions, and averred that the taxpayer’s activities amounted to
no more than a hobby, and not to a trade of farmer as defined in the Act.
Issue: was the taxpayer engaged in ‘farming operations’?
Held: in the affirmative. A person is engaged in farming operations if there is a genu-
ine intention to develop land as a farming proposition in the hope that an ultimate
profit will be derived. This hope must be based on reasonable grounds. These require-
ments were satisfied in the present case.
Smith J: The issue before this Court is whether, in general terms, the appellant was entitled to
the allowances granted to farmers under s 15(2)(c) and (bb) of the Income Tax Act . . . In this
connection, the onus lies on the appellant to show that he was a farmer and that he incurred
expenditure ‘for the purposes of his trade’ (s 15(2)(c)) or ‘on farming operations’ (s 15(2)(bb))
. . . ‘Farmer’ is defined in s 2 as meaning –
‘any person who derives income from pastoral, agricultural or other farming activities, including any per-
son who derives income from the letting of a farm used for such purposes.’
Pastoral and agricultural activities clearly signify something more than grazing a couple of goats
or digging up a small patch of ground to grow vegetables. Pastoral activity in its ordinary sense
involves the keeping of a flock or herd . . . and agriculture involves at least the working or tilling
of the land . . . The use of the words ‘farming activity’ in the context cannot therefore mean
each and every activity on whatever scale which a farmer might undertake. A farmer might grow
acres of peas on contract for a canning factory, but a person who grows a bed of peas in his gar-
den all of which he intends to sell is not a farmer.
. . . I am, however, clear that it is not intended that within the term ‘farmer’ are to be included
persons who indulge in certain country pursuits merely as an interest, or to give themselves a
more enjoyable way of life, or even to enable them to live a little more economically than other-
wise . . .
Mr Donovan submitted that the test to be applied was not wholly a subjective one. There was an
objective element. He argued that it could not possibly be correct that any taxpayer who con-
vinced the Court that he was genuinely attempting to carry on farming operations could be cat-
egorised as a farmer. The Court should look not only at what the taxpayer intended but also at
31
what he was actually doing. I accept this. As Whitaker QC said in ITC No 1135:
‘The determination of an issue of this kind does not, therefore, depend upon whether the activities car-
ried on can be regarded as farming operations but upon (1) the nature and extent of the operations and
(2) the purpose with which the operations are carried on.’
________________________

31 (1969) 31 SATC 228 at 231.

666 Income Tax in South Africa: Cases and Materials

In ITC No 131932 Smalberger J considered the case of a medical specialist who resided on a small-
holding about thirty hectares in extent and about eighteen kilometres from the city centre. The
taxpayer claimed that he conducted farming operations on the property, averred that during the
two years in question those operations had resulted in substantial net losses and sought to set off
those losses against his professional and other income during the two years. Smalberger J said33 –
‘. . . Farming operations are not defined in the Act and whether or not a person carries on farming opera-
34
tions is a question of fact. In this regard Silke on South African Income Tax says the following:
“There is no provision in the Act that a person must occupy lands of a certain size or extent before he
can be regarded as carrying on farming operations. As long as there is a genuine intention to develop
land as a farming proposition in the hope that an ultimate profit will be derived, this, it is submitted,
constitutes the carrying on of a farming operation.”
...
In so far as the test propounded by Silke purports to be an entirely subjective one, I do not agree with it. It
seems to me that before a person can be said to carry on farming operations there must be a genuine in-
tention to farm, coupled with a reasonable prospect that an ultimate profit will be derived, thereby incor-
porating an objective element into the test . . .’
The incorporation by Smalberger J into the test of an objective element that there must be a
reasonable prospect that an ultimate profit will be derived has been criticised. In (1984) The
35
Taxpayer it is said in relation to this objective element:
‘This may be putting the test too high. If the taxpayer intends to farm in the hope of an ultimate profit,
why should he be held not to be farming because his hope is ill-founded or unreasonable? That it is ill-
founded or unreasonable can be a test of his genuineness, but that there should be a reasonable prospect
that an ultimate profit will be derived is to propound a criterion which, with respect, we consider the Act
does not require.’
In (1982) The Taxpayer 36 reference is made to an Australian case37 where the point in issue was
whether the taxpayer was entitled to claim expenses incurred by him in respect of a forest which
he planted. He was in full-time employment but, with a view to his retirement therefrom, he
bought a 15 acre property on which he planted pine trees with the intention of selling them
commercially for the Christmas trade. The venture was not a success. The location was unsuita-
ble for growing pine trees commercially and the methods used were outdated. In the course of
the judgment upholding the taxpayer, a member of the court said the following which bears
quoting –
‘Whether a man is or is not carrying on a business is, ultimately, a question of fact and little assistance is
derived from a study of the cases . . . How many trees make a forest is as elusive as counting the number of
angels which can fit on the head of a pin – and as sterile . . .’
On the commercial proposition aspect the court said this:
‘Applying the law as I understand it to the facts of the instant case, it may well be that the growing of pine
trees on this property was “a very chancy operation”. Again, this man may well have “failed in several re-
spects in achieving a standard of (competency) and good husbandry that might be expected of a man set-
ting out to grow trees as a business venture”. However, this has not deterred judges in the past from
holding that the taxpayer was engaged in business. A view to profit is merely one of the indicia, and not
conclusive. It is enough to travel hopefully even if one is never destined to arrive.’
In my view the proper test to be applied is that put forward in Silke on South African Tax. As long
as there is a genuine intention to develop land as a farming proposition in the hope that an
ultimate profit will be derived then the taxpayer can be said to be a farmer who is carrying on
farming operations or incurring expenditure for the purposes of his trade. This hope must of
course be based on reasonable grounds. If the area used for farming operations or the means
used or available to the taxpayer are such that there could never possibly be any chance of an
ultimate profit then it could not be said that the hope of an ultimate profit is a reasonable one.
If the objective element suggested by Smalberger J in ITC 1319, supra, were to be accepted many
so-called commercial farmers in this country would cease to qualify for treatment as farmers

________________________

32 (1980) 42 SATC 263.

33 At 264.
34 9 ed at 814.
35 1984 The Taxpayer at 198-199.
36 At 187.
37 25 CTBR/NS Case 80.
 Farming 667

under the Income Tax [Chapter 181] as they appear to be travelling hopefully but are never
destined to arrive.
. . . In my view the appellant is still ‘travelling hopefully’ and there is a reasonable foundation on
which that hope is based. Only time will tell whether he will arrive.
Accordingly the appeal is allowed.

Notes
This decision first holds that the ‘proper test’ of what constitutes a ‘farmer’ is that laid
down by Silke, namely, a purely subjective test. In the same breath, though, the judge
tacks his own gloss onto that test – ‘This hope must of course be based on reasonable
grounds’. This additional requirement is completely inconsistent with the test laid down
by Silke – which the judge purports to accept. It makes the criterion substantially the
same as that laid down in ITC 1319 – which the judge purported to reject!

A taxpayer who claims to be carrying on farming operations for the purposes of s 26(1) of the Income
Tax Act is only required to show that he possessed at the relevant time a genuine intention to carry
on farming operations profitably. (He need not show that there was, objectively, a reasonable prospect
of profit.) All considerations which bear on the question of whether his stated intention was indeed
genuine, including the objective prospects of making a profit, will contribute to the answer.

[342]
CIR v Smith
2002 (6) SA 621 (SCA), 65 SATC 6
The taxpayer, a medical practitioner had purchased and sold two farms in succession. In
1982, he purchased a farm intending to farm stock, particularly goats, mainly devoting
his weekends to the project. In about 1987, he decided to convert to game farming,
intending to derive a viable income from hunting, once he had spent eight to ten years
developing the farm and the game animals. In 1990–1992, he sold a portion of the farm,
having found that it was unsatisfactory for game farming, and in 1993 he sold the re-
mainder of the farm because of ill-health and the opportunity presented by an unsoli-
cited buyer. He then acquired another farm, as he thought it had potential for game
farming and his health had improved. The land was already well-stocked with trophy
animals and he purchased springbok and improved the roads, dams, kraals and accom-
modation. He then became involved in a dispute with a neighbour which threatened the
viability of the farm which he sold in March.
The taxpayer had run both farms at a substantial loss and in his income tax returns he
had set off the losses against the profits derived from his medical practice as permitted by
s 20(1)(b) of the Income Tax Act 58 of 1962. The Commissioner had allowed the set-off
until 1996 when, on 22 July 1996, he notified respondent that he would not allow the
losses for the years 1992, 1993, 1994 and 1995 on the grounds that there seemed to be no
possibility that the farm could be profitable. The Commissioner further disputed that the
had been carrying on bona fide farming operations within the meaning of s 26(1) of the
Act.
Issue: on appeal, the sole issue before the court whether ‘farming operations’, as con-
templated in s 26(1) are carried on when there is no reasonable prospect that profit will
be derived from such operations, or whether all that is required is a subjective, bona fide
intention to carry on farming operations at a profit.
Held: ‘farming operations’ as contemplated in s 26(1) of the Act require a genuine
intention to carry on farming operations profitably, and there is no independent require-
ment that there be an objectively reasonable prospect of profit. However, the question of
668 Income Tax in South Africa: Cases and Materials

whether there was an objective prospect of profit is one of the relevant factors in deter-
mining whether his claimed intention was indeed genuine.
Heher AJA: The issue is whether farming operations can be carried on as contemplated in
s 26(1) of the Act in the absence of a reasonable prospect that profit will be derived from such
operations.
The special court found that the respondent had no reasonable prospect of turning a profit
during any of the relevant periods. Nevertheless it was satisfied on the totality of the evidence
that the respondent had at all material times engaged in activities which were properly described
as farming with a genuine intention to produce a profit at a future time. In reaching that con-
clusion the court held that a proper assessment of the respondent’s bona fides took account of
his ipse dixit and objective elements against which his word could be tested, the last-mentioned
including aspects such as the size of the property, its suitability for the undertaking, the time and
effort expended on the operations, its management and the prospect of profitability, no one
factor being of itself decisive.
On appeal the sole issue argued was the correctness of the approach of the court a quo to the
interpretation of s 26(1) . . .
Section 26(1) provides –
‘The taxable income of any person carrying on pastoral, agricultural or other farming operations shall, in
so far as it is derived from such operations, be determined in accordance with the provisions of this Act
but subject to the provisions of the First Schedule.’
The First Schedule deals with the ‘Computation of Taxable Income derived from Pastoral, Agri-
cultural or other Farming Operations’. It makes available to farmers benefits of which the ordi-
nary taxpayer does not have the advantage. For that reason counsel for the appellant submitted
that s 26(1) should be construed in such a manner as to restrict access to the Schedule. Whether
that is correct it is unnecessary to decide, since, it seems to me, the gloss which he is seeking to
place upon the meaning of farming operations has nothing to do with and does not derive from
any possible restrictive interpretation.
It is clear that s 26(1) does no more than establish a basic framework for a taxpayer who carries
on farming operations by affirming the right and obligation of such a person to be taxed on a
basis common to all taxpayers except in so far as the First Schedule expressly or by necessary
implication overrides or supplements the general provisions of the Act.
In ordinary parlance the phrase ‘carrying on farming operations’ is capable of several meanings.
In the context of s 26(1) it could mean simply ‘a particular form or kind of activity’ or it could
38
bear a more commercial nuance, ‘a business activity or enterprise’. . . .
The Act is directed to the taxation of profit-making activities. There is no apparent reason why
the legislature should have intended a taxpayer who farms as a hobby or who dabbles in farming
for his own satisfaction to receive the benefits conferred by the First Schedule.
Both counsel relied upon the authority of judgments in the special courts. The earliest statement
39
appears in ITC 208 in which the court, dealing with what it described as the ‘subsidiary occupa-
tion of farming’ held that the statute required a ‘genuine intention to develop . . . a farming
operation in the hope that it will ultimately pay’. See also ITC 93740 and ITC 1258.41 There was
no mention of the reasonable prospect of making a profit. Nor was the problem considered in
the light of the carrying on of a business.
42
In ITC 1319, however, Smalberger J was faced with a medical practitioner who claimed an enti-
tlement to set off farming losses against professional and other income. The learned judge ex-
pressly rejected a statement in the 9th edition of Silke on South African Income Tax based on the
decision in ITC 208 (supra) saying –

________________________

38 The Oxford English Dictionary 2 ed sub nom ‘operation’.

39 6 SATC 55.
40 24 SATC 374.
41 39 SATC 58.
42 42 SATC 263.
 Farming 669

‘In so far as the test propounded by Silke purports to be an entirely subjective one, I do not agree with it. It
seems to me that before a person can be said to be carrying on farming operations there must be a genu-
ine intention to farm, coupled with a reasonable prospect that an ultimate profit will be derived, thereby
incorporating an objective element into the test. To hold otherwise would make it well-nigh impossible for
the Commissioner to determine whether or not to allow farming losses as a deduction from other income,
for he must needs adopt an objective approach when doing so.’
That the learned judge had in mind an independent criterion is clear from the following pas-
sage in his judgment:
‘In all the circumstances the indications are that in 1976 and 1977 the appellant, despite his ipse dixit to
the contrary, had no genuine intention of farming and was, at best, merely marking time until he could
subdivide and dispose of the bulk of his property. It is, however, not necessary to come to any firm deci-
sion on this point as it appears in any event that at the relevant time . . . the appellant had no reasonable
prospects of ultimately farming on a profitable basis . . .’
There are two judgments of relevance in the Zimbabwean Special Court. In ITC 142443 Smith J
considered the judgment in ITC 1319 (supra). Having referred to an Australian case (25
CTBR/NS Case 80) in which it was held that –
‘A view to profit is merely one of the indicia, and not conclusive. It is enough to travel hopefully even if
one is never destined to arrive’.
The learned judge said (at 106-107)
‘In my view the proper test to be applied is that put forward in Silke on South African Income Tax. As long as
there is a genuine intention to develop land as a farming proposition in the hope that an ultimate profit
will be derived then the taxpayer can be said to be a farmer who is carrying on farming operations or in-
curring expenditure for the purposes of his trade. This hope of course must be based on reasonable
grounds. If the area used for farming operations or the means used are such that there could never possi-
bly be any chance of an ultimate profit then it could not be said that the hope of an ultimate profit is a
reasonable one.
If the objective element suggested by Smalberger J in ITC 319 were to be accepted many so-called com-
mercial farmers in this country would cease to qualify for treatment as farmers under the Income Tax Act
as they appear to be travelling hopefully but are never destined to arrive . . . It would appear that [the tax-
payer and his wife] are putting a lot of hard work into the venture and providing employment for a num-
ber of workers. In my view the appellant is still “travelling hopefully” and there is a reasonable foundation
on which that hope is based. Only time will tell whether he will arrive.’
It seems, with respect, that the learned judge was attempting to straddle the divide by his insist-
ence on a ‘reasonable hope’.
In ‘J’ v Commissioner of Taxes 44 Smith J put the test thus –
‘It seems to me that a similar test [to that in ITC 1424 supra] must be applied in trying to determine the
question of the secondary object ‘ to make a profit. Applying such a test in this case, the court must decide
whether there existed a genuine intention to make a profit based on reasonable grounds that an ultimate
profit would be derived.’
There seems little difference between the views expressed in that case and the conclusion of
Smalberger J.
In ITC 164445 Southwood J considered the spectrum of approaches to which I have referred and
concluded – [translated]
‘But the intention to make a profit from those activities must be a genuine intention. Because intention is
always subjective it is difficult to determine whether it is genuine. This can only be determined on the basis
of the objective facts. The person’s ipse dixit cannot be decisive. If his activities are in no way reconcilable
with his ipse dixit, his ipse dixit cannot be accepted. If it is supported by the objective facts, then his inten-
tion is regarded as genuine. In that regard, the nature, scope and control of his activities are important.’
The appellant’s advocate is therefore not correct that the correct test is a genuine expectation of
making a profit. The correct test is as formulated by Smalberger J and Smith J, but the prospect
of making a profit is not limited to a particular tax year.
Finally, in ITC 170146 Kirk-Cohen J followed the judgment of Smalberger J in applying the dual
test of a genuine intention to farm and a reasonable prospect of making a profit.

________________________

43 49 SATC 99.
44 55 SATC 62.
45 61 SATC 23.
46 63 SATC 214.
670 Income Tax in South Africa: Cases and Materials

Before us, Mr Marais for the appellant espoused a line of argument which in general terms re-
lied on the line of reasoning propounded by Smalberger J though he seemed to suggest that the
test for genuine intention could be a holistic one in which the reasonable prospect of making a
profit should operate as the decisive element. How are we to cut the gordian knot of this fre-
quently confusing and sometimes self-contradictory mélange of approaches.
Reference to the tax reports of other jurisdictions shows that the problem of how to treat tax-
payers who carry on farming operations as a second sphere of interest is by no means a South
African phenomenon . . . It is therefore not surprising that despite differences in legislation the
question which faces this court has been squarely addressed in both Australia and New Zealand.
See EF Mannix and DW Harris, Australian Income Tax Law and Practice Vol 1 6/78. One of the
cases which the authors cite is Tweddle v FCT.47 Of this authority the court of Appeal of New Zea-
land had the following to say in Grieve v CIR:48
‘The definition of “business” in the Australian legislation does not contain any reference to “for pecuniary
profit” or any such expression and for that reason the Australian authorities must be read with some care.
But there is one passage in the judgment of Williams J in Tweddle to which Quilliam J referred in relation
to the philosophy underlying the income tax legislation which it is helpful to set out in order to compare it
with Quilliam J’s response. Williams J said:
‘It is not suggested that it is the function of income tax Acts, or of those who administer them, to dictate
to taxpayers in what business they shall engage or how to run their business profitably or economically.
The Act must operate upon the result of a taxpayer’s activities as it finds them. If a taxpayer is in fact
engaged in two businesses, one profitable and the other showing a loss, the Commissioner is not enti-
tled to say he must close down the unprofitable business and cut his losses even if it might be better in
his own interests and although it certainly would be better in the interests of the Commissioner if he did
49
so (Toohey’s Ltd v Commissioner of Taxation for NSW. ) If the appellant succeeds and makes a profit it will
plainly be taxable, and it is difficult to see how his activities could at that moment of time be transmogri-
fied from an indulgence in a somewhat unusual form of recreation into the carrying on of a business. I
am satisfied that the appellant is seeking to establish himself at Winlaton as a recognized breeder of
high-class stud stock, and that while he is prepared to make losses to achieve this ambition he has a
genuine belief that he will be able eventually to make the business pay. Indeed, unless he can do so, his
experience will hardly be an encouragement to others to emulate his example.’
Quilliam J found himself unable to agree with Williams J and went on to say:
‘I do not consider that our statute entitles a taxpayer to create or persist in an entirely unrealistic venture
and then, because it has the outward semblance of a business, to be able to assert that it is one. If that is
the principle to be derived from Tweddle’s case then I respectfully decline to follow it.
In the present case, and after citing a long extract from Prosser including both those passages and refer-
ring to the facts of the present case, Sinclair J observed that “there is no justifiable reason why the general
run of taxpayers ought, in these circumstances, to in reality subsidise the Objectors in what I term an un-
realistic venture’.
With the greatest respect I prefer the view taken by Williams J. Just as it is not for the court or the
Commissioner to say how much a taxpayer ought to spend in obtaining his income but only how
much he has spent ‘ a proposition derived from Australian authorities and confirmed in relation
to our s 111 by the Privy Council in both the Europa cases (Commissioner of Inland Revenue v Euro-
pa Oil (NZ) Ltd;50 and Europa Oil (NZ) Ltd v Commissioner of Inland Revenue 51 so too, while the
courts are justified in viewing circumspectly a claim that a taxpayer genuinely intended to carry
on a business for pecuniary profit when looked at realistically there seems no real prospect of
profit, an actual intention once established is sufficient. The legislation sensibly allows for de-
ductions and allowances to be claimed even where the overall result is a trading loss. It is not for
the courts or the Commissioner to confine the recognition of businesses to those that are always
profitable or to do so only so long as they operate at a profit’ (per Richardson J).
McMullin J, while expressing himself in complete agreement with Richardson J, added –
‘Lack of reasonable prospect is only relevant as a factor by which the genuineness of the taxpayer’s
proclaimed profit-making intention is to be judged. In the result the prospect of profit-making
should have been regarded in the present case as no more than an objective index against which the
appellants’ stated intention to carry on their farming operation for pecuniary profits could have been tested.’

________________________

47 (1942) 2 AITR 360.

48 [1984] 1 NZLR 101 at 109.
49 (1922) 22 SR (NSW) 432 at 440-441.
50 [1971] NZLR 641, 649.
51 [1976] 1 NZLR 546, 556.
 Farming 671

It seems to me that the philosophy underlying the Act is, in respect of taxpayers who carry on
farming operations, no different from that which was recognised in New Zealand. Nor should
our conclusion be different. Neither the words of our statute nor the context of s 26 provide
a discernible reason for introducing a reasonable prospect of profit as a requirement independ-
ent of the taxpayer’s genuine intention to make a profit. As far as the contention that such
an objective element is necessary to facilitate the Commissioner’s evaluation is concerned,
it is commonplace in our law to refer to objective criteria in order to determine a subjective in-
tention (eg in relation to mens rea in criminal prosecutions). That is, however, no reason to ele-
vate the objective facts above the subjective element (which is the true object of the enquiry) as
counsel would have us hold. In this regard we should approve the dictum of Miller J in
ITC 118552
‘It is no difficult matter to say that an important factor is: what was the taxpayer’s intention when he
bought the property’ It is often very difficult, however, to discover what his true intention was. It is neces-
sary to bear in mind in that regard that the ipse dixit as to his intent and purpose should not lightly be re-
garded as decisive. It is the function of the court to determine on an objective review of all the relevant
facts and circumstances, what the motive, purpose and intention of the taxpayer were . . . This is not to say
that the court will give little or no weight to what the taxpayer says his intention was, as is sometimes con-
tended in argument on behalf of the Secretary in cases of this nature. The taxpayer’s evidence under oath
and that of his witnesses, must necessarily be given full consideration and the credibility of the witnesses
must be assessed as in any other case which comes before the court. But direct evidence of intent and pur-
pose must we weighed and tested against the probabilities and the inferences normally to be drawn from
the established facts.’
In the result I conclude that a taxpayer who relies on s 26(1) is (over and above proof that he is
engaged in an activity in the nature of farming) only required to show that he possesses at the
relevant time a genuine intention to carry on farming operations profitably. All considerations
which bear on that question including the prospect of making a profit will contribute to the
answer, none of itself being decisive.
The appeal is dismissed with costs.
HEFER AP, SCHUTZ JA, SCOTT JA and BRAND JA concurred.

Notes
The court pointed out in this case that the Income Tax Act is directed to the taxation of
profit-making activities and that the legislature did not intend that a person who farms as
a hobby, or who dabbles in farming for his own personal satisfaction, should receive the
tax benefits of the First Schedule to the Income Tax Act.
This is merely a particular application of the general distinction that tax law draws be-
tween a ‘hobby’ and a ‘business’. A hobby is pursued primarily for private pleasure, and
the expenses attendant upon it are not deductible in terms of s 11(a).
It is important to note, that in terms of this decision, the question whether the farming
activities in question had, objectively, a reasonable prospect of profit remains relevant.
But it is relevant only in so far as it casts light on whether the taxpayer’s claimed inten-
tion to carry on farming to make a profit, is credible as a genuinely-held intention.

§3 Plantation farming
Disposal of plantation; para 14 of Schedule 1

Paragraph 14 of the First Schedule (which deems the proceeds of the sale of a plantation to be non-
capital and therefore to be included in the seller’s gross income) applies only where the seller of the
plantation was the party who had carried on the plantation farming.

________________________

52 35 SATC 122 at 123-124.

672 Income Tax in South Africa: Cases and Materials

[343]
Kluh Investments (Pty) Ltd v CSARS
[2014] ZAWCHC 141
Kluh Investments (Pty) Ltd was the owner of land on which there was a plantation (de-
fined as ‘any artificially established tree . . . . or any forest of such trees’53) and on which
plantation farming had been carried on. Typically, a plantation farmer harvests a propor-
tion of the trees annually and sells the cut timber with a view to making a profit.
In 2004 Kluh Investments (Pty) Ltd sold the land together with the plantation. Sec-
tion 26(1) of the Income Tax Act provides that:
‘The taxable income of any person carrying on pastoral, agricultural or other farming opera-
tions shall, in so far as it is derived from such operations, be determined in accordance with the
provisions of this Act but subject to the provisions of the First Schedule.’
The First Schedule provides in para 14 that –
‘Any amount received by or accrued to a farmer in respect of the disposal of any plantation shall,
whether such plantation is disposed of separately or with the land on which it is growing, be
deemed not to be a receipt or accrual of a capital nature and shall form part of such farmer’s
gross income’.
Kluh Investments (Pty) Ltd had acquired the land and the plantation on it in October
2001. By agreement, Kluh Investments (Pty) Ltd permitted its holding company, Stein-
hoff (Pty) Ltd, to conduct plantation farming operations on the land for the latter’s own
account (in other words, for its own profit and loss) without the payment of any rent.
Issue: Was the amount that accrued to Kluh Investments (Pty) Ltd in respect of the
selling price of the plantation deemed to be included in its gross income by virtue of
para 14 of the First Schedule?
Held: in the negative. Para 14 of the First Schedule applies only where the plantation
farming operations in respect of the plantation that has been disposed of were carried
on by the taxpayer in question. In the present case, although Kluh Investments (Pty) Ltd
was the owner of the land on which the plantation was growing, the plantation farming
operations had been carried on by another party, namely, its holding company, Steinhoff
(Pty) Ltd. Para 14 therefore did not apply, and the proceeds of the sale of the plantation
were accordingly not deemed to be part of the gross income of Kluh Investments (Pty)
Ltd, but were a capital receipt.
Rogers J:
[5] The First Schedule uses the word ‘farmer’. This is clearly a short-hand reference to the ex-
pression ‘any person carrying on pastoral, agricultural or other farming operations’ in s 26(1). I
shall for convenience use the phrase ‘farming operations’ to cover the expression used in
s 26(1).
[49] . . . I regard the critical question as being essentially a legal one which arises from the un-
disputed facts as to the oral arrangement by which Steinhoff was permitted to conduct the plan-
tation operations and the further undisputed fact that the appellant retained the ownership of
the land and had a commercial interest in the plantation’s being restored to it in good condition
and with the same volume of trees as in June 2001. . . .
[50] . . . I do not see how the answer to the problem can lie in the parties’ characterisation of
what was sold in 2003 any more than in what the appellant’s witnesses claimed their understand-
ing on that question to be. If, on the undisputed facts I have summarised, the appellant is found
to have been a person ‘carrying on pastoral, agricultural or other farming operations’, it is irrel-
evant that the appellant and Steinhoff may have thought otherwise. . . .

________________________

53 See para 16 of the First Schedule.

 Farming 673

The two-pronged enquiry

[53] . . . Section 26(1) does not apply merely because there has accrued to the taxpayer income
which has ‘derived from’ farming operations; the section applies to a person carrying on farming
operations to the extent that his income is derived from such operations. Two questions must
therefore be answered: (i) Was the person whom SARS wishes to tax a person carrying on farm-
ing operations during the year of assessment in question? (ii) If so, did the particular item of
income in dispute derive from those farming operations? . . .
[56] Certain tax court decisions which were cited to us in argument appear to me, with respect,
likewise to have erred in conflating the two questions. . . .
[58] In both these cases (ITC 166 and ITC 1630) the court went directly to the question whether
there was a direct connection between the rent paid under the partiarian lease and the farming
operations. . . . . There is an anterior question, namely whether the taxpayer to whom the in-
come has accrued is a person carrying on farming operations. . . .
[60] If, on the facts of the present case, one were to conclude that the appellant was conducting
farming operations, I think it would follow almost as a matter of course that the proceeds of the
disposal accrued to the appellant as a farmer. Ordinarily such a disposal would be of a capital
nature but para 14 of the First Schedule deems it to be gross income. The real issue in the pre-
sent case is not the second one (a sufficiently close connection between the income and farming
operations) but the threshold enquiry whether the appellant was carrying on farming opera-
tions.
SARS’ first basis
[61] . . . Para 14 does not stipulate in unqualified language that the proceeds of the disposal of
a plantation constitute gross income. Para 14 states that the disposal of a plantation constitutes
deemed gross income if it is an amount received by or accrued to ‘farmer’, that is, a person car-
rying on farming operations as contemplated in s 26(1).
[62] I thus consider that there must be conduct by the taxpayer apart from disposing of a plan-
tation previously acquired by the taxpayer in order to constitute the carrying on by him of farm-
ing operations.
[63] Farming operations involve the performance of a range of physical activities associated with
the land with a view to profit . . .
[64] The cultivation, maintenance and harvesting of timber with a view to profit plainly consti-
tute farming operations. Farming operations in the form of plantation operations would typically
involve the harvesting of trees from year to year. The proceeds from the annual sale of timber
constitutes gross income of a revenue nature. The farmer would typically undertake the planta-
tion operations with a view to his revenue from timber sales exceeding his operating expendi-
ture, that is with a view to profit.
[66] SARS did not allege in the present case that the appellant was engaged in a profit-making
scheme which would, on ordinary taxation principles, result in the plantation proceeds being of
a revenue nature. . . . .
[68] Despite the fact that the purchase and resale of the plantation was not alleged to be a prof-
it-making venture, the disposal proceeds, despite their fiscal nature as capital, would be deemed
to be part of the appellant’s gross income in terms of para 14 of the First Schedule if, but only if,
the appellant was carrying on farming operations. . . .
SARS’ alternative basis
[69] It thus becomes necessary to consider SARS’ alternative basis, which adds, to the appel-
lant’s acquisition and later disposal of the plantation, the farming operations carried out on its
land by Steinhoff.
[70] It is clear, on the undisputed evidence concerning the oral arrangement, that Steinhoff’s
operations on the farm were not conducted as an agent for the appellant. Steinhoff was carrying
on its own farming operations for its own profit and loss.
[71] It is so that Steinhoff was contractually obliged to the appellant to maintain the plantation
to a particular standard and to return it upon termination of the arrangement with the same
volume of timber as at June 2001. That is not enough, however, to attribute Steinhoff’s farming
674 Income Tax in South Africa: Cases and Materials

operations to the appellant. If one reasons by analogy, it is at least settled law that s 26(1) does
not apply to an owner of a farm who lets it out for a fixed rent rather than for a share of the
farming profits. The case for treating the appellant as a farmer is weaker still than a fixed-rent
lease, because Steinhoff had effectively the same rights as a lessee and the appellant was to re-
ceive no rent at all. Even if the two tax court judgments which I queried earlier were correctly
decided, there is no question here of the appellant having had any share of the profits from the
farming operations conducted by Steinhoff.
[72] Most leases contain express terms regarding the duties of the parties in regard to the
maintenance of the premises and the lessee’s duty to restore the premises. It is an implied term
of a lease that the duty of maintaining the premises in a condition reasonably fit for the purpose
for which they are let rests on the landlord. . . .
[73] The fact that the lessee has an obligation to maintain premises and to restore them in the
same good order plainly does not mean that the landlord can be said to be conducting the busi-
ness of the lessee. The landlord has an interest in the maintenance of the premises because the
property constitutes an investment and, upon termination of the lease, he might wish to contin-
ue earning rents from it or to dispose of it at a favourable price. . . .
[74] The oral arrangement between the appellant and Steinhoff was not a lease because Stein-
hoff was not obliged to pay rent.
[86] . . Steinhoff could not be regarded as having been managing the farming operations on
behalf of the appellant for a fee (in the form of felled timber) when the appellant stood to make
no profit or loss from the farming operations. The only risk which the appellant faced, if Stein-
hoff failed to conduct itself in accordance with the agreed standard, was that its investment’s
value might suffer, a risk which a landlord or bare dominium owner would also face if the tenant
or usufructuary breached his obligations.
Conclusion
[The court set aside the assessment in which the proceeds of the sale of the plantation had been
included in the gross income of Kluh Investment (Pty) Ltd.]

TRAVERSON DJP and ALLIE J concurred.

Notes
In terms of ordinary principles, if a plantation farmer were to sell the plantation, the
proceeds of the sale would be capital, not revenue, as the plantation would have been a
capital asset in his hand. But once trees have been felled, and thereby separated from the
land, the cut timber constitutes the plantation farmer’s trading stock and the proceeds of
the sale of cut timber are therefore income.
However, where para 14 of the First Schedule applies, its provisions override these
principles. Para 14 states that, whether or not the plantation is sold together with the
land on which it is located, the proceeds of the sale of the plantation are deemed to be of a
non-capital nature and must thus be included in the farmer’s gross income.
In other words, it is only where the deeming provisions of para 14 of the First Schedule
apply that the proceeds of the sale of a plantation by a farmer engaged in farming opera-
tions are income and not capital; ordinarily, growing trees (as distinct from timber that
has been felled) are a capital asset.
The issue
The core transaction in issue in this case involved a sale of land and the plantation on
the land by Kluh Investments (Pty) Ltd, the owner of the land.
As the court pointed out (at para [53]) the mere fact that Kluh Investments (Pty) Ltd
had sold a plantation was not enough to trigger the application of para 14 of the First
Schedule in terms of which the proceeds of the sale of the plantation are deemed to be
non-capital and are included in gross income.
 Farming 675

It was held that it was only if Kluh Investments (Pty) Ltd had been the person carrying on
plantation farming operations that para 14 would be triggered on the sale of the plantation,
and would deem to the proceeds of the sale to be included in its gross income. In the
result, the court held that the plantation farming operations had been carried on, not by
Kluh Investments (Pty) Ltd, but by its holding company, the Steinhoff company.
The basis for this conclusion was that, on the facts of this particular case, Kluh Invest-
ments (Pty) Ltd had agreed at the outset (see para [49]) that the Steinhoff company was
permitted to conduct the plantation operations in question, and it was thus Steinhoff
(see para [63]) that was the party engaged in ‘the range of physical activities’ that consti-
tuted plantation farming operations. Moreover, (see paras [82]–[83]) the agreement was
that, from the outset, Steinhoff would conduct the plantation operations ‘on its own
account’ in other words, for its own profit and loss.
The judgment concedes (see para [60]) that, if Kluh Investments (Pty) Ltd had been
the party that was conducting the plantation farming operations, the proceeds of the sale
would have accrued to it and para 14 of the First Schedule would have applied, thereby
deeming the proceeds of the sale of the plantation to be included in its gross income.
The court held (see para [86]) that Steinhoff could not be regarded as having been
managing the plantation farming operations ‘on behalf of’ (that is to say, as agent for)
Kluh Investments (Pty) because their agreement made clear that the latter could make
no profit or loss from the farming operations.
The court therefore rejected SARS’s argument that the proceeds of the disposal of the
plantation fell to be included in the gross income of Kluh Investments (Pty) Ltd in terms
of para 14 of the First Schedule.
In overview, the court held that it was not Kluh Investments (Pty) Ltd who had been
carrying on the plantation farming. Consequently, para 14 of the First Schedule which
deems the proceeds of the sale of a plantation by a farmer (that is to say, by the person
who carried on the plantation farming operations in question) to be part of his gross
income was not applicable on the facts of this case.

§4 Expenditure incurred after the cessation of farming operations

is not deductible in terms of the First Schedule
Expenditure incurred in farming operations, though deductible whilst such operations continue, is
not deductible after the cessation of such farming operations.

[344]
ITC 1135
(1969) 31 SATC 228 (Rhodesia Special Court)
In 1945 the taxpayer purchased a farm near Salisbury. At the time of purchase, the
appellant was in full-time employment but was nearing retirement from that employ-
ment. He purchased the farm to develop it in order to provide him with supplementary
income, particularly after his retirement. After acquiring the property, the appellant
commenced growing crops and rearing cattle. The venture was initially fairly successful,
but income began to dwindle significantly from 1951 onwards. In order to meet losses in
that and later years, and in an attempt to expand farming activities, the appellant bor-
rowed three separate sums of £2 000 each. In 1953 he borrowed £2 000 to meet losses
which he had sustained. In 1958 and 1959 he obtained two further loans of £2 000 each
in order to purchase additional dairy stock. The venture was not a success, however, and
most of this stock was sold in 1961. Thereafter, his income was about £340 per annum
from the sale of cream and steers and from letting the dipping facilities to neighbouring
676 Income Tax in South Africa: Cases and Materials

farmers. In 1963 he disposed of the remainder of his dairy herd, and thereafter his only
income from the farm was derived from letting its grazing and dipping facilities. In the
year of assessment in question, his income was £169 and £47 from letting these two
facilities respectively, plus £10 from the sale of firewood.
Issue: was the taxpayer a ‘farmer’, as statutorily defined, who carried on the trade of
farming?
Held: this was a question of fact and depended on (1) the nature and extent of the op-
erations and (2) the purpose with which the operations were carried on. During the tax
year in issue, the taxpayer’s operations consisted principally of letting portions of the
property. There had been a complete abandonment of any intention to develop the farm
or expand the farming activities. On these facts, the taxpayer was not carrying on the
trade of farming. Since the taxpayer’s business had ceased, the interest incurred by him
was not expenditure for the purposes of trade, and was therefore not deductible.
EJ Whitaker: In 1961 the appellant went back to full-time employment and in 1964 the appel-
lant’s wife also obtained employment. From 1963 to 1966 the appellant disposed of the machin-
ery which had been acquired by him for the growing of crops and from 1966 the appellant
placed the property on the market for sale. It remained on the market until sold by the appel-
lant in July of this year.
No part of the £6 000 borrowed by the appellant had been repaid before 31 March 1968, and in
the year of assessment which ended on that date, the appellant incurred an indebtedness in
respect of interest in the sum of £461. The appellant also incurred an expenditure of the sum of
£470 in respect of matters pertaining to the farm.
During the year of assessment he also owned assets which suffered depreciation.
The appellant claims that he is entitled to deduct from his income the interest paid and the
expenditure incurred under the provisions of s 14(2)(a) of the Income Tax Act, 1967 and an
allowance for wear and tear on the improvements and machinery under the provisions of
s 14(2)(c) of the said Act.
The respondent disallowed the appellant’s claim to deduct £461. He made no deduction of any
part of the sums of £470 or £90, but at the same time ignored the income of £233 derived from
the farm in assessing the appellant’s income tax.
Under the provisions of s 14(2)(a) it is incumbent upon the appellant to show, inter alia, that any
expenditure was incurred for the purpose of trade or in the production of income. In terms of
s 14(2)(c) it was necessary for him to establish that the improvements and machinery were used
by him for the purposes of his trade.
The word ‘trade’ is defined in the Act as:
‘“Trade” includes any profession, trade, business, employment, calling, occupation or venture, including
the letting of any property, carried on, engaged in or followed for the purposes of producing income as
defined in s 8 and anything done for the purpose of producing such income;’
It is to be observed that the definition is extremely wide in scope. It is possible that it is wide
enough (it is not necessary for me to make any finding on this point) to embrace as a ‘trade’ the
limited activities conducted by the appellant on the property during the year of assessment.
The difficulty with which the appellant was faced in this connection, however, was his inability to
relate expenditure or the use of the improvements to this limited form of ‘trade’, or at least, in a
sum in excess of the income which had been ignored by the respondent.
The same difficulty presented itself to the appellant in attempting to relate expenditure to the
production of the income referred to above.
The appellant, in an attempt to overcome his difficulty in this respect, expressly abandoned any
attempt to relate expenditure to the production of income, but sought instead to put his case on
the basis that his trade was ‘farming’ and that the expenditure had been incurred and the de-
preciated assets had been used for the purposes of this trade.
The first point for determination, therefore, is whether the appellant was carrying on the trade
of farming during the year of assessment. This is an issue of fact in respect of which no guidance
 Farming 677

is to be obtained from previously decided cases, which have all, as far as I have been able to as-
certain, been decided on quite dissimilar facts.
I have little doubt that the activities engaged in by the appellant during the year of assessment
might, in some circumstances, be appropriately regarded as farming operations. That the legisla-
ture has regarded them as such appears to be evident from the definition of ‘farmer’ in s 2 of
the said Act which reads:
‘“farmer” means any person who derives income from pastoral, agricultural or other farming activities in-
cluding any person who derives income from the letting of a farm used for such purposes, and “farming
operations” and “farming purposes” shall be construed accordingly;’
It does not follow, however, that the conduct of one or two activities which might properly be
described as farming operations, necessarily constitutes the trade of ‘farming’. This, in my view,
is not to be inferred from the definition of ‘farmer’. Were this so, then by reason of the inclusion
of the words ‘including any person who derives income from the letting of a farm’, any person
letting a farm would have to be regarded as carrying on the trade of ‘farming’. In my opinion
this result could not have been intended.
The determination of an issue of this kind does not, therefore, depend upon whether the activities
carried on can be regarded as farming operations but upon (1) the nature and extent of the opera-
tions and (2) the purpose with which the operations are carried on.
In this case the operations during the relevant year of assessment consisted principally of the
letting of portions of the property. Moreover there had been a complete abandonment of any
intention further to develop the property or to widen the scope of the farming activities.
On these facts I do not consider that it could possibly be said that the trade of farming was being
pursued.
This being so it is apparent that the appeal in respect of expenditure of £470 and the wear and
tear allowance of £90 must fail. It remains for me to consider whether or not the sums borrowed
by the appellant were borrowed for the purposes of trade and, if so, whether the interest ex-
pended during the year of assessment can now be said to be an expenditure ‘for the purposes of
trade’.
At the time of the borrowing it was apparent that the appellant was attempting to develop the farm
and to conduct a wide range of farming operations on the farm. I am satisfied, and I did not under-
stand the respondent to contend the contrary, that the appellant, when borrowing the sums, bor-
rowed them for the purposes of his then trade of farming.
The question which arises under this head is whether now, despite the cessation of that trade,
the appellant can be said to have expended the interest for the purposes of the trade of farming
during the year of assessment.
...
The weight of authority appears to indicate that a deduction is not allowable in respect of an ex-
penditure incurred after the cessation of business, unless there is a continuity or link between the
expenditure and the business income from which the deduction is sought to be made. I consider
that this view is to be preferred. I should point out, also, that in the cases in which this view was not
adopted the courts were concerned with obligations which were not determinable at the option of
the taxpayer. Where the obligation is determinable after the cessation of the business in respect of
which it was incurred and before the relevant year of assessment, then in my view it cannot be re-
garded as an expenditure for the purposes of trade unless, of course, it is then related to another
trade being carried on by the taxpayer at the relevant time.
I have already held that the trade for which the capital sums were borrowed by the appellant
had ceased before the commencement of the year of assessment under review. The appellant
further was lawfully entitled to bring his obligation to pay interest to an end. It follows that the
appellant has failed to establish that the expenditure in respect of interest was made for the
purposes of his trade. As I have found that the appellant has not established that the expenditure
of interest was for the purposes of his trade it is not necessary for me to deal with the further point
raised by the respondent, viz that the expenditure was, in any event, an expenditure of a capital
nature.
The appeal is dismissed.
678 Income Tax in South Africa: Cases and Materials

§5 Horse-racing and breeding

Horse racing is not a farming operation and stake money won in racing horses is not income from
farming operations.

[345]
ITC 1285
(1978) 41 SATC 73
The taxpayer company was in business as a stock farmer and breeder of race horses. It
appealed against a decision of the Secretary that stake moneys won by racing horses is
not income from farming operations.
Issue: is money won by racing horses income from ‘farming operations’?
Held: even if it is in the interests of a breeder of race horses to race them, horse racing
is not a farming operation, and income earned thereby is not income from farming
operations.
Van Thyn J: In the returns of the appellant company, submitted for the 1974 and 1975 tax years,
racing stakes won, amounting to R4 600 and R6 640 respectively, were, according to the papers
before the court, returned as gross farming income against which the cost of farming improve-
ments claimed in terms of s 12(1) of the First Schedule of the Income Tax Act 58 of 1962 was set
off.
The Secretary in his assessments taxed the amounts referred to as non-farming income. The
appellant was not satisfied with the correctness of these assessments; hence the present appeal.
...
The only question to be decided therefore is whether the Secretary was wrong in concluding that
the stakes won in horse-racing could not be considered as having been derived from farming
operations.
Section 26 of the Income Tax Act 58 of 1962 provides as follows:
‘Determination of taxable income derived from farming. (1) The taxable income of any person carrying on pas-
toral, agricultural or other farming operations shall, in so far as it is derived from such operations, be de-
termined in accordance with the provisions of this Act but subject to the provisions of the First Schedule.’
It is clear that it is sometimes of little use to compare the meaning of a certain word in one stat-
ute as interpreted by the courts with the meaning of the same word in another statute . . .
In the present matter, however, I do think that one does get some assistance from the decisions
in our courts dealing with the interpretation of the expression farming operations in different
statutes.
In Rex v Giesken and Giesken 54 the Appellate Division decided – and I quote from the
headnote – that:
‘. . . the sale or distribution of milk obtained from other sources by purchase was not a farming operation,
even if milk produced by the seller be added. Though the appellants were engaged in farming operations,
the sale and distribution of the milk was not a farming operation, and that was the case whether what was
being delivered consisted of seventy per cent of milk purchased and thirty per cent of milk produced by
their farming operations or vice versa.’
In Rex v Porterville Ko-op Landbou Maatskappy Bpk 55 Van Winsen J decided that:
‘. . . Waar art 96(2) van boerderywerk (farming operations) melding maak, verwys dit myns insiens in
die eerste instansie na werk op ’n plaas verrig met die bedoeling om te produseer. Die begrip
“boerderywerk” kan egter ’n wye betekenis hê en ook werk dek deur ’n boer of sy werknemers verrig in die
produksie of verkoop van plaasprodukte, afgesien van waar dit verrig word. Ek is egter die mening
toegedaan dat die begrip nie in so ’n wye sin toegepas kan word nie om werk te dek in verband met
plaasprodukte wat verrig word na die produksie daarvan en wel deur iemand anders as die produsent. In
die eersgenoemde geval is die persone wat die werk verrig besig om van en uit ’n plaas te produseer, en in
laasgenoemde geval nie.’
________________________

54 1947 (4) SA 561 (A).

55 1952 (1) SA 44 (C) at 47.
 Farming 679

...
Now it is clear that before the First Schedule can apply, the taxpayer must derive taxable income
from pastoral, agricultural or other farming operations. There being no definition in the Act of
farming operations, the question in every case is whether in fact the taxpayer carried on farming
operations and whether the income sought to be brought under the provisions of s 26 of the Act
is income derived from farming operations.
The section clearly states, with reference to the income and the operation of the provisions of
s 26 of the Act:
‘ . . . in so far as it [the taxable income] is derived from such operations [farming operations].’ (My italics.)
To me it is clear that the section itself narrows the field. The question is not whether it is in the
interest of the farmer or even of the utmost importance to a farmer that his horses be raced but
whether the operation itself can be termed a farming operation.
The public officer of the appellant company argued, inter alia (with reference to thoroughbred
breeding and horse-racing), that –
‘The whole procedure is an essential extension of the farming operation, resulting ultimately in a higher
taxable income from the sale of his product.’
Whilst accepting, for the purposes of this judgment, this submission, the fact still remains that
the extension of the farming operation must in itself be a farming operation before it can be
said that such income is derived from farming operations.
After careful consideration of the argument of the public officer of the company and all the
material before the court, the court has unanimously come to the conclusion that horse-racing
cannot be regarded as a ‘farming operation’ and that – even by stretch of imagination – stake
money won in the operation termed horse-racing cannot be considered income derived from
the operation called farming.
56
In conclusion the court refers to the judgment in ITC 641. The conclusion of this court is in
agreement with the decision.

Notes
There are sound business reasons why a breeder of race-horses also races his bloodstock;
see [346] ITC 639. However, the question is whether the racing is part of the ‘farming
operations’ involved in the breeding, or whether the racing activities are a separate
trade. Naturally, there would be advantages for a taxpayer if the racing of his horses was
also a farming operation, since he would then be entitled to the tax advantages of the
First Schedule, including the right to deduct certain capital expenditure. If the racing is
not a ‘farming operation’, but merely an ordinary trade, the taxpayer will still be entitled
to the deductions available outside of the First Schedule.

[346]
ITC 639
(1947) 15 SATC 226
CJ Ingram KC: It was contended on the appellant’s behalf that the racing of his horses and the
winning of stakes by so running them was not an objective in itself but was merely a means to an
end or a subsidiary to his main objective, which was the breeding of horses for the purpose of
sale. Accordingly, that his racing activities were not a separate activity or business, but formed an
integral part of his main business, the breeding and sale of bloodstock.
In support of this contention he emphasised that in order to make a success of his breeding and
selling bloodstock the performance of his produce on the turf was of vital importance in its ap-
peal to purchasers. Consequently that it was essential for him to race the horses be bred. That he
preferred to race the horses he bred himself and not to lease them because thereby he retained
control over them and avoided them being raced unduly severely and could retire the fillies to
stud at an early date.
________________________

56 15 SATC 233.
680 Income Tax in South Africa: Cases and Materials

The Court sees no reason to doubt that the reasons given by the appellant for the methods
adopted by him in advertising the qualities of the bloodstock bred by him are sound and good
business reasons. They support the conclusion that the racing of the horses he breeds, whether
he races them himself or not, is an important factor to the success of his industry as a breeder of
racing stock. It is however a far step for the Court to take, as it is asked by the appellant to take,
that the stakes he wins from his racing activities are to be regarded as income derived from farm-
ing operations. Without laying down too precise a definition as to the type of operation in which
farming operations consist, one may take the view that such operations convey the idea that they
are connected with the occupation of land, see Barnes’s Income Tax Handbook.57 The training and
racing of horses with the consequent result of rewards in the shape of stakes has no necessary
connection with the occupation of land. See Dawson v Counsell (H M Inspector of Taxes).58
It was necessary for the appellant’s case to contend that the whole of his activities, breeding and
racing must be regarded as one business, and could not be split up into a business of farming
and a business of racing; and that the breeding side was the main feature and that the racing
side was merely subsidiary thereto. An examination however of the facts points to a somewhat
different conclusion. The appellant’s racing activities appear from the stakes he had actually won
to have been on a fairly large scale. He is a member of three leading Turf Clubs. He employs a
trainer. In addition for the tax year in question he made a substantial profit in betting on his
horses. On the other hand, during the period in question he derived no income from the pro-
ceeds of sale of bloodstock. It appears to the Court therefore, that it would be equally easy to
surmise that the appellant’s breeding activities were subsidiary to his racing activities as the re-
verse. However that may be, on the facts it is clear to the Court that the appellant was carrying
on two businesses, one the industry of breeding bloodstock, and the other the business of the
racing of horses from which was derived income in stakes, and profits also by betting on them. It
is impossible in any case to accept the proposition that the income so derived is income derived
from farming operations. See Knight v COT (Ratcliffe and McGrath).59

[347]
J v COT
(1993) 55 SATC 62 (High Court of Zimbabwe)
The taxpayer had, since April 1972, been engaged in the business of breeding and train-
ing horses for trotting and racing. For the tax year ending on 31 March 1967 he claimed
a deduction for a loss of $8 110.80 incurred for the purposes of his trade of horse breed-
ing, training and racing. The Commissioner disallowed the deduction. The evidence
revealed that the taxpayer’s interest in trotting started as a hobby in 1971, and became a
business or scheme of profit-making by 1975. He had then kept separate books of ac-
count for his trotting activities, and was taxed separately on them Since 1980 the taxpayer
had not made any profit from his trotting activities, and in each tax year he had claimed
a loss ranging from $824 to $9 645. During the tax year in issue, the taxpayer owned six
horses, two being brood mares, two young horses and two race-horses. He provided
stabling for another four brood mares and two foals which belonged to other owners.
There were eight horses in training, two of his and six belonging to other owners. As
many horses under training as possible were entered for race meetings, and normally a
horse raced twice at each meeting. The taxpayer’s main income was from livery and
training fees. The fees he could charge were limited by the owners’ ability to pay. If he
had increased his fees, the owners might have withdrawn from trotting. The taxpayer’s
other source of income was stake moneys. These activities were mainly conducted by his
wife who held an open trainer’s licence and worked practically full-time. The taxpayer
employed two full-time workers and one part-time worker during busy periods. He hoped
that his losses would not continue, and that hope was reasonably based on the expectation
________________________

57 Barnes, Income Tax Handbook, 5 ed at 173.

58 1922 TC 149.
59 IT Decisions 1928-1930 at 230.
 Farming 681

of an increase in prize money paid by the Trotting Club, and a consequential increase in
his earnings, and in the livery and stable fees he could charge. He contended that both
he and the Commissioner regarded his activities as a business, and that his intention was
to make a profit from his trotting venture. The Commissioner contended that the tax-
payer was not trading in the year in question, but was financing the trotting activities
solely or primarily to give his wife an outlet for her talents and interests, and to get a tax
refund, without any reasonable expectation of profit.
Issue: was the taxpayer, during the tax year in question, engaged in a profit-making
scheme involving horse-breeding, racing and training?
Held: in the affirmative. It was for the court to decide whether there was a genuine in-
tention to make an ultimate profit, based on reasonable grounds. The evidence support-
ed an affirmative answer. The diversity and scale of the taxpayer’s activities were
sufficient to constitute a profit-making scheme. His losses were therefore allowable.
Smith J: The respondent’s case is that the appellant was not carrying on a trade as defined in
Chapter 181 in the year in question. His activities in the trotting field were financed by him sole-
ly or primarily to give his wife an outlet for her talents and interests and in order to secure a
refund of tax paid without any reasonable expectation of profitable trade. This contention is
based on the fact that during the period 1978 to 1987 the horse racing, breeding and training
activities of the appellant had showed profits in only two years, . . . On the basis of the foregoing,
the respondent contends that no imminent substantial increase in stake earnings or livery and
training earnings, sufficient to lead to a position of profit, can reasonably be anticipated.
It is clear that a hobby may develop into a scheme of profit-making – see ITC 712,60 supra, where
the court held that on the facts in that case the racing and betting activities of the taxpayer had
developed into and become a scheme of profit-making. However, since 1980 the appellant has
not made any profits on his trotting activities. Does that mean that his scheme of profit-making
has reverted to being a hobby? It seems to me that the test suggested by Mr Gillespie, which is that
one must ascertain the dominant motive and be guided solely by that, cannot be accepted. When
the appellant was making a profit, that is in the years prior to 1980, the respondent accepted
that the hobby was the dominant motive but contended that there was a secondary object, which
was to make a profit. Such an approach is acceptable – African Life Investment Corporation (Pty) Ltd
v Secretary for Inland Revenue.61 Accordingly, I consider that what this court has to determine is
whether, in the circumstances that have pertained since 1980, it could still be said that the profit-
making scheme still existed in the year ended 31 March 1987.
In ITC 142462 the court laid down the criteria for determining whether the taxpayer in question
was engaged in farming operation. At p 106-7 the President of the court said – ‘In my view the
proper test to be applied is that put forward in Silke on South African Income Tax. As long as there
is a genuine intention to develop land as a farming proposition in the hope that an ultimate
profit will be derived then the taxpayer can be said to be a farmer who is carrying on farming
operations or incurring expenditure for the purposes of his trade. This hope must of course be
based on reasonable grounds.’
It seems to me that a similar test must be applied in trying to determine the question of the con-
tinued existence of the secondary object – to make a profit. Applying such a test in this case, the
court must decide whether there existed a genuine intention to make a profit based on reasona-
ble grounds that an ultimate profit would be derived. It seems to me that the activities of the
appellant after 1980 evidenced a genuine intention to make a profit. I consider that the diversity
and scale of operations were sufficient to establish a profit-making scheme. Was his hope of mak-
ing ultimate profits a reasonable one, having regard to the fact that he had made losses in the
preceding six income tax years? The evidence of the appellant in this regard is that for many
years he and other members of the Trotting Club expended considerable time and effort in
attempts to attract members of the public to visit the trotting and to bet on the results. They
would only have done so if they thought that they had some prospects of success. Had they been
________________________

60 (1950) 17 SATC 335.

61 1969 (4) SA 259 (A), 31 SATC 163.
62 (1986) 49 SATC 99.
682 Income Tax in South Africa: Cases and Materials

successful then no doubt the profit-making scheme of the appellant would have again come into
existence. Accordingly I am of the view that the appellant has established that his hope of mak-
ing a profit was reasonable in that realistic efforts were being made by himself and other mem-
bers of the Trotting Club to restore trotting in Harare to its former viable state.
Accordingly the appeal is allowed.

A breeder of thoroughbred horses who rears them and sells them for profit is carrying on farming
operations.

[348]
ITC 1373
45 SATC 1373
The taxpayer, a veterinary surgeon, acquired eight acres of peri-urban land in 1980. On
this land he erected a block of stables for seven horses. He also established four pad-
docks and planted kikuyu grass. He then bought two brood mares from which he began
to breed thoroughbred horses. After 1980 the taxpayer expanded his horse-breeding
activities by acquiring more ground and more mares. At the time in issue he owned six
mares, two fillies and six weanlings intended for sale as yearlings. For the 1980 year of
assessment the taxpayer claimed, under the Zimbabwean Income Tax Act, the cost of the
stables as a special initial allowance and an investment allowance on the cost of new farm
improvements. All these deductions were disallowed by the Commissioner on the
grounds that the taxpayer was not carrying on farming operations as defined in the Act,
namely a person who derives income from pastoral, agricultural or other farming activities.
Issue: did the taxpayer’s activities of breeding thoroughbred horses and selling them
for profit constitute ‘farming operations’?
Held: in the affirmative; the taxpayer’s business was to raise thoroughbred horses, and
such animals are stock no less than cows, sheep, pigs or chickens.
Squires J: This appeal raises the interesting question of whether a breeder of thoroughbred
horses, who sells them for profit, can be said as such, to be deriving that income from ‘. . . agri-
cultural, pastoral or other farming activities’ within the definition of ‘farmer’ in the Income Tax
Act; and consequently, whether such a person carries on ‘farming operations’ so as to qualify for
the deductions allowed to farmers by the Fourth Schedule of the Act as read with section
15(2)(c).
[After setting out the facts the judgment proceeds:]
Finally, it may be said that there was a certain amount of evidence related to the tasks of achiev-
ing the successful breeding and selling of horses . . . I am abundantly satisfied that the activity of
breeding horses demands a considerable degree of skill and care, and particularly a high level of
consistent management in the daily supervision of the animals.
To qualify for the deductions claimed, the appellant has to show that the stables in question are
a ‘farm improvement’ as defined in paragraph 1 of the Fourth Schedule to the Act. Because this
describes such an improvement as ‘. . . any building . . . of a permanent nature . . . which is used
in the carrying on of farming operations . . .’, one has then to decide whether the enterprise de-
scribed can be called a ‘farming operation’. In s 2 of the Act itself ‘farmer’ is defined as meaning:–
‘. . . any person who derives income from pastoral, agricultural or other farming activities, . . . and ‘farm-
ing operations’ and ‘farming purposes’ shall be construed accordingly; . . .’
The eventual result of the application of these definitions is that the applicant has to show that if
his horse-breeding enterprise is not a pastoral or agricultural activity, then it falls into the ambit
of ‘other farming activities’ that additionally constitute the meaning of a farmer.
Mr Donovan, on behalf of the appellant, said that the phrase ‘other farming activities’ appeared
and should be so interpreted, as widening the meaning of ‘farmer’ beyond a person who earns
an income from pastoral or agricultural activities. Mr Horn, for the respondent, on the other
hand, argued that the noscitur a sociis rule applied here and the words ‘other farming activities’
took their meaning from the preceding words and context, namely, ‘pastoral and agricultural
 Farming 683

activities’. If the activity was not of the same basic nature as pastoral and agricultural, it could
not, he said, be regarded as ‘farming’, otherwise all sorts of unintended activities – such as fish
farming, crocodile farming or even the breeding of dogs – could be called farming and there-
fore qualify for the deductions in the Fourth Schedule . . .
In any event, one ought to bear in mind the classic caution expressed by the well-known Ameri-
can Judge, Learned Hand J, against making a fortress out of the dictionary or a textbook of
grammar, and to bear in mind that even the most authoritative language in another judicial
decision ought not to obscure the need for bringing primarily to the task of interpreting one’s
own Statutes a lively sense of the subject matter actually arising for decision.
...
It seems to me in the main that by using the additional words ‘other farming activities’ after the
words ‘. . . pastoral, agricultural or . . .’, Mr Donovan is correct when he argues that the Legisla-
ture intended to widen the ambit of activities that were included in the definition beyond those
that were strictly pastoral and agricultural . . .
On the other hand, I have little doubt that there is also a measure of validity in Mr Horn’s argu-
ment when he says that the general words ‘other farming activities’ take their colour and tenor
from the preceding particular words, and the activities thereby contemplated must be activities
that are farming in the same sense that pastoral and agricultural activities are farming . . .
Clearly, as spelled out by the judgment in H v Commissioner of Taxes 23 SATC 292 the scale and
nature of the operations is important, because it is not everyone who ‘grazes a couple of goats or
who digs up a patch of ground to grow vegetables . . .’ who is a fsarmer for purposes of the Act.
But, subject to that, if a person earns income from the business of raising crops or livestock, then
he may be said to be a farmer in my assessment of the Act.
...
. . . I have little doubt that the appellant here was carrying on a farming activity. His business was,
and is, to raise thoroughbred horses, and such animals are no less stock in my judgment than
cows, sheep, pigs or chickens – being all of the genus of domesticated creatures that are raised
on the land. It is true, as Mr Horn also argues, that such horses are not bred for consumption – at
least not intentionally and not primarily. But I do not think that this can be the test, otherwise a
breeder of dairy cows or stud bulls or mohair goats would not be a farmer, nor would a grower of
cotton . . . Someone like the appellant superintends the conception, birth, early care, weaning
and daily growth of his horses just as a stud farmer does for his calves or other animals until they
can be sold for a profit or are used to repeat the process in his own business. He rears them part-
ly on the produce that he himself grows in a typical cultivated process. That he has to buy addi-
tional food no more detracts from the enterprise as ‘farming’ than any dairy farmer or beef
producer does who buys in supplementary feed for the nourishment of his stock. And the appel-
lant’s intention, like them, is indisputably to earn income from such activity. In short, the evi-
dence satisfies me that he is carrying on a ‘farming activity’ within the meaning of these words in
the definition of a ‘farmer’.
 14
TAX AVOIDANCE AND EVASION

§ Page
1 The statutory general anti-avoidance rule (GAAR) ................................................ 686
2 The distinction between tax avoidance and tax evasion ........................................ 686
[349] IRC v Duke of Westminster ........................................................................ 686
[350] Lord Vestey’s Executors v IRC ................................................................... 686
[351] Hicklin v SIR ............................................................................................... 687
3 Common law principles, substance prevails over form, simulated transactions
and transactions in fraudem legis .............................................................................. 687
[352] Zandberg v Van Zyl ..................................................................................... 687
[353] Commissioner of Customs and Excise v Randles, Brothers & Hudson Ltd 687
[354] Erf 3183/1 Ladysmith (Pty) Ltd v CIR ...................................................... 688
[355] CIR v Conhage (Pty) Ltd (formerly Tycon (Pty) Ltd).............................. 694
[356] Michau v Maize Board...................................................................... .......... 695
[357] CSARS v NWK Ltd ...................................................................................... 695
[358] Roshcon (Pty) Ltd v Anchor Auto Body Builders CC ............................... 700
4 The doctrine of ‘fiscal nullity’ ................................................................................. 703
[359] WT Ramsay v IRC ........................................................................................ 703
5 Section 103(1) – (now repealed) general anti-avoidance rule ............................... 706
5.1 The elements of (the now repealed) s 103(1) .............................................. 706
5.2 The requisite sole or main purpose (originally, this had to be a sole
or main purpose of avoiding tax, but a subsequent amendment required
instead a sole or main purpose of obtaining a tax benefit) .......................... 707
[360] SIR v Gallagher .................................................................................... 707
[361] CIR v Conhage (Pty) Ltd (formerly Tycon (Pty) Ltd) ...................... 709
5.3 Abnormality of the rights or obligations created, or of the means
or manner in which the scheme was entered into or carried out ................ 712
[362] Meyerowitz v CIR ................................................................................. 713
6 Section 103(1) (now repealed) does not apply unless there was the requisite
sole or main purpose and, in addition, the requisite abnormality; one without
the other does not suffice ....................................................................................... 716
[363] SIR v Geustyn, Forsyth & Joubert ............................................................... 716
[364] Hicklin v SIR ............................................................................................... 719
[365] CIR v Louw .................................................................................................. 723
7 Section 103(1) (now repealed): powers of the Commissioner.............................. 729
[366] Hicklin v SIR ............................................................................................... 729
685
686 Income Tax in South Africa: Cases and Materials

§ Page
8 Section 103(2): agreement affecting a company or a change in shareholding
or members’ interests, resulting in the receipt of income, which was entered
into for the purpose of utilising an assessed loss; set-off of loss disallowed ....... 729
[367] New Urban Properties Ltd v SIR ................................................................ 730
[368] ITC 1123 ...................................................................................................... 732
[369] Broomberg, ‘Tax Strategy’ ......................................................................... 735

§1 The statutory general anti-avoidance rule (GAAR)

Common law principles have an important role to play in combating undesirable
forms of tax avoidance and outright tax evasion. These include the principle that sub-
stance prevails over form, that the courts will ignore a simulated transaction and give
effect to the real transaction, and the principle that the law will strike down transac-
tions entered into in fraudem legis.
Most fiscal jurisdictions also have statutory general anti-avoidance provisions, that is to
say, statutory provisions that are expressed in general terms and are not aimed at spe-
cific conduct or particular transactions, and which seek to nullify transgressions or at
least to negate any resultant fiscal benefits.
Section 103(1) of the Income Tax Act 58 of 1962 was such a general anti-avoidance
provision. Its interpretation was considered in a number of judicial decisions, the most
significant of which are summarised in this chapter. Section 103(1) was repealed with
effect from 2 November 2006 when the new general anti-avoidance provisions of
Part IIA of the Act came into force.
To date, there have been no reported judicial decisions on the interpretation of the
new Part IIA of the Act. However, the language and the underling concepts of these
new provisions borrow significantly from the now-repealed s 103(1), notably the con-
cept of a ‘sole or main purpose’ of tax avoidance, the concept of ‘normality’ in the
means or manner in which a transaction was entered into and the normality or other-
wise of the rights and obligations created by the transaction.
For that reason, the landmark decisions on the interpretation of s 103(1) remain rele-
vant and will inevitably have an impact on the interpretation of Part IIA of the Act.

§2 The distinction between tax avoidance and tax evasion

Every man is entitled (to the extent permitted by law) to order his affairs so as to reduce the amount
of tax payable by him.

[349]
IRC v Duke of Westminster
[1936] AC 1
Lord Tomlin: Every man is entitled, if he can, to order his affairs so that the tax attaching under
the appropriate Acts is less than it otherwise would be.

[350]
Lord Vestey’s Executors v IRC
[1949] All ER 1108:
Lord Normand: Tax avoidance is an evil, but it would be the beginning of much greater evils if
the courts were to stretch the language of the statute in order to subject to taxation people of
whom they disapproved.
 Tax avoidance and evasion 687

[351]
Hicklin v SIR
1980 (1) SA 481 (A)
For the facts of this case, see extract [364].
Trollip JA: It is true of course that the shareholders could have repaid their loans by declaring
Reklame’s reserves and assets as dividends, thereby incurring the ensuing tax liability. But they
were not obliged to do that. They were perfectly entitled to try to avoid such tax liability by adopt-
ing some other legitimate course (see CIR v Estate Kohler).1

§3 Common law principles: substance prevails over form, simulated

transactions and transactions in fraudem legis 2

Where there is a disguised agreement, the court will give effect to the real intention of the parties and
not their simulated agreement.
[352]
Zandberg v Van Zyl
1910 AD 302
Innes J: Now, as a general rule, the parties to a contract express themselves in language
calculated without subterfuge or concealment to embody the agreement at which they have
arrived. They intend the contract to be exactly what it purports; and the shape which it assumes
is what they meant it should have. Not infrequently, however (either to secure some advantage
which otherwise the law would not give, or to escape some disability which otherwise the law
would impose), the parties to a transaction endeavour to conceal its real character. They call it
by a name, or give it a shape, intended not to express but to disguise its true nature. And when a
Court is asked to decide any rights under such an agreement, it can only do so by giving effect to
what the transaction really is: not what in form it purports to be. The maxim then applies plus
valet quod agitur quam quod simulate concipitur. But the words of the rule indicate its limitations.
The Court must be satisfied that there is a real intention, definitely ascertainable, which differs
from the simulated intention. For if the parties in fact mean that a contract shall have effect in
accordance with its tenor, the circumstances that the same object might have been attained in another way will
not necessarily make the arrangement other than it purports to be. The enquiry, therefore, is in each case
one of fact, for the right solution of which no general rule can be laid down. (my emphasis).

If the parties honestly intend an agreement to have effect according to its tenor, the court will give
effect to the agreement according to its tenor.

[353]
Commissioner of Customs and Excise v Randles, Brothers & Hudson Ltd
1941 AD 369
Watermeyer JA: ‘I wish to draw particular attention to the words [used by Innes J in Zandberg
v van Zyl] “a real intention, definitely ascertainable, which differs from the simulated intention”,
because they indicate clearly what the learned Judge meant by a “disguised” transaction. A
transaction is not necessarily a disguised one because it is devised for the purpose of evading the
prohibition in the Act or avoiding liability for the tax imposed by it. A transaction devised for
that purpose, if the parties honestly intend it to have effect according to its tenor, is interpreted
by the Courts according to its tenor, and then the only question is whether, so interpreted, it
falls within or without the prohibition or tax.’
________________________

1 1953 (2) SA 584 (A) at 591F-592H.

2 in fraud of law.
688 Income Tax in South Africa: Cases and Materials

Where parties to an agreement do not honestly intend to give effect to it or to some of its terms, and
have an ascertainable and different ‘real agreement’, the court will give effect to their real agreement.

[354]
Erf 3183/1 Ladysmith (Pty) Ltd v CIR
1996 (3) SA 942 (A), 58 SATC 229
The Pioneer group of companies consisted of Pioneer Seed Company (Pty) Ltd and its
subsidiary, Pioneer Seed Holdings (Pty) Ltd (‘Holdings’). The Pioneer group wished to
build a furniture factory in the Ladysmith area.
Erf 3183/1 Ladysmith (Pty) Ltd owned vacant industrial land in Ladysmith. Holdings
acquired all the shareholding in Erf 3183/1 Ladysmith (Pty) Ltd and the other compa-
nies in the latter’s group, and therefore now controlled those companies.
In order to accomplish its purpose of financing the building of a furniture factory in
the most tax-effective way, the following arrangements were made in relation to each of
two vacant stands owned by Erf 3183/1 Ladysmith (Pty) Ltd or companies in the latter’s
group of companies.
The appellant (one of the companies in the Erf Ladysmith group) entered into an
agreement of lease (‘the main lease’) in which the appellant leased the vacant land
which it owned to the Board of Executors Pension Fund (‘the Fund’) which was a tax-
exempt entity. This lease stated that the lessee (the Fund) was entitled but not obliged to
erect improvements (the envisaged factory) on the land, and that at the end of the lease,
the land would revert to the appellants who would not be obliged to pay the lessee (the
Fund) for any improvements it had made to the land during the period of the lease.
The Fund then sub-leased the same land to Pioneer. The terms of this sub-lease stated
that the Fund was obliged to erect a factory on the land in accordance with certain plans
and that Pioneer would pay the Fund, in addition to the agreed rent, a ‘lease premium’
in consideration for the Fund’s undertaking to erect the factory.
In terms of the Income Tax Act, where a lessee undertakes an obligation in terms of a
lease to effect improvements on the leased premises, the lessee is entitled to a deduction
for the cost of the improvements (under s 11(g) of the Income Tax Act) and the lessor
must include the value of the improvements in his gross income (under para (h) of the
definition of ‘gross income’). These back-to-back tax consequences (where one party is
taxable on the value of the improvements made to the leased property and the other can
deduct the cost of effecting the improvements) applies only where the latter party has a
legal obligation to effect the improvements and the other party has a corresponding
legal right to have the improvements effected.
On the face of the written leases, the Pioneer company was obliged under the sub-
lease to effect stipulated improvements to the leased property (ie to build the factory)
but Erf Ladysmith (Pty) Ltd had no right, under the main lease, to have those improve-
ments effected. Thus, if the agreements were taken at face value, the Pioneer company
would get a section 11(g) deduction for the cost of building the factory, but Erf Lady-
smith (Ltd) would not have to include any amount in its gross income under para (h) of
the definition of gross income.
Under the sub-lease, the Fund had the right to have the factory erected on the leased
premises, and thus had to include the value of the improvements in its gross income
under para (h) of the definition of gross income. However, since the Fund was a tax-
exempt entity, this was painless, as it would not have to pay any tax on that amount.
On the face of the contractual arrangements, Erf Ladysmith (Pty) had no legal right to
require its lessee, the Fund, to effect improvements to the leased premises. Therefore,
even though a factory was erected on the land it owned, that company would not be
 Tax avoidance and evasion 689

taxed under para (h) of the definition of gross income on the value of the improve-
ments, ie the value of the factory which was in due course built on the company’s land.
Hence, taken at face value, Erf Ladysmith (Pty) Ltd would get a factory erected on
land owned by it, without incurring any tax liability on the value of the improvements to
the land, while Pioneer would get a tax deduction under s 11(g) for the cost of erecting
the factory, which it paid by way of a lease premium.
Issue: was para (h) of the definition of ‘gross income’ applicable to Erf Ladysmith (Pty)
Ltd? In other words, did the value of the improvements have to be included in its gross
income on the basis that (despite what the written agreements said to the contrary) the
‘real agreement’ between the parties was that a right had accrued to that company to
have improvements (a factory) erected on the leased premises?
Held: in terms of the real agreement between the parties, Erf Ladysmith (Pty) Ltd did
indeed have a right to have the improvements effected to the leased premises (ie to have
a factory built). Hence, the value of those improvements had to be included in its gross
income in terms of para (h) of the definition of ‘gross income’.
Hefer JA: [The judge referred to the eight inter-related lease agreements and proceeded:] The-
se agreements, as will presently appear, are the source of the dispute . . . Since the land on which
the factory was to be erected thus belonged to the group (I speak in practical terms), one is im-
mediately struck by the cumbrous arrangements for its construction. Affiliated companies are of
course at liberty to structure their mutual relationships in whatever legal way their directors may
prefer; but when, for no apparent commercial reason, a third party is interposed in what might
equally well have been an arrangement between affiliates, it is not unnatural to seek the motive
elsewhere.
When the appellants’ witnesses were questioned in this regard it came to light that the agree-
ments were concluded pursuant to a scheme first mooted by the group’s banker and subsequent-
ly devised on the advice of a tax consultant by the directors and auditors of Pioneer and
Holdings. Its aim, so both witnesses claimed, was to procure the benefit of a deduction under
s 11( f ) of the Act for Pioneer. (In terms of s 11( f ) a deduction from gross income is allowed
‘in respect of any premium or consideration in the nature of a premium paid by a taxpayer for
. . . the right of use or occupation of land or buildings used or occupied for the production of
income or from which income is derived’.) . . .
[T]he enquiry must proceed, as appellants’ attorney conceded, on the basis that the sub-leases
were intended to serve the single purpose of ensuring that there would be no accrual of income
to the appellants as recipients of the premium.
Relying on the principle that: ‘[e]very man is entitled, if he can, to order his affairs so as that the
tax attaching under the appropriate Acts is less than it otherwise would be’ (per Lord Tomlin in
IRC v Duke of Westminster),3 appellants’ attorney argued that effect must be given to the agree-
ments according to their tenor despite their underlying purpose. He submitted that, whatever
their purpose might have been, a right as envisaged in para (h) of the definition of ‘gross in-
come’ in s 1 of the Act did not accrue to the appellants in terms of the main leases.
The relevant part of para (h) is to the effect that a taxpayer’s gross income for any year or period
of assessment includes
‘in the case of any person to whom, in terms of any agreement relating to the grant to any other person of
the right of use or occupation of land or buildings, . . . there has accrued in any such year or period the
right to have improvements effected on the land or to the buildings by any other person –
(i) the amount stipulated in the agreement as the value of the improvements or as the amount to be
expended on the improvements . . .’
Appellants’ attorney correctly pointed out that para (h) does not deal with the benefit accruing
to the owner of land as a result of the improvement of his property as such, but with the accrual
of a right to have improvements effected . . .

________________________

3 [1936] AC 1 at 19.
690 Income Tax in South Africa: Cases and Materials

The keystone of the contention that such a right did not accrue to the appellants is clause 7.1 of
the main leases which entitles but does not oblige the Fund to erect buildings on the leased
property. The Fund, so the argument goes, was indeed obliged to erect the buildings but that
obligation stemmed from the terms of the sub-leases and was enforceable by Pioneer – not by
the appellants. The nub of the contention is that, in the absence of an obligation enforceable by
the appellants, a right to have the buildings erected did not accrue to them. As a matter of pure
logic and law the argument is undoubtedly sound if the enquiry is confined to the four corners
of the written agreements. However, the Commissioner’s case is that the documents do not re-
flect the real intention of the contracting parties; because the entire purpose of the transaction
was to evade tax, the agreements were concluded in a form which conceals the fact that the appel-
lants did acquire the right to have the buildings erected . . .
The argument on both sides focused largely on the application of two well-known legal princi-
ples. The first is the one expounded in The Duke of Westminster’s case(supra). It was adopted by
Centlivres CJ in his minority judgment in CIR v Estate Kohler 4 and affirmed in subsequent judg-
ments of this court. (See eg SIR v Hartzenberg;5 Hicklin v SIR.6) In effect it involves the application
of the more general principle, recognised eg in Dadoo Ltd and Others v Krugersdorp Municipal
Council 7 and Van Heerden v Pienaar,8 which permits parties to arrange their affairs so as to remain
outside the provisions of a particular statute. Of course, in every case in which this principle is
invoked, it is for the court to decide whether the party concerned has succeeded in achieving
that result . . . It is in this regard that the second principle comes into play. Succinctly stated it is
to the effect that:
‘Courts of law will not be deceived by the form of a transaction: it will rend aside the veil in which the
transaction is wrapped and examine its true nature and substance.’
(Per Wessels ACJ in Kilburn v Estate Kilburn.)9
The application of these principles is usually not a matter of great difficulty in cases where only
one of them is invoked. But certain remarks in some of the English cases on the subject would
seem to suggest that they are mutually exclusive and accordingly incapable of application in one
and the same case. In the Duke of Westminster’s case Lord Tomlin observed eg (at 20):
‘This so-called doctrine of “the substance” seems to me to be nothing more than an attempt to make a
man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not
legally claimable.’
Since this was written sixty years ago the interaction between the two principles has become a
contentious matter in the English courts . . . For present purposes it is not necessary to get in-
volved in the dispute. In his judgment in the Duke of Westminster’s case Lord Russell of Killow-
en said –
‘If all that is meant by the doctrine is that having once ascertained the legal rights of the parties you may
disregard mere nomenclature and decide the question of taxability or non-taxability in accordance with
the legal rights, well and good . . . If, on the other hand, the doctrine means that you may brush aside
deeds, disregard the legal rights and liabilities arising under a contract between parties, and decide the
question of taxability or non-taxability upon the footing of the rights and liabilities of the parties being dif-
ferent from what in law they are, then I entirely dissent from such a doctrine.’
The South African approach has always been substantially in accordance with the first possibility
mentioned by Lord Russell. In Dadoo’s case Innes CJ said:
‘a transaction is in fraudem legis when it is designedly disguised so as to escape the provisions of the law, but
falls in truth within these provisions. Thus stated, the rule is merely a branch of the fundamental doctrine
that the law regards the substance rather than the form of things – a doctrine common, one would think,
to every system of jurisprudence and conveniently expressed in the maxim plus valet quod agitur quam quod
10
simulate concipitur. ’
________________________

4 1953 (2) SA 584(A) at 591E-592H.

5 1966 (1) SA 405 (A) at 408 in fin; 409C-D.
6 1980 (1) SA 481 (A) at 494G.
7 1920 AD 530 at 548.
8 1987(1) SA 96(A) at 107E-F.
9 1931 AD 501 at 507.
10 ‘Greater value is attached to what is done than to what appears to be done’; BC Plant Hire CC v Grenco (SA)
(Pty) Ltd (unreported; Cape High Court, 2003).
 Tax avoidance and evasion 691

Provided that each of them is confined to its recognised bounds there is no reason why both
principles cannot be applied in the same case. I have indicated that the court only becomes con-
cerned with the substance rather than the form of a transaction when it has to decide whether
the party concerned has succeeded in avoiding the application of a statute by an effective arrange-
ment of his affairs. Thus applied, the two principles do not conflict.
The locus classicus on the subject of simulated transactions is Innes J’s judgment in Zandberg v Van
Zyl 11 where the following appears:
‘Not frequently, however (either to secure some advantage which otherwise the law would not give, or to
escape some disability which otherwise the law would impose), the parties to a transaction endeavour to
conceal its real character. They call it by a name, or give it a shape, intended not to express but to disguise
its true nature. And when a court is asked to decide any rights under such an agreement, it can only do so
by giving effect to what the transaction really is; not what in form it purports to be . . . But the words of the
rule indicate its limitations. The court must be satisfied that there is a real intention, definitely ascertaina-
ble, which differs from the simulated intention. For if the parties in fact mean that a contract shall have
effect in accordance with its tenor, the circumstances, that the same object might have been attained in
another way will not necessarily make the arrangement other than it purports to be. The enquiry, there-
fore, is in each case one of fact, for the right solution of which no general rule can be laid down.’
The thrust of the passage lies in the italicised lines and the factual enquiry referred to in the last
sentence is thus to ascertain the actual intention of the contracting parties. As explained in
Commissioner of Customs and Excise v Randles, Brothers & Hudson Ltd:12
‘[a] transaction is not necessarily a disguised one because it is devised for the purpose of evading the prohibi-
tion in the Act or avoiding liability for the tax imposed by it. A transaction devised for that purpose, if the
parties honestly intend it to have effect according to its tenor, is interpreted by the court according to its
tenor, and then the only question is whether, so interpreted, it falls within or without the prohibition or
tax.
A disguised transaction in the sense in which the words are used above is something different. In
essence it is a dishonest transaction: dishonest, in as much as the parties to it do not really intend
it to have, inter partes, the legal effect which its terms convey to the outside world. The purpose
of the disguise is to deceive by concealing what is the real agreement or transaction between the
parties. The parties wish to hide the fact that their real agreement or transaction falls within the
prohibition or is subject to the tax, and so they dress it up in a guise which conveys the impres-
sion that it is outside of the prohibition or not subject to the tax. Such a transaction is said to be
in fraudem legis, and is interpreted by the courts in accordance with what is found to be the real
agreement or transaction between the parties.
Of course, before the court can find that a transaction is in fraudem legis in the above sense, it
must be satisfied that there is some unexpressed agreement or tacit understanding between the
parties.’ . . .
I have quoted the relevant passages from the leading cases in full in order to reveal the funda-
mental flaw in a submission which tinged the entire argument for the appellants. It is to the
effect that, once it is found that the parties to the present agreements actually intended to struc-
ture their arrangement in the form of a lease coupled with a sub-lease and a building contract,
there is really an end to the matter, because in that event effect must be given to each agreement
according to its tenor. This is plainly not so. That the parties did indeed deliberately cast their
arrangement in the form mentioned, must of course be accepted; that, after all, is what they had
been advised to do. The real question is, however, whether they actually intended that each
agreement would inter partes have effect according to its tenor. If not, effect must be given to
what the transaction really is. I must also point out that, by virtue of the provisions of s 82 of the
Act, the burden to prove that any amount is exempt from tax and the duty to show that the
Commissioner’s decision to disallow their objection to the assessments was wrong, rest on the
appellants . . . Therefore, unless the appellants have shown on a preponderance of probability
that the agreements do indeed reflect the actual intention of the parties thereto, the Commis-
sioner’s decision cannot be disturbed . . .
[The court proceeded to discuss the agreements and their apparent anomalies.]
________________________

11 1910 AD 302 at 309.

12 1941 AD 369 at 395-396.
692 Income Tax in South Africa: Cases and Materials

These anomalies are consistent with a wider, unexpressed agreement or tacit understanding the
terms of which have not been divulged. As such they bear significantly on the question whether
the accrual to the appellants of a right to the erection of the buildings has been concealed . . .
There is a real likelihood that there was an unexpressed agreement or tacit understanding be-
tween the appellants and Pioneer that the appellants would be entitled if need be to enforce
compliance with the relevant terms of the sub-leases, either against Pioneer or possibly against
Pioneer and the Fund jointly . . . The evidence does not exclude what is thus a real likelihood
that the written agreements do not reflect the true or full intention of the parties. Appellants’
entire case rests on the provisions of clause 7.1 of the main leases. However, it is those very provi-
sions that, on the aforegoing analysis, bear the stamp of simulation. The purpose could well have
been to conceal the real or complete terms of what the parties truly intended but chose not to
express.
It follows that the appellants have not shown that a right to have improvements effected as envis-
aged in para (h) did not accrue to them. In view of this conclusion it is not necessary to deal with
the other issues which were argued including the applicability of s 103(1) of the Act on which
the Commissioner relied as an alternative.
The appeal is dismissed . . .
NESTADT JA, HOWIE JA, SCHUTZ JA and PLEWMAN JA concurred.

Notes
The underlying issue in this case was the inter-relationship between two legal principles.
The first principle, expounded in the Duke of Westminster’s case (and endorsed by the
Appellate Division in South Africa) is that every person is entitled, if he can, to arrange
his affairs so as to avoid or reduce his liability to tax.
The second principle is that courts of law are not deceived by the form of a transac-
tion, and give effect to its substance.
The court pointed out that these two principles are not mutually contradictory, and
the two principles are capable of being applied in the same case.
The decision in Zandberg v Van Zyl 13 is the locus classicus in South Africa on simulated
transactions. The principle laid down in this case is that where the court is satisfied that
the parties to an agreement have ‘a real intention, definitely ascertainable, which differs
from the simulated intention’ then the courts will ignore the simulated transaction and
give effect to the real transaction. The issue in this regard is whether the parties honestly
intend the contract to have effect according to its tenor – ie what the contract says.
In the present case, the court pointed out that –
‘a disguised transaction . . . is a dishonest transaction: dishonest, in as much as the parties to it do not really
intend it to have, inter partes, the legal effect which its terms convey to the outside world. The purpose of
the disguise is to deceive by concealing what is the real agreement or transaction between the parties.’
Such a contract is said to be in fraudem legis 14 and the courts will give effect to what the
parties actually intended and not to the dishonest disguise.
Importantly, the court in Erf Ladysmith cautions that, ‘before the court can find that a
transaction is in fraudem legis in the above sense, it must be satisfied that there is some
unexpressed agreement or tacit understanding between the parties’.
In the present case, the court found that the parties had indeed acted in fraudem legis.
Although the lease agreements said that the Fund was not obliged to erect a factory on
the land, the reality was that it was indeed so obliged; and although the lease agreements
said that no right accrued to Erf Ladysmith (Pty) Ltd to have a factory erected on its
land, in fact such a right had indeed accrued.
________________________

13 1910 AD 302.
14 In fraud of the law.
 Tax avoidance and evasion 693

The court struck down a tax avoidance scheme on common law principles
The wider significance of this decision is that the court struck down a tax avoidance
scheme on the basis of common law principles, without needing to invoke the statutory
general anti-avoidance provision, s 103. The court struck down the scheme by disregard-
ing a ‘simulated’ agreement, involving leases and sub-leases, and giving effect to the
parties’ real intention, and implementing the tax consequences that flowed from that
real intention.
In the result, the court gave effect to the ‘real agreement’ between the parties which
was that the lessee under the main lease, namely the Fund, was indeed obliged to effect
improvements to the leased premises by building a factory, and hence that Erf Ladysmith
(Pty) Ltd did have a ‘right’ to have those improvements effected. Consequently, in terms
of para (h) of the definition of gross income, the value of those improvements had to be
included in the gross income of the latter company – in short, the value of those improve-
ments were indeed taxable in its hands.
The idea behind the scheme
In understanding the tax avoidance scheme that the parties tried to implement in this
case, it is necessary to bear in mind certain fundamental tax principles. The starting
point is that, if a taxpayer buys land and builds a factory on it, the purchase price of the
land and the cost of erecting the factory is expenditure of a capital nature and hence not
deductible under s 11(a). Hence, it would not have been attractive, from a tax point of
view, for Pioneer simply to buy the land and build a factory on it.
Tax deductions for effecting improvements to leased premises (such as the building of
a factory) can be created by using a lease. But the difficulty is that those deductions bring
about a back-to-back taxable benefit for the other party to the lease. Thus, where a lessor
leases land to a lessor in terms of a lease agreement in which the lessee undertakes an
obligation to effect improvements (such as the building of a factory) on the land, the Act
provides that the lessee is entitled to deduct, over a period of several tax years, the cost of
the improvements; on the other hand, the lessor must include, in his gross income, the
value of those improvements. Hence, the lessee gets a tax deduction and the lessor gets a
taxable benefit.
What the parties in this case tried to achieve was a situation where the lessee became
entitled to a deduction for the cost of the improvements, but the lessor was not taxed on
the value of those improvements. They sought to achieve this by interposing between the
lessor and the lessee a tax-exempt entity (in this case a tax-exempt pension fund), which
could take upon itself the taxable value of the improvements, but pay no tax on that
amount because it was exempt from tax.
In the subsequent case of Relier (Pty) Ltd v CIR 60 SATC 1 (SCA) – which involved facts
almost identical to Erf Ladysmith – the taxpayer attempted the same stratagem, namely
the interposition between lessor and lessee of a tax-exempt entity (in that case a prov-
ident fund) so that the latter could painlessly accept taxable leasehold improvements. It
was held that the interposition of the provident fund as a tenant was not truly intended
by the parties and amounted to a simulation. The same common law principles as in Erf
Ladysmith were applied to nullify the tax benefit that the scheme sought to achieve.

Within the bounds of statutory anti-avoidance provisions, a taxpayer is entitled to minimise his tax
liability. If the same commercial result can be achieved in different ways, he may enter into the type of
transaction which does not attract tax or attracts less tax. But, when it comes to considering whether
he has succeeded in avoiding or reducing the tax, the Court will ignore any simulation and give
effect to the true nature and substance of the transaction. The sale and leaseback in issue was held to
be a genuine transaction and not a simulation.
694 Income Tax in South Africa: Cases and Materials

[355]
CIR v Conhage (Pty) Ltd (formerly Tycon (Pty) Ltd)
1999 (4) SA 1149 (SCA)
Hefer JA:
[1] Within the bounds of any anti-avoidance provisions in the relevant legislation, a taxpayer
may minimise his tax liability by arranging his affairs in a suitable manner. If, for example,
the same commercial result can be achieved in different ways, he may enter into the type of
transaction which does not attract tax or attracts less tax. But, when it comes to considering
whether by doing so he has succeeded in avoiding or reducing the tax, the Court will give
effect to the true nature and substance of the transaction and will not be deceived by its
form. (Erf 3183/1 Ladysmith (Pty) Ltd v CIR.15)
[2] At issue in the present case is the true nature and substance of two sets of agreements be-
tween the taxpayer (‘Tycon’) and Firstcorp Merchant Bank Ltd (‘Firstcorp’). In form, each
set comprises a sale and leaseback of some of Tycon’s manufacturing plant and equipment.
The Commissioner’s contention is that the agreements are not what they purport to be.
The dispute arose when Tycon sought to deduct the rentals paid in terms of the leasebacks
as expenditure in the production of income under s 11(a) of the Income Tax Act. When
the Commissioner refused to allow the deductions and in addition invoked s 103 of the Act
. . . the first issue is the true nature and substance of the agreements. In the event of a find-
ing that they are indeed what they purport to be as the Special Court found, a further ques-
tion will be whether the Commissioner correctly invoked s 103.
The true nature of the agreements
[3] In broad terms the Commissioner’s contention is that, despite the form of the agreements,
Tycon did not sell and lease back its equipment, but in substance borrowed the ‘purchase
price’ from Firstcorp. [The Commissioner argued that] although Tycon and Firstcorp
might honestly have believed that it would be sufficient to go through the formality of
concluding that kind of agreement in order to procure tax benefits for themselves, they
had no real intention to enter into agreements of sale and leaseback . . .
[4] . . . In the present case, Tycon required capital to expand its business. Firstcorp was pre-
pared to make the funds available. Both parties were aware of the tax benefits to be gained
from sales and leasebacks and decided to follow that course. If they did not genuinely in-
tend ownership of the merx to pass upon signature of the agreement as each agreement of
sale stipulated, the agreements would have been simulations and could only have been
signed with the object of deceiving the Commissioner. The conclusion that this would in-
deed be a case of fraus legis cannot be avoided.
[5] . . . The real point of [the Commissioner’s submission] is that neither Tycon nor Firstcorp
actually intended to enter into agreements of sale and leaseback. [After discussing the ev-
idence, the judgement proceeds:] All this goes to show that the parties were not merely
going through the motions of concluding agreements. And if they were not, the very
foundation of the submission crumbles.
[6] – [8] . . .
[9] The fact of the matter is that the evidence that the parties had every intention of entering
into agreements of sale and leaseback and of putting the agreements into effect was not
contradicted . . . Mr Rubens referred us to certain provisions of the agreements which, he
submitted, are not usually found in agreements of sale and agreements of lease and mili-
tate against an intention to buy and sell and to lease back . . . If we were to look at the
agreement of sale separately this would be a valid point, but, viewed in the context of the
whole transaction, the argument loses its sting . . . All in all the transactions made perfect-
ly good business sense.
[10] In my view, the Special Court was correct in deciding the first issue in Tycon’s favour.

________________________

15 1996 (3) SA 942 (A) at 950I-952C.

 Tax avoidance and evasion 695

Notes
The principles laid down in Conhage were applied in ITC 1833 (2008) 70 SATC 238 –
which was later reversed on appeal in the judgment reported as [357] CSARS v NWK
Ltd. In the latter case, the taxpayer, who required some R50 million for immediate
business needs, entered into an ostensible loan for R96 million. The taxpayer then
claimed a deduction under s 11(a) for the interest on a loan of R96 million. SARS con-
tended that the transactions in question had been artificially engineered to conceal the
fact that the true loan amount was R50 million, and that the taxpayer should be entitled
to deduct interest only in respect of a loan of the latter amount – this argument failed in
the Tax Court but was successful in the Supreme Court of Appeal.

[356]
Michau v Maize Board
2003 (6) SA 459 (SCA), 66 SATC 288
Scott JA: It has long since been established in cases such as Zandberg v Van Zyl,16, Dadoo Ltd v Kru-
gersdorp Municipal Council,17 Commissioner of Customs and Excise v Randles, Brothers & Hudson Ltd18
and more recently affirmed in Erf 3183/1 Ladysmith (Pty) Ltd v CIR19 that parties are free to ar-
range their affairs so as to remain outside the provisions of a particular statute. Merely because
those provisions would not have been avoided had the parties structured their transaction in a
different and perhaps more convenient way does not render the transaction objectionable. What
they may not do is conceal the true nature of their transaction or, in the words of Innes JA in
Zandberg’s case,20 ‘call it by a name, or give it a shape, intended not to express but to disguise its
true nature’. In such event a court will strip off its ostensible form and give effect to what the
transaction really is.

In order to determine whether a transaction is ‘simulated’ it is not sufficient merely to determine

whether the parties intended to perform it according to its tenor; it is necessary to determine, in
addition, whether the agreement made commercial sense for if its only purpose was to achieve tax
evasion, it will be regarded as simulated.

[357]
CSARS v NWK Ltd
[2010] ZASCA 168; 2011 (2) SA 67 (SCA)
Between 1999 and 2003, NWK Ltd claimed deductions from income tax in respect of
interest of some R96 million purportedly paid on a loan to the company from Slab
Trading Co (Pty) Ltd (‘Slab’) and SARS allowed the deductions. In 2003, SARS issued
new assessments, disallowing the deductions and imposing additional tax and interest
totalling some R47 million. The basis of the revised assessments was that the loan which
purportedly gave rise to NWK’s liability to pay interest was not a genuine transaction, but
was a disguised transaction, and that the real amount of the loan from FNB to NWK was
not R96 million, but only R50 million. SARS contended in the alternative that the
arrangement had been entered into for the avoidance of tax and that it fell within the
scope of s 103(1).
The Tax Court upheld the taxpayer’s appeal against the revised assessments and SARS
appealed against that judgment.
________________________

16 1910 AD 302.
17 1920 AD 530.
18 1941 AD 369.
19 1996 (3) SA 942 (A).
20 1910 AD 302 at 309.
696 Income Tax in South Africa: Cases and Materials

The structure of the purported loan was as follows. Slab (which was a subsidiary of First
National Bank) would lend some R96 million to NWK to be repaid by NWK over a
period of five years, not in money, but by NWK’s delivering some 100 tons of maize to
Slab at the end of those five years. (NWK’s main business was trading in maize.) Interest
on the loan at 15.41% would be paid by NWK by issuing ten promissory notes to Slab,
payable every six months, to the value of some R75 million; the latter sum was the
amount that NWK then claimed as tax-deductible interest on the loan. In order to raise
the funds to lend to NWK, Slab would discount the promissory notes (ie sell them for less
than their face value, given that they were payable in the future and were not
immediately payable) to FNB, and on the due date of each of the ten promissory notes,
NWK would pay – and did in fact pay – the amount of the note to FNB. First Derivatives
(a division of FNB, but not a separate company) would sell to NWK, for some
R46 million, the right to take delivery of the same amount of maize; this sum would be
payable immediately on conclusion of the contract, but delivery would only take place
five years hence. (This contract was explained as being to neutralise the risk run by NWK
in promising to deliver maize in the future, with all the associated contingencies that this
promise entailed.)
In totality, this was a ‘structured finance deal’ devised by FNB for its client, NWK, and
the arrangement professed to entitle NWK to a s 11(a) deduction for the interest that it
paid by way of the ten promissory notes. The requisite contracts were signed virtually
simultaneously.
In terms of the contracts, NWK had the obligation to deliver some 100 tons of maize to
Slab in five years time as repayment of the loan (and Slab later transferred to FNB this
right to take delivery) and NWK also acquired the right from Slab to take delivery of the
same quantity of maize on the same date and NWK then ceded to FNB this right to take
delivery. FNB’s acquired obligation to make delivery and its acquired right to take delivery of
the same amount of maize cancelled each other out by way of confusio.
Lewis JA:21 (HARMS DP, CACHALIA and SHONGWE JJA and BERTELSMANN AJA concurring)
[29] [SARS argued that] NWK had no intention of repaying its loan with Slab through the
delivery of the maize; Slab had no intention of acquiring the maize or selling it, in turn, to FNB;
and the cessions from Slab to FNB and of NWK to FNB effectively cancelled the respective
obligations. (The Commissioner contended that the respective obligations were extinguished by
set-off.) . . .
[30] The Commissioner thus considered that the transactions ‘were specifically designed to
conceal the fact that in reality, the actual loan amount advanced’ to NWK was R50 million [and
not R96 million]. The additional amount was simulated with a series of contracts purporting to
sell maize which the parties never intended to have any effect. Slab had no real role to play and
its participation was ‘artificially engineered and specifically designed to conceal the fact that the
true loan amount was the sum of [R50 m]. Slab’s sole purpose was therefore to facilitate the
enhanced deduction claimed by [NWK] in terms of s 11(a) of the Act’. FNB made an
immediate profit of R600 000 when it bought the promissory notes for R50 697 518 from Slab.
Furthermore, FNB, in receiving the sum of R74 686 861 (the face value of the promissory notes)
in effect was paid interest on the real loan of R50m.
[31] Thus having regard to the ‘substance and reality of the transaction’ the face value of the
promissory notes was determined by combining the capital value of the loan (R50m) with
interest over the period of the loan of R23 989 343. The total of these two amounts, plus the fee
of R697 518, was equal to the face value of the promissory notes.
[32] The Commissioner considered that the actual transaction that was contemplated by FNB
and NWK was a loan for R50m: the promissory notes covered both the capital and interest. Thus

________________________

21 In the interests of brevity, some footnotes have been omitted in this edited version of the judgment.
 Tax avoidance and evasion 697

the portion of the notes that constituted repayment of capital was not deductible as interest in
terms of s 11(a) of the Act and was also not expended in the course of trade.
[33] In the alternative the Commissioner contended that the series of transactions constituted a
‘transaction, operation or scheme’ in terms of s 103(1) of the Act that had the effect of avoiding
or reducing NWK’s liability for tax in the 1999 to 2003 years of assessment and that the
transactions were abnormal and were entered into solely or mainly for the purpose of obtaining
a tax benefit.
The grounds of appeal
[35] NWK alleged in its grounds of appeal that the contracts concluded between Slab, NWK
and FNB were performed in accordance with their terms: NWK received the amount of
R96 415 776 in terms of the loan agreement, and delivered the promissory notes to Slab. NWK
paid the price of the maize – R46 415 776 – to First Derivatives in terms of the forward sale
agreement. NWK was not party to the agreements between Slab and FNB. The terms of the loan
reflected the intention of NWK and were implemented and performed in accordance with their
tenor. And there was no tacit understanding or unexpressed agreement on the part of NWK that
was not recorded in the contracts to which it was party.
The decision of the Tax Court
[37] The Tax Court found that NWK had acted in terms of the agreements. . . [T]he
Commissioner’s case in the Tax Court was that the simulation of the transactions was deliberate.
There was no contention that the parties had genuinely believed that the transactions were bona
fide and would be performed in accordance with their terms. It was argued in that court that
NWK and FNB were acting deliberately to conceal the true nature of the transaction.
[41] . . . How then does a court ascertain the real intention of a party to a contract when the
contract appears to be simulated? This is the question to which I now turn before examining any
of the evidence.
Real intention and simulation: substance and form
[42] It is trite that a taxpayer may organise his financial affairs in such a way as to pay the least
tax permissible. There is, in principle, nothing wrong with arrangements that are tax effective.22
But there is something wrong with dressing up or disguising a transaction to make it appear to
be something that it is not, especially if that has the purpose of tax evasion, or the avoidance of a
peremptory rule of law. However, as Hefer JA said in Erf 3183/1 Ladysmith (Pty) Ltd v CIR23 one
must distinguish between the principle that one may arrange one’s affairs so as to ‘remain
outside the provisions of a particular statute’, and the principle that a court ‘will not be deceived
by the form of a transaction: it will rend aside the veil in which the transaction is wrapped and
examine its true nature and substance’ (per Wessels ACJ in Kilburn v Estate Kilburn,24 cited by
Hefer JA in Ladysmith). As the court said in Ladysmith the principles are not in conflict.
[43] I shall not traverse the long line of authority in which these two principles have been
invoked. They are dealt with comprehensively in Ladysmith. And they are expressed in classic
statements in Zandberg v Van Zyl25 and Commissioner of Customs and Excise v Randles, Brothers &
Hudson Ltd.26 In Zandberg Innes JA said:
‘Now, as a general rule, the parties to a contract express themselves in language calculated without
subterfuge or concealment to embody the agreement at which they have arrived. They intend the contract
to be exactly what it purports; and the shape which it assumes is what they meant it should have. Not
infrequently, however (either to secure some advantage which otherwise the law would not give, or to
escape some disability which otherwise the law would impose), the parties to a transaction endeavour to
conceal its real character. They call it by a name, or give it a shape, intended not to express but to disguise
its true nature. And when a Court is asked to decide any rights under such an agreement, it can only do so
________________________

22 IRC v Duke of Westminster [1936] AC 1 at 19, cited by the court in Ladysmith, above. The principle is af-
firmed by Hefer JA in CIR v Conhage (Pty) Ltd 1999 (4) SA 1149 (SCA) para 1.
23 Erf 3183/1 Ladysmith (Pty) Ltd v CIR [1996] ZASCA 35; 1996 (3) SA 942 (A).
24 1931 AD 501 at 507.
25 1910 AD 302 at 309.
26 1941 AD 369.
698 Income Tax in South Africa: Cases and Materials

by giving effect to what the transaction really is: not what in form it purports to be. The maxim then
applies plus valet quod agitur quam quod simulate concipitur. But the words of the rule indicate its limitations.
The Court must be satisfied that there is a real intention, definitely ascertainable, which differs from the
simulated intention. For if the parties in fact mean that a contract shall have effect in accordance with its tenor, the
circumstances that the same object might have been attained in another way will not necessarily make the arrangement
other than it purports to be. The enquiry, therefore, is in each case one of fact, for the right solution of which
no general rule can be laid down’ (my emphasis).
[44] In Randles Watermeyer JA, after quoting this statement said:
‘I wish to draw particular attention to the words “a real intention, definitely ascertainable, which differs
from the simulated intention”, because they indicate clearly what the learned Judge meant by a “disguised”
transaction. A transaction is not necessarily a disguised one because it is devised for the purpose of evading
the prohibition in the Act or avoiding liability for the tax imposed by it. A transaction devised for that
purpose, if the parties honestly intend it to have effect according to its tenor, is interpreted by the Courts
according to its tenor, and then the only question is whether, so interpreted, it falls within or without the
prohibition or tax.’
[54] But in both Friedman and Conhage, where the courts held that the parties intended their
contracts to be performed in accordance with their tenor, there were sound reasons for
structuring the transactions as they did: . . . There was a commercial reason or purpose for the
transactions to be structured as they were. . . .
[55] In my view the test to determine simulation cannot simply be whether there is an intention
to give effect to a contract in accordance with its terms. Invariably where parties structure a
transaction to achieve an objective other than the one ostensibly achieved they will intend to give
effect to the transaction on the terms agreed. The test should thus go further, and require an
examination of the commercial sense of the transaction: of its real substance and purpose. If the
purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a
peremptory law, then it will be regarded as simulated. And the mere fact that parties do perform
in terms of the contract does not show that it is not simulated: the charade of performance is
generally meant to give credence to their simulation.
A genuine intention to borrow R96 415 776? The peculiar features of the transactions
[57] What then is the real purpose of the loan in this case? Does it have any commercial
substance or make business sense? NWK argued that the loan to it by Slab, like the sales to
individuals in Friedman Motors, was genuinely intended to have legal effect in accordance with its
tenor. But as I have said, the hire-purchase agreements in that and similar cases made good
commercial sense. They allowed the purchasers to raise finance while at the same time retaining
possession of the vehicles. And there was a genuine transfer of ownership.
[58] Was there any purpose or commercial sense – other than creating a tax advantage to NWK
– for the loan by Slab to NWK to be structured in the way it was? Was there any genuine
intention to deliver maize to Slab or a cessionary? The Tax Court did not address these
questions, accepting the contracts in issue at face value and not questioning their purpose.
There were several inexplicable aspects to the whole series of transactions that require scrutiny.
Simulation and motive for deception
[79] The Tax Court found that although NWK required only R50m for business purposes, it
had been offered a greater sum by FNB, structured in a particular fashion that would enable it to
claim a tax advantage to which it would not otherwise have been entitled. NWK was not obliged,
the court said, ‘to choose the less tax-effective route’. That is of course correct, as the authorities
cited earlier show. But the Tax Court went on to say that given the apparent tax benefit of the
structure proposed by FNB it was difficult to see why NWK would have wished to simulate the
transaction. There was, it held, ‘no financial or other disadvantage to actually implementing the
alternative structure as opposed to pretending to do so’. NWK, the court said, had no motive for
deception. Hence it had established on a balance of probabilities that its true intention was to
contract with Slab and FNB on the terms reflected in the contracts.
[80] It is correct that FNB and NWK outwardly performed in terms of the various contracts, as
indicated earlier . . . and the Tax Court should have . . . asked whether there was actually any
purpose in the contract other than tax evasion. This is not to suggest that a taxpayer should not
take advantage of a tax-effective structure. But as I have said, there must be some substance –
commercial reason – in the arrangement, not just an intention to achieve a tax benefit or to
 Tax avoidance and evasion 699

avoid the application of a law. A court should not look only to the outward trappings of a
contract: it must consider, when simulation is in issue, what the parties really sought to achieve.
[86] As I have said, the appropriate question to be asked, in order to determine whether the
loan and other transactions were simulated, is whether there was a real and sensible commercial
purpose in the transaction other than the opportunity to claim deductions of interest from
income tax on a capital amount greater than R50 million. None is to be found. What NWK really
wished to achieve was a tax advantage. What else could it, or did it, achieve through the
transactions in respect of the maize? . . .
[87] . . . The contract was dressed up in order to create an obligation to pay interest, and
consequently a right to claim a tax deduction, to which NWK was not entitled. NWK deliberately
disguised the true nature of the loan for this purpose. It did not intend, genuinely, to borrow a
sum approximating the one it purported to borrow.
[90] In view of the conclusion that I have reached that the loan for R96 415 776 was a
transaction designed to disguise the real agreement between the parties – a loan of R50m – the
Commissioner’s assessments were correct, and the appeal against the decision of the Tax Court
in this respect must succeed. There is thus no need to examine whether s 103(1) of the Act
could have been applied.

Notes
The most striking feature of this controversial judgment is that it departs from the long-
established principle laid down by Innes CJ in Zandberg v van Zyl 1910 AD 302 by
superimposing a further criterion on the criterion laid down in the latter case. The
further criterion laid down in NWK, it is submitted, is inconsistent with the principle laid
down in Zandberg v van Zyl in that a transaction which would have passed muster as not
simulated in terms of the Zandberg criterion may be condemned as simulated by the
additional criterion laid down in the NWK decision.
The principle laid down in Zandberg v Van Zyl is that if the parties to a contract
honestly intend that it will have effect according to its tenor (in other words, if the
parties genuinely intend to do what the contract requires them to do), then the contract
is not simulated or disguised and the court will give effect to the contract as it is
expressed.
The decision in NWK holds that, in order to decide whether or not a contract is
simulated, it is not sufficient to ask whether the parties intended to perform the contract
according to its tenor, and that a further question needs to be asked. Thus the court per
Lewis JA said (at para [55]) –
‘In my view the test to determine simulation cannot simply be whether there is an intention to give effect
to a contract in accordance with its terms. Invariably where parties structure a transaction to achieve
an objective other than the one ostensibly achieved they will intend to give effect to the
transaction on the terms agreed. The test should thus go further, and require an examination of the
commercial sense of the transaction: of its real substance and purpose. If the purpose of the
transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law,
then it will be regarded as simulated. And the mere fact that parties do perform in terms of the
contract does not show that it is not simulated: the charade of performance is generally meant to
give credence to their simulation.’
(Emphasis added.)
The court said further (at para [86]) that –
‘. . . the appropriate question to be asked, in order to determine whether the loan and other
transactions were simulated, is whether there was a real and sensible commercial purpose in the
transaction other than the opportunity to claim deductions of interest from income tax . . .’
(Emphasis added.)
In other words, the decision in NWK holds that even if the parties to an agreement
genuinely intend to perform the obligations imposed on them exactly in terms of the
700 Income Tax in South Africa: Cases and Materials

contract, their contract will be ‘simulated’ if it had no genuine commercial purpose and
was entered into solely for purposes of tax avoidance.

A gloss on the NWK judgment by the Supreme Court of Appeal

In an attempt to address criticisms levelled at the NWK judgment for apparently chang-
ing the legal criteria that characterise a simulated transaction, Wallis JA said in Roshcon
(Pty) Limited v Anchor Auto Body Builders CC [2014] ZASCA 40 at para [37] that–
‘. . . the notion that NWK transforms our law in relation to simulated transactions, or requires
more of a court faced with a contention that a transaction is simulated than a careful analysis of
all matters surrounding the transaction, including its commercial purpose, if any, is incorrect. The
position remains that the court examines the transaction as a whole, including all surrounding
circumstances, any unusual features of the transaction and the manner in which the parties intend27
to implement it, before determining in any particular case whether a transaction is simulated. ’

Was it necessary for the court in NWK to go into the issue of whether there was ‘commercial sub-
stance’ to the transaction under scrutiny?
One of the puzzling features of the judgment in NWK is that the court held (see para
[87]) that –
‘NWK . . . did not intend, genuinely, to borrow a sum approximating the one it purported to
borrow.’
If that was so – in other words, if the real transaction was not a loan of R96 million, but a
loan of only R50 million, why did the court not simply – on the basis of the unadorned
principle laid down in Zandberg v Van Zyl – hold that in the case at hand there was ‘a real
intention, definitely ascertainable, which differs from the simulated intention’ (in other
words, a real intention to borrow R50 million which differed from the simulated intention
to borrow R96 million) and then proceed to give effect to the real intention and allow a
deduction of interest on R50 million?
Why was it necessary for the Supreme Court of Appeal to embark on a long and complex
excursus into whether the contract had ‘commercial substance’ when all it had to do was
give effect to the real transaction (a loan of R50 million) and ignore the simulation (a
pretended loan of R96 million) by allowing an interest deduction on the real loan of R50
million, and disallowing the deduction of interest on the additional amount of the
simulated loan?

Whether a particular transaction is a simulated transaction is a question of its genuineness. If it is

genuine the court will give effect to it and, if not, the court will give effect to the underlying transac-
tion that it conceals. And whether it is genuine will depend on a consideration of all the facts and
circumstances surrounding the transaction.
[358]
Roshcon (Pty) Limited v Anchor Auto Body Builders CC
[2014] ZASCA 40
Wallis JA: (MAYA, SHONGWE, PETSE and SALDULKER JJA concurring)
[22] I have read the judgment of Shongwe JA [in the present case] with which I agree. I add some-
thing of my own merely because it appeared from the submissions made to us that there may be a
misconception regarding the proper approach to simulated transactions. In Roshcon’s heads of
argument it was submitted that in South African Revenue Services v NWK Limited,28 this
________________________

27 This accords with the conclusion of Davis J in Bosch v CSARS 2013 (5) SA 130 (WCC) paras 78 to 92
(footnote as in the judgment).
28 CSARS v NWK Limited 2011 (2) SA 67 (SCA).
 Tax avoidance and evasion 701

court developed or clarified the test laid down in previous judgments of this court and thereby
took our law in that regard in a new direction.
[23] The foundation of our law in regard to simulated transactions is the classic statement by
Innes J in Zandberg v Van Zyl29that:
‘Now, as a general rule, the parties to a contract express themselves in language calculated without subter-
fuge or concealment to embody the agreement at which they have arrived. They intend the contract to be
exactly what it purports; and the shape which it assumes is what they meant it should have. Not infrequent-
ly, however (either to secure some advantage which otherwise the law would not give, or to escape some
disability which otherwise the law would impose), the parties to a transaction endeavour to conceal its real
character. They call it by a name, or give it a shape, intended not to express but to disguise its true nature.
And when a Court is asked to decide any rights under such an agreement, it can only do so by giving effect
to what the transaction really is: not what in form it purports to be. The maxim then applies plus valet quod
agitur quam quod simulate concipitur. But the words of the rule indicate its limitations. The Court must be
satisfied that there is a real intention, definitely ascertainable, which differs from the simulated intention.
For if the parties in fact mean that a contract shall have effect in accordance with its tenor, the circum-
stances that the same object might have been attained in another way will not necessarily make the ar-
rangement other than it purports to be. The inquiry, therefore, is in each case one of fact, for the right
solution of which no general rule can be laid down.’
[26] . . . [T]he law permits people to arrange their contractual or business affairs so as to obtain
a benefit for themselves that a different arrangement would not permit or so as to avoid a prohi-
bition that the law imposes. That principle was laid down in Dadoo Ltd v Krugersdorp Municipal
30
Council, where Innes CJ said:
‘… parties may genuinely arrange their transactions so as to remain outside [a statute’s] provisions. Such a
procedure is, in the nature of things, perfectly legitimate.’
[27] . . . [I]n both Zandberg v Van Zyl and Dadoo Innes CJ relied on the principle embodied in
the maxim plus valet quod agitur quam quod simulate concipitur (the real intention carries more
weight than a fraudulent pretence). Whether a particular transaction is a simulated transaction
is therefore a question of its genuineness. If it is genuine the court will give effect to it and, if
not, the court will give effect to the underlying transaction that it conceals. And whether it is
genuine will depend on a consideration of all the facts and circumstances surrounding the
transaction.
[32] Nothing said subsequently in any of the judgments of this court dealing with simulated
transactions31 alters those original principles in any way or purports to do so. However, in a
number of them dealing with income tax, the courts have been called upon to apply these prin-
ciples in a different context. The earlier cases dealt with cases of agreements being dressed up in
a particular form where the underlying intention of the parties was inconsistent with that form.
In the income tax cases a different problem arises.
[33] In the income tax cases, the parties seek to take advantage of the complexities of income
tax legislation in order to obtain a reduction in their overall liability for income tax. There are
various mechanisms for doing this, but they all involve taking straightforward commercial trans-
actions and adding complex additional elements designed solely for the purpose of claiming
increased or additional deductions from taxable income, or allowances provided for in the legis-
lation. The feature of those that have been treated as simulated transactions by the courts is that
the additional elements add nothing of value to the underlying transaction and are very often
self-cancelling. Thus in Erf 1383/1 Hefer JA said that ‘there is a distinct air of unreality about the
agreements’.32 In Relier Harms JA referred to the ‘unusual and unreal aspects’ of the transac-
33 34
tions. The analysis by Lewis JA of the transactions in NWK clearly demonstrated that a range of
________________________

29 Zandberg v Van Zyl 1910 AD 302 at 309.

30 Dadoo Ltd and others v Krugersdorp Municipal Council 1920 AD 530 at 548.
31 Du Plessis v Joubert 1968 (1) SA 585 (A); Vasco Dry Cleaners v Twycross 1979 (1) SA 603(A); Skjelbreds Rederi
A/S and Others v Hartless (Pty) Ltd 1982 (2) SA 710 (A); Hippo Quarries (Tvl) (Pty) Ltd v Eardley [1991] ZASCA
174; 1992 (1) SA 867 (A); Bank Windhoek Bpk v Rajie en ‘n ander 1994 (1) SA 115 (A); Erf 3183/1 Ladysmith
(Pty) Ltd and Another v CIR [1996] ZASCA 35; 1996 (3) SA 942 (A); Relier (Pty) Ltd v CIR (1997) 60 SATC
1; CIR v Conhage (Pty) Ltd (formerly Tycon (Pty) Ltd) 1999 (4) SA 1149 (SCA); MacKay v Fey NO and Anoth-
er 2006 (3) SA 182 (SCA).
32 At 954D.
33 At 123.
702 Income Tax in South Africa: Cases and Materials

unrealistic and self-cancelling features had been added to a straightforward loan. They served no
commercial purpose, were based on no realistic valuation of the different elements of the trans-
action and were included solely to disguise the nature of the loan and inflate the deductions that
NWK could make against its taxable income. In those circumstances the courts stripped away the
unrealistic elements in order to disclose the true underlying transaction.35
[34] The problem dealt with in NWK was the contention that, irrespective of the unreality of
most of the elements of the arrangement under scrutiny, provided the parties intended to take
all the steps provided for in the contractual documents, in other words to jump through the
contractual hoops as a matter of form, the court could not find that the transaction was simulat-
ed. That is what Lewis JA was dealing with, in paragraph 55 of her judgment, when she said:
‘In my view the test to determine simulation cannot simply be whether there is an intention to give effect
to a contract in accordance with its terms. Invariably where parties structure a transaction to achieve an
objective other than the one ostensibly achieved they will intend to give effect to the transaction on the
terms agreed. The test should thus go further, and require an examination of the commercial sense of the
transaction: of its real substance and purpose. If the purpose of the transaction is only to achieve an object
that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere
fact that parties do perform in terms of the contract does not show that it is not simulated: the charade of
performance is generally meant to give credence to their simulation.’
[35] It appears that in some circles this, and particularly the statement that ‘If the purpose of the
transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law,
then it will be regarded as simulated’, has been understood to condemn as simulated transac-
tions any and all contractual arrangements that enable the parties to avoid tax or the operation
of some law seen as adverse to their interests.36 But that fails to read this sentence in the context
of both the particular paragraph in the judgment and the entire discussion of simulated transac-
tions that precedes it. If it meant that whole categories of transactions were to be condemned
without more, merely because they were motivated by a desire to avoid tax or the operation of
some law, that would be contrary to what Innes J said in Zandberg v Van Zyl in the concluding
sentence of the passage quoted above, namely that:
‘The inquiry, therefore, is in each case one of fact, for the right solution of which no general rule can be
laid down.’
That was manifestly not Lewis JA’s intention.
[37] . . . [T]he notion that NWK transforms our law in relation to simulated transactions, or
requires more of a court faced with a contention that a transaction is simulated than a careful
analysis of all matters surrounding the transaction, including its commercial purpose, if any, is
incorrect. The position remains that the court examines the transaction as a whole, including all
surrounding circumstances, any unusual features of the transaction and the manner in which
the parties intend to implement it, before determining in any particular case whether a transac-
tion is simulated.37

Notes
Wallis JA’s judgment is a welcome affirmation that the essence of a simulated transaction
is not that is has the effect of avoiding tax or that it lacks ‘commercial purpose’ – as some
passages in the NWK judgment seem to suggest – but rather that the essence of a simu-
lated transaction is (see para [27] of his judgment) is that it is not genuine and that if
the transaction is genuine, the court will give effect to it.

________________________

34 Paras 56 to 90.
35 Kilburn v Estate Kilburn 1931 AD 501 at 507.
36 Trevor Emslie SC ‘Simulated transactions – A new approach?’ (2011) 60 The Taxpayer 2 at 5-6; Eddie
Broomberg SC ‘NWK and Finders Hall’ (2011) 60 The Taxpayer 187 at 197-8; C J Pretorius ‘Simulated
agreements and commercial purpose – Commissioner for the South African Revenue Service v NWK
Ltd’ (2012) 75 THRHR 688 at 696; Andrew Hutchinson and Dale Hutchinson ‘Simulated transactions and
the fraus legis doctrine’ (2014) 131 SALJ 69.
37 This accords with the conclusion of Davis J in Bosch v CSARS 2013 (5) SA 130 (WCC) paras 78 to 92.
 Tax avoidance and evasion 703

§4 The doctrine of ‘fiscal nullity’

In the United Kingdom, the concept of ‘fiscal nullity’ connotes that where a contract has been entered
into for the purposes of tax avoidance, the revenue authorities have the power – at common law – to
treat the transaction as a nullity for tax purpose, in other words, to treat it as though it had never
been entered into, even though it remains contractually valid between the parties.

[359]
WT Ramsay v IRC
[1982] AC 300 (House of Lords)
For a fee, the appellants had purchased a ready-made scheme from a company specialis-
ing in advising on tax avoidance. The general nature of the scheme was to create two
assets, one of which would decrease in value for the benefit of the other. The decreasing
asset would be sold so as to create the desired loss; the increasing asset would be sold,
yielding a gain which it was hoped would be exempt from tax. The loss was intended to
match the gain and to be allowable as a deduction for capital gains tax purposes. The two
amounts were intended to cancel each other out. At the conclusion of the series of
operations, the taxpayer’s financial position would be precisely as it was at the beginning,
except that he had paid a fee and certain expenses to the promoter of the scheme.
The scheme consisted of a number of steps to be carried out, documents to be execut-
ed and payments to be made, according to a pre-arranged sequence.
It was common cause that the sole purpose of each scheme was the avoidance of tax.
On appeal to the House of Lords, the revenue authorities, while supporting the deci-
sion of the Court of Appeal in the court below, mounted a fundamental attack on the
whole of the scheme and (whilst conceding that this was a revolutionary argument)
averred that the steps in the scheme should be treated, fiscally, as a nullity, producing
neither a gain nor a loss.
The House of Lords held that the transactions in question had produced neither a
gain nor a loss, thus effectively holding that they were a fiscal nullity.
Lord Wilberforce
I think it opportune to restate some familiar principles and some of the leading decisions so as
to show the position we are now in.
A subject is only to be taxed upon clear words, not upon “intendment” or upon the “equity” of
an Act. Any taxing Act of Parliament is to be construed in accordance with this principle. What
are “clear words” is to be ascertained upon normal principles: these do not confine the courts to
literal interpretation. There may, indeed should, be considered the context and scheme of the
relevant Act as a whole, and its purpose may, indeed should, be regarded, (see IRC v Wesleyan
and General Assurance Society (1948) 30 TC 11, 16 per Lord Greene: Mangin v IRC [1971] AC 739,
746 per Lord Donovan. The relevant Act in these cases is the Finance Act 1965, the purpose of
which is to impose a tax on gains less allowable losses, arising from disposals.
A subject is entitled to arrange his affairs so as to reduce his liability to tax. The fact that the
motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment
so provides. It must be considered according to its legal effect.
It is for the fact-finding commissioners to find whether a document, or a transaction, is genuine
or a sham. In this context to say that a document or transaction is a “sham” means that while
professing to be one thing, it is in fact something different. To say that a document or transac-
tion is genuine, means that, in law, it is what it professes to be, and it does not mean anything
more than that. I shall return to this point. . . . …
Given that a document or transaction is genuine, the court cannot go behind it to some sup-
posed underlying substance. This is the well-known principle of IRC v Duke of Westminster [1936]
AC 1. This is a cardinal principle but it must not be overstated or overextended. While obliging
704 Income Tax in South Africa: Cases and Materials

the court to accept documents or transactions, found to be genuine, as such, it does not compel
the court to look at a document or a transaction in blinkers, isolated from any context to which
it properly belongs. If it can be seen that a document or transaction was intended to have effect
as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as
a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer
form to substance, or substance to form. It is the task of the court to ascertain the legal nature of
any transaction to which it is sought to attach a tax or a tax consequence and if that emerges
from a series or combination of transactions, intended to operate as such, it is that series or
combination which may be regarded. . . For the commissioners considering a particular case it is
wrong, and an unnecessary self-limitation, to regard themselves as precluded by their own find-
ing that documents or transactions are not “shams”, from considering what, as evidenced by the
documents themselves or by the manifested intentions of the parties, the relevant transaction is.
They are not, under the Westminster doctrine or any other authority, bound to consider individu-
ally each separate step in a composite transaction intended to be carried through as a
whole. . . Before I come to examination of the particular schemes in these cases, there is one
argument of a general character which needs serious consideration. For the taxpayers it was said
that to accept the Revenue’s wide contention involved a rejection of accepted and established
canons, and that if so general an attack upon schemes for tax avoidance as the Revenue suggests
is to be validated, that is a matter for Parliament. The function of the courts is to apply strictly
and correctly the legislation which Parliament has enacted: if the taxpayer escapes the charge, it
is for Parliament, if it disapproves of the result, to close the gap. General principles against tax
avoidance are, it was claimed, for Parliament to lay down. …

I have a full respect for the principles which have been stated but I do not consider that they
should exclude the approach for which the Crown contends. That does not introduce a new
principle: it would be to apply to new and sophisticated legal devices the undoubted power and
duty of the courts to determine their nature in law and to relate them to existing legislation.
While the techniques of tax avoidance progress and are technically improved, the courts are not
obliged to stand still. Such immobility must result either in loss of tax, to the prejudice of other
taxpayers, or to Parliamentary congestion or (most likely) to both. To force the courts to adopt,
in relation to closely integrated situations, a step by step, dissecting, approach which the parties
themselves may have negated; would be a denial rather than an affirmation of the true judicial
process. In each case the facts must be established, and a legal analysis made: legislation cannot
be required or even be desirable to enable the courts to arrive at a conclusion which corre-
sponds with the parties’ own intentions.

The Capital Gains Tax was created to operate in the real world, not that of make-belief. As I said
in Aberdeen Construction Group Ltd v IRC [1978] AC 885, it is a tax on gains (or I might have added
gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which
appears to arise at one stage in an indivisible process, and which is intended to be and is can-
celled out by a later stage, so that at the end of what was bought as, and planned as, a single con-
tinuous operation, is not such a loss (or gain) as the legislation is dealing with, is in my opinion
well and indeed essentially within the judicial function. …

Of this scheme, relevantly to the preceding discussion, the following can be said—

As the tax consultants’ letter explicitly states “the scheme is a pure tax avoidance scheme and has
no commercial justification in so far as there is no prospect of [the prospective taxpayer] making
a profit; indeed he is certain to make a loss representing the cost of undertaking the scheme”.

As stated by the tax consultants’ letter, and accepted by the special commissioners, every transac-
tion would be genuinely carried through and in fact be exactly what it purported to be.

It was reasonable to assume that all steps would, in practice, be carried out, but there was no
binding arrangement that they should. The nature of the scheme was such that once set in mo-
tion it would proceed through all its stages to completion.

The transactions regarded together, and as intended, were from the outset designed to produce
neither gain nor loss: in a phrase which has become current, they were self-cancelling. . . .
 Tax avoidance and evasion 705

The scheme was not designed, as a whole, to produce any result for the appellant or anyone else,
except the payment of certain fees for the scheme. Within a period of a few days, it was designed
to and did return the appellant except as above to the position from which it started.
The money needed for the various transactions was advanced by a finance house on terms which
ensured that it was used for the purposes of the scheme and would be returned on completion,
having moved in a circle.
On these facts it would be quite wrong, and a faulty analysis, to pick out, and stop at, the one
step in the combination which produced the loss, that being entirely dependent upon, and
merely a reflection of the gain. The true view, regarding the scheme as a whole, is to find that
there was neither gain nor loss, and I so conclude. . . I would dismiss this appeal.

Notes
No decision of the South African courts has to date held that the doctrine of fiscal nullity,
as put forward in the Ramsay decision, forms part of our common law. The concept of
‘fiscal nullity’ connotes that the revenue authorities have the power – at common law – to
treat a transaction as a nullity for tax purpose, in other words, to treat it as though it had
never been entered into, even though it remains contractually valid between the parties.
Although this is a doctrine peculiar to the United Kingdom, an extract from the deci-
sion in Ramsay is however included in this work for several reasons.
The first reason is the immense amount of discussion that the doctrine has evoked,
and the long debate as to what the decision in Ramsay actually decided. It has been
suggested, for example, that the decision is applicable only to tax-avoidance transactions
that include elements that are self-cancelling. It has also been suggested that the Ramsay
doctrine has no application to transactions that have ‘enduring legal consequences’ and
that such transactions cannot therefore be treated as fiscal nullity.38
Secondly, the incorporation of aspects of the Ramsay decision into the general anti-
avoidance provision in our own Income Tax Act. It will be recalled that s 103(1) (which
was repealed with effect from 2 November 2006) empowered the Commissioner, in
circumstances in which that provision applied, to treat the transaction in question as
though it had not been entered into – in essence, as being a fiscal nullity, as was envis-
aged in Ramsay. The new GAAR, contained in Part IIA of the Act, also empowers the
Commissioner (see s 80B); inter alia, to treat a transaction as though it had not been
entered into.
Thirdly, some of the language used by the Supreme Court of Appeal in [357] CSARS v
NWK Ltd 2011 (2) SA 67 (SCA) in relation to the lack of commercial substance and the
extinction of obligations by confusio in the transactions in question is reminiscent of the
language used in the Ramsay decision (which referred to the transactions there in issue
as having ‘no commercial justification’ and as being ‘self-cancelling’), although the
Supreme Court of Appeal nowhere acknowledges any debt to the fiscal nullity debate in
general, or to the Ramsay decision in particular. In contrast to the decision in Ramsay, the
Supreme Court of Appeal in NWK, while extremely critical of transactions that seek to
generate a tax benefit but incorporate elements that lack ‘commercial substance,’ did
not hold that such a transaction is, on that account alone, a fiscal nullity. Instead, the
Supreme Court of Appeal merely took the view that this characteristic pointed toward a
‘simulated’ transaction. Where a transaction is held to be simulated, the court does not
regard it as void, but merely gives effect to (and attaches the usual fiscal consequences
to) the real transaction.

________________________

38 As suggested by Vinelott J in the court below in Furniss v Dawson and referred to in the speech of Lord
Brightman in the House of Lords decision reported in [1984] AC 474, 2 WLR 226.
706 Income Tax in South Africa: Cases and Materials

The third reason why the fiscal nullity doctrine is of interest in a South African context
is that the new GAAR in Part IIA of the Income Tax Act employs a lack of commercial
substance as a criterion that, in combination with an objective sole or main purpose of
generating a tax benefit, will stamp the arrangement as an ‘impermissible avoidance
arrangement’, as envisaged in s 80A, which then triggers the Commissioner’s draconian
anti-avoidance powers in terms of s 80B.
The decision in Ramsay was not controversial in its view that a series of transactions,
particularly if they are pre-ordained, need not be looked at separately, but in combina-
tion – even if, taken separately, they are each a genuine transaction. The controversy lay
in the notion that the court can – without the sanction of Parliament – take it on itself to
treat transactions that had certain characteristics as a nullity for fiscal purposes. In this
regard, it must be borne in mind that the UK has no general anti-avoidance provision in
its income tax legislation, so any tax avoidance transaction that escapes the net of com-
mon law principles will succeed in its objective. Consequently, the courts in the UK have
felt pressure to expand the reach of the common law so as to provide an effective coun-
ter to modern tax schemes.
In his speech, Lord Wilberforce expressly denied that he was laying down any new
principle of law, and later commentators have echoed that he was merely laying down a
principle for the construction of tax legislation.

§5 Section 103(1) (now repealed) – the general anti-avoidance rule

Section 103(1) was repealed in 200639 (as was s 103(3) and s 103(7); s 103(4) was simul-
taneously amended) but remains applicable to any transaction entered into prior to
2 November 2006. Consequently, s 103(1) remains relevant in relation to tax avoidance
schemes involving transactions entered into prior to 2 November 2006.
With effect from 2 November 200640 a new general anti-avoidance rule (“GAAR”) was
inserted into the Income Tax Act41 as Part IIA of Chapter III, and the new provisions
apply to any arrangement or any steps in or part of an arrangement entered into on or
after that date.42
Some key provisions of the new GAAR have not been crafted from scratch, but borrow
from and incorporate elements of the now-repealed s 103(1), namely the concepts of a
transaction, operation or scheme,43 a sole or main purpose, abnormality of means or manner, and
the creation of rights and obligations that would not normally be created between persons dealing at
arm’s length.
Consequently, even under the new GAAR, case law on the interpretation of these con-
cepts, as determined by the courts in the context of s 103(1), will remain highly relevant.

§5.1 The elements of (the now repealed) s 103(1)

Prior to its repeal in 2006,44 as outlined above, section 103(1) – usually called ‘the gen-
eral anti-avoidance provision’ or ‘general anti-avoidance rule’ (“GAAR”) stated that:
‘Whenever the Commissioner is satisfied that any transaction, operation or scheme . . . including a trans-
action, operation or scheme involving the alienation of property –

________________________

39 Revenue Laws Amendment Act 20 of 2006 s 36(2).

40 See the Revenue Laws Amendment Act 20 of 2006 s 34(1).
41 58 of 1962.
42 Ibid s 34(2).
43 See s 80L sv ‘arrangement’.
44 Revenue Laws Amendment Act 20 of 2006 s 36(2).
 Tax avoidance and evasion 707

(a) has been entered into or carried out which has the effect of avoiding or postponing liability for the
payment of any tax, duty or levy imposed by this Act . . . or of reducing the amount thereof; and
(b) having regard to the circumstances under which the transaction, operation or scheme was entered
into or carried out –
(i) was entered into or carried out –
(aa) in the case of a transaction, operation or scheme in the context of business, in a manner
which would not normally be employed for bona fide business purposes, other than the
obtaining of a tax benefit; and
(bb) in the case of any other transaction, operation or scheme, being a transaction, operation
or scheme not falling within the provisions of item (aa), by means or in a manner which
would not normally be employed in the entering into or carrying out of a transaction,
operation or scheme of the nature of the transaction, operation or scheme in question;
or
(ii) has created rights or obligations which would not normally be created between persons dealing
at arm’s length under a transaction, operation or scheme of the nature of the transaction, opera-
tion or scheme in question; and
(c) was entered into or carried out solely or mainly for the purposes of obtaining a tax benefit the Com-
missioner shall determine the liability for any tax . . . imposed by this Act and the amount thereof, as
if the transaction, operation or scheme had not been entered into or carried out, or in such manner
as in the circumstances of the case he deems appropriate for the prevention or diminution of such
avoidance, postponement or reduction.’
Major elements in this provision are (a) the taxpayer’s purpose in entering into or carry-
ing out the scheme, and whether this was a sole or main purpose of obtaining a tax
benefit; and (b) abnormality in relation to the ‘means’ or ‘manner’ in which the transac-
tion, operation or scheme was carried out, and in relation to the rights and obligations
which were created.

§5.2 The requisite sole or main purpose (originally, this had to be a sole
or main purpose of avoiding tax, but a subsequent amendment required in-
stead a sole or main purpose of obtaining a tax benefit)
If the transaction, operation or scheme was not entered into for the sole or main purpose of avoiding
or postponing income tax or any other tax or duty imposed by the Income Tax Act or administered by
the Commissioner, section 103(1) is not applicable. The existence of such a test is a question of fact
and involves a subjective test.

[360]
SIR v Gallagher
1978 (2) SA 463 (A)
The taxpayer owned shares which were listed on the Johannesburg Stock Exchange. He
also held shares in a private investment company and had a claim on loan account
against the latter company. On 15 February 1968 he formed a company, SPH Holdings
(Pty) Ltd (‘SPH’), which had a capital of 1 000 R1 shares. On 27 February 1968 the
taxpayer formed three trusts, each of them for the benefit of one of his three children
and he donated to the three trusts all his shares in SPH. Consequently, the trustees of the
trusts held all the shares in SPH. On 27 February 1968 the taxpayer sold to SPH all his
shares in the public companies and the private investment company for a purchase price
of R740 000, being the current value of the shares, and this price remained as a debt to
the taxpayer, payable on demand.
The taxpayer had formed SPH and the trusts on the recommendation of an attorney
whom he had consulted for advice on how to save estate duty. The attorney, an expert on
trusts, told the taxpayer that these measures would bring about a substantial saving in
estate duty, but would not save much in income tax.
The Commissioner invoked s 103(1) and included in the taxpayer’s income the divi-
dends earned by SPH on the shares sold to it by the taxpayer.
708 Income Tax in South Africa: Cases and Materials

Issue: was the Commissioner empowered, in these circumstances, to act in terms of

s 103(1)?
Held: in the negative. The taxpayer had not had the purpose of avoiding income tax
but to avoid estate duty; the criterion for purpose was subjective, and s 103(1) was there-
fore inapplicable.
Corbett JA: [T]he various requisites which must co-exist in order to justify the Commissioner in
invoking his powers under [s 103(1)] were enumerated in SIR v Geustyn, Forsyth & Joubert.45 . . .
Section 103(4) also expressly makes any decision of the Secretary under, inter alia, s 103(1) sub-
ject to objection and appeal. The effect of this is that, although a major criterion prescribed by
s 103(1) is the ‘opinion of the Secretary’ . . . this does not debar the Special Court from re-
hearing the whole case and, if it so decides, substituting its own decision for that of the Secre-
tary. Any party dissatisfied with the decision of the Special Court thus given under s 103(4) may
then appeal in the usual way, with the necessary consent, to this Court on the ground that the
decision is ‘erroneous in law’. (See SIR v Geustyn, Forsyth and Joubert.)46
The sole issue . . . concerns . . . whether or not the avoidance, postpone or reduction of income
tax was the ‘sole purpose’ or ‘one of the main purposes’ of the scheme entered into by the respon-
dent.
It is submitted in the heads of argument of appellant’s counsel that, in determining the purpose
of a transaction, operation or scheme, an ‘objective’ test should be applied. By an objective test
in this context is evidently meant a test which has regard rather to the effect of the scheme, ob-
jectively viewed, as opposed to a ‘subjective’ test which takes as its criterion the purpose which
those carrying out the scheme intend to achieve by means of the scheme. Although appellant’s
counsel did not press this submission in argument before us, he did not abandon it. In the circum-
stances it is appropriate to state that, in my view, the test is undoubtedly a subjective one. This was
obviously the view of Ogilvie-Thompson CJ when he delivered the judgment of this Court in SIR
v Geustyn, Forsyth and Joubert;47 and in Glen Anil Development Corporation v SIR,48 Botha JA, relying
on Geustyn’s case, also adopted a subjective test in applying the analogous provisions of s 103(2)
of the Act. Section 103(1) draws a clear distinction between the ‘effect’ of a scheme and the
‘purpose’ thereof . . . and this virtually rules out an interpretation which seeks to give ‘purpose’
an objective connotation and to equate it, more or less, to ‘effect’.
If the subjective approach be adopted (as it must), then it is obvious that of prime importance in
determining the purpose of the scheme would be the evidence of respondent, the progenitor of
the scheme, as to why it was carried out.
...
The finding of the court a quo to the effect that avoidance, postponement or reduction of liabil-
ity for income tax was not one of the purposes, still less the sole or a ‘major’ (clearly meaning
thereby ‘main’) purpose of the scheme, is cardinal to the applicability of s 103(1). Consequently,
unless appellant can overcome this finding, he cannot possibly succeed in this appeal. Moreover,
49
the finding is manifestly one of fact (see SIR v Geustyn, Forsyth & Joubert; Glen Anil Development
50
Corporation v SIR) with the result that it is not subject to appeal except on the ground that there
was no evidence on which the finding could reasonably have been made. It is only upon this
ground, therefore, that the finding can be overcome by appellant.
...
Subject to one qualification the Court a quo accepted the respondent’s evidence, and more par-
ticularly that relating to the purpose of the scheme and his own state of mind in regard to the
scheme . . .
________________________

45 1971 (3) SA 567 (A) at 571E-H.

46 1971 (3) SA 567 (A) at 572A-D.
47 At 576G-H.
48 1975 (4) SA (A) at 730H.
49 1971 (3) SA 567 (A) at 576H.
50 1975 (4) SA 715 (A) at 730B.
 Tax avoidance and evasion 709

...
Having fully considered the respondent’s evidence, the Court a quo concluded:
‘We believe that in truth the appellant was advised, and accepted the advice, that the scheme would yield
little or no advantages in relation to income tax, and we consequently accept the evidence that the avoid-
ance, postponement or diminution of liability for income tax was not one of the purposes, still less the sole
or a major purpose of the operation which he thereupon undertook. It follows that in our view s 103 was
not applicable and the appeal must succeed.’
...
The finding of the Court a quo to the effect that the avoidance, postponement or reduction of
liability for income tax was not one of the purposes, still less the sole or a ‘major’ (clearly mean-
ing thereby ‘main’) purpose, of the scheme is cardinal to the applicability of s 103(1) of the Act.
Consequently, unless appellant can overcome this finding, he cannot possibly succeed in this
appeal. Moreover, the finding is manifestly a finding of fact (see Geustyn, Forsyth & Joubert,
supra;51 Glen Anil Development Corporation, supra,52 with the result that it is not subject to appeal
except on the ground that there was no evidence upon which the finding could reasonably have
been made.
The appeal is dismissed with costs, . . .
WESSELS JA, TROLLIP JA, MILLER JA and TRENGROVE AJA concurred.

Notes
During the tax years in issue in Gallagher, s 103(1) applied to schemes entered into for
the purpose of avoiding ‘the payment of any tax, duty or levy imposed by this Act’. Estate
duty was not imposed by the Income Tax Act. Hence the powers of the Commissioner
under s 103(1) could not be invoked where the purpose of the scheme was to avoid
estate duty. After the decision in Gallagher, s 103(1) was amended to make it extend to
schemes where the purpose was the avoidance of tax imposed by the Income Tax Act ‘or
by any other law administered by the Commissioner’.

A taxpayer is free, within the bounds of the anti-avoidance provisions of the Income Tax Act, to
minimise his tax liability. If the same commercial result can be achieved in different ways, he is free
to enter into the type of transaction which does not attract tax or attracts less tax. When determining
whether a taxpayer has succeeded in avoiding or reducing tax, a court gives effect to the true nature
and substance of the transaction and is not deceived by its mere form.

[361]
CIR v Conhage (Pty) Ltd (formerly Tycon (Pty) Ltd)
1999 (4) SA 1149 (SCA)
Two sets of agreements were entered into between the taxpayer and Firstcorp Merchant
Bank Ltd (‘Firstcorp’) for the sale and leaseback of some of the taxpayer’s manufacturing
plant and equipment. The taxpayer had required capital to expand its business and Firstcorp
had been prepared to make the funds available. Both parties had, however, been aware
that there were tax benefits to be gained from structuring the arrangement as a set of
sale and leaseback transactions and decided to follow that course instead of a simple loan.
The taxpayer sought to deduct the rentals paid in terms of the leasebacks as expend-
iture incurred in the production of income under s 11(a) of the Income Tax Act. The
Commissioner disallowed the deductions, contending that, despite the form of the
agreements, the taxpayer had not, in fact, intended to sell and lease back its equipment
________________________

51 At 576H.
52 At 730B.
710 Income Tax in South Africa: Cases and Materials

but had in substance borrowed the ‘purchase price’ of the equipment from Firstcorp,
and had only entered into a sale and leaseback in order to reduce tax liability. The
Commissioner also invoked s 103 of the Act, treating the taxpayer’s actions as an oper-
ation or scheme for the purpose of avoiding liability for or reducing tax.
The taxpayer contended that the purpose of the arrangement had been to obtain cap-
ital, not to reduce tax and, if the reduction of its tax liability could in any way be regarded
as a purpose of the transactions as envisaged by s 103(1) of the Act, then such had not
been the main purpose, and therefore that s 103 did not apply.
Issues: (a) Were the sale and lease back agreements ‘simulated transactions’ at com-
mon law? (b) Did the agreements fall foul of s 103(1)?
Held: in the negative. As to (a), the parties had intended the agreements to have effect
according to their tenor, and the agreements were therefore not simulated. As to (b),
the main purpose of the arrangement was to raise capital, not to avoid tax; hence,
s 103(1) did not apply.
Hefer JA:
[1] Within the bounds of any anti-avoidance provisions in the relevant legislation, a taxpayer
may minimise his tax liability by arranging his affairs in a suitable manner. If, for example,
the same commercial result can be achieved in different ways, he may enter into the type of
transaction which does not attract tax or attracts less tax. But, when it comes to considering
whether by doing so he has succeeded in avoiding or reducing the tax, the Court will give
effect to the true nature and substance of the transaction and will not be deceived by its
form. (Erf 3183/1 Ladysmith (Pty) Ltd v CIR.53)
[2] At issue in the present case is the true nature and substance of two sets of agreements be-
tween the taxpayer (‘Tycon’) and Firstcorp Merchant Bank Ltd (‘Firstcorp’). In form, each
set comprises a sale and leaseback of some of Tycon’s manufacturing plant and equipment.
The Commissioner’s contention is that the agreements are not what they purport to be.
The dispute arose when Tycon sought to deduct the rentals paid in terms of the leasebacks
as expenditure in the production of income under s 11(a) of the Income Tax Act. When
the Commissioner refused to allow the deductions and in addition invoked s 103 of the Act
. . . the first issue is the true nature and substance of the agreements. In the event of a find-
ing that they are indeed what they purport to be as the Special Court found, a further ques-
tion will be whether the Commissioner correctly invoked s 103.
The true nature of the agreements
[3] In broad terms the Commissioner’s contention is that, despite the form of the agreements,
Tycon did not sell and lease back its equipment, but in substance borrowed the ‘purchase
price’ from Firstcorp. [The Commissioner argued that] although Tycon and Firstcorp
might honestly have believed that it would be sufficient to go through the formality of
concluding that kind of agreement in order to procure tax benefits for themselves, they
had no real intention to enter into agreements of sale and leaseback . . .
[4] . . . In the present case, Tycon required capital to expand its business. Firstcorp was pre-
pared to make the funds available. Both parties were aware of the tax benefits to be gained
from sales and leasebacks and decided to follow that course. If they did not genuinely in-
tend ownership of the merx to pass upon signature of the agreement as each agreement
of sale stipulated, the agreements would have been simulations and could only have been
signed with the object of deceiving the Commissioner. The conclusion that this would in-
deed be a case of fraus legis cannot be avoided.
[5] . . . The real point of [the Commissioner’s submission] is that neither Tycon nor Firstcorp
actually intended to enter into agreements of sale and leaseback. [After discussing the ev-
idence, the judgement proceeds:] All this goes to show that the parties were not merely
going through the motions of concluding agreements. And if they were not, the very
foundation of the submission crumbles.
________________________

53 1996 (3) SA 942 (A) at 950I-952C.

 Tax avoidance and evasion 711

[6] – [8] . . .
[9] The fact of the matter is that the evidence that the parties had every intention of entering
into agreements of sale and leaseback and of putting the agreements into effect was not
contradicted . . . Mr Rubens referred us to certain provisions of the agreements which, he
submitted, are not usually found in agreements of sale and agreements of lease and mili-
tate against an intention to buy and sell and to lease back . . . If we were to look at the
agreement of sale separately this would be a valid point, but, viewed in the context of the
whole transaction, the argument loses its sting . . . All in all the transactions made perfect-
ly good business sense.
[10] In my view, the Special Court was correct in deciding the first issue in Tycon’s favour.
Did the Commissioner correctly invoke s 103?
[11] Although s 103 was no doubt designed to enable the Commissioner to deal effectively with
tax avoidance schemes, it operates only in the circumstances stipulated in the section it-
self. As Watermeyer CJ observed in CIR v King:54
‘. . . if a transaction is covered by the terms of the section its provisions come into operation, if it is
not then its provisions cannot be applied’.
Broadly speaking, the section empowers the Commissioner to determine a taxpayer’s
liability for income tax and other taxes by disregarding any abnormal transaction which
the latter has entered into for the purpose of avoiding or postponing his tax liability or
reducing the amount thereof. I need not list all the requirements that must co-exist before
the power may be exercised because we are only concerned with the abnormality require-
ment and the purpose requirement. A transaction is regarded as abnormal if it was en-
tered into or carried out by means or in a manner which would not normally be employed
in the entering into or carrying out of a transaction of the nature of the transaction in
question; or has created rights or obligations which would not normally be created be-
tween persons dealing at arm’s length under a transaction of the nature of the transaction
in question. An abnormal transaction may be disregarded if it was entered into or carried
out solely or mainly for the purposes of the avoidance or the postponement of liability for
the payment of any tax or the reduction of the amount of such liability.
[12] From the judgment in SIR v Geustyn, Forsyth & Joubert55 and other reported judgments of
this Court the following emerges:
(a) Although the Commissioner may invoke the section whenever he is satisfied of
the presence of its requirements, a Special Court may re-hear the whole case and, if
necessary, substitute its own decision for that of the Commissioner. When Geustyn was
decided appeals against decisions of Special Courts were limited to questions of law.
The Act has since been amended to do away with this limitation and this Court may
now exercise the same powers as a Special Court.
(b) The effect, purpose and normality of a transaction are essentially questions of fact.
The onus is on the Commissioner to prove that its effect was to avoid or postpone the
liability for tax or to reduce the amount thereof. Upon proof that this was the case it
is presumed (in terms of ss (4)) that the effect of the transaction was also its sole or
main purpose.
(c) What has to be determined in every case is the subjective purpose of the taxpayer.
[13] In the present case the Special Court found that the Commissioner had not established
the abnormality of the sales and leasebacks and that Tycon had established the absence of
the purpose requirement. Both findings were attacked in this Court, but a decision in
Tycon’s favour on either will dispose of the appeal. I proceed to deal with the purpose of
the transactions.
[14] The enquiry is limited to a single question. I have already mentioned that Firstcorp was
prepared to make the capital available which Tycon needed to expand its business. The

________________________

54 1947 (2) SA 196 (A) at 209.

55 1971 (3) SA 567 (A) at 571E-H.
712 Income Tax in South Africa: Cases and Materials

financing could be structured either as a loan or as a sale and leaseback; but from an in-
come tax point of view the latter was preferable and mainly for this reason Tycon decided
on a sale and leaseback. The Commissioner’s contention is that this is all that counts; the
sole purpose of the transaction was to reduce the company’s tax liability; and it matters
not that Tycon needed the capital to finance its expansion programme. Tycon’s argument
is precisely the opposite: the purpose of the whole exercise was to obtain capital, not to
reduce tax; and if the reduction of its tax liability can be regarded as a purpose of the
transactions as envisaged in s 103 at all, it was not the main purpose.
[15] I share the Special Court’s view that the agreements of sale and leaseback served the dual
purpose of providing Tycon with capital and to take advantage of the tax benefits to be
derived from that type of transaction. The following passage in the Court’s judgment neat-
ly describes the situation:
‘[The raising of finance] was the fons et origo of the transactions and it remained the underlying
and basic purpose thereof . . . . [T]his whole arrangement . . . was to achieve the predominant
purpose of raising finance but, because of the welcome by-product of the tax benefit, the vehicles
chosen were the sale and leaseback transactions.’
It is submitted on behalf of the Commissioner that the only reason why sales and leasebacks were
preferred to a straightforward loan was that a loan would not bring about such advantageous tax
deductions. This is not entirely correct because there were other commercial reasons too. But,
even if the particular type of transaction was chosen solely for the tax benefits, it would be wrong
to ignore the fact that, had Tycon not needed capital, there would not have been any transaction
at all. Tycon did not approach Firstcorp in order to alleviate its tax burden; it did so because it
was in need of capital and this plainly remained the main purpose of the transactions. . . .
I conclude therefore that the Special Court correctly found in Tycon’s favour on the second
issue as well.
The appeal is accordingly dismissed . . .
MAHOMED CJ, OLIVIER JA, FARLAM AJA and MADLANGA AJA concurred.

Notes
In this case, the taxpayer needed capital. It could raise this either by way of a straight-
forward loan, or through a sale and leaseback arrangement with a bank. It elected the
latter, because it held tax advantages over the former.
At common law, the Commissioner could only impeach the agreements if they were
simulated, in other words, if the parties did not intend the agreements to have effect
according to their tenor (ie if the parties did not honestly intend to give effect to what
the agreements said). On appeal, the court held that the parties did intend to give effect
to the agreements according to their tenor. (Compare Erf Ladysmith 56 and Relier 57 where it
was held that the agreements were simulated because the parties did not intend the
agreements to have effect according to their tenor.)
In terms of s 103(1), the Commissioner can invoke his powers under that section only
if the agreements were entered into for the main purpose of tax avoidance, and if they
were ‘abnormal’ in the sense contemplated in s 103(1).
The court held that the taxpayer’s main purpose in entering into the agreements was
to raise capital. Consequently, an essential element of s 103(1) was lacking, and the
section was not applicable.
§5.3 Abnormality of the rights or obligations created, or of the means
or manner in which the scheme was entered into or carried out
It is abnormal, within the meaning of s 103(1), for a person to arrange for the fruits of his labours
to accrue to someone else. If this is done for the purpose of avoiding tax, it will infringe s 103(1).
________________________

56 Erf 3183/1 Ladysmith (Pty) Ltd v CIR 1996 (3) SA 942 (A), 58 SATC 229.
57 Relier (Pty) Ltd v CIR 60 SATC 1 (SCA).
 Tax avoidance and evasion 713

[362]
Meyerowitz v CIR
1963 (3) SA 863 (A), 25 SATC 287
The taxpayer was the author of two legal textbooks, published by Juta and Co Ltd. After
paying Juta’s the costs of publication, the profits were shared between the taxpayer and
Juta’s. The taxpayer was also the co-author, with two other persons (Silke and Spiro) of
The Taxpayer, a monthly journal. This journal was published by a company, The Taxpayer
(Pty) Ltd, formed by these three persons in March 1952 to limit their liability should the
venture fail. The company concluded a similar contract with Juta’s in April 1952 to
publish the journal.
At the same time as he incorporated The Taxpayer (Pty) Ltd to publish the journal,
the taxpayer formed a second company, Visandra (Pty) Ltd, to take over his interests in
the textbooks. He and his wife were the only shareholders. In 1952 the taxpayer ceded to
Visandra (Pty) Ltd for no consideration all his right, title and interest in and to the two
textbooks and his contract with Juta’s concerning them.
Later the same year, the Meyerowitz Trust was formed in favour of the taxpayer’s chil-
dren. In 1952, and for a consideration of £75, Visandra (Pty) Ltd ceded to the
Meyerowitz Trust all its right, title and interest in and to the taxpayer’s two textbooks and
his contracts with Juta’s concerning them.
In October 1952 a partnership called ‘Legal Publications’ was formed between Spiro,
the Meyerowitz Trust and the Silke Trust for the purpose of carrying on business as
publishers. In 1952 the partnership acquired the rights of The Taxpayer (Pty) Ltd for
£32-3s-5d. From that point the partnership took over the production of The Taxpayer, and
Juta’s continued to publish it as before, and paid the taxpayer, Silke and Spiro editorial
fees of £200, £300 and £305 per annum respectively.
In his income tax return for the years ending on 30 June 1959 and 1960 respectively,
the taxpayer included his editorial fees in his income; he did not include any profits
from the sale of the textbooks or income derived from The Taxpayer, which were instead
reflected as income of the Meyerowitz Trust.
The Commissioner, professing to act in terms of s 90 of the Act (the predecessor of
s 103) included in the taxpayer’s income the amounts disclosed by the Trust as its in-
come. The assessment was upheld by the Special Court. The taxpayer appealed on the
ground that there was no evidence on which the Special Court was entitled to conclude
that the various transactions amounted to a ‘scheme’ within the meaning of s 90.
Issue: was the formation of The Taxpayer (Pty) Ltd, Visandra (Pty) Ltd and the
Meyerowitz Trust a tax avoidance scheme within the scope of s 103(1)?
Held: in the affirmative. Although The Taxpayer (Pty) Ltd had not initially been
formed for tax avoidance, it was later used for the purpose of a tax avoidance scheme,
involving the abnormality that the fruit of the taxpayer’s labour accrued not to him, but
to his children. The Commissioner was therefore entitled, under s 103(1), to ignore the
existence of that company, as well as other entities created by the taxpayer for that
purpose, and to tax the income in the hands of the taxpayer personally.
Beyers JA: [The judge referred to the taxpayer’s evidence that channelling the income through
The Taxpayer (Pty) Ltd would have prejudiced Spiro, because Spiro’s personal rate of tax was
less than the company’s rate of tax. Spiro had suggested that The Taxpayer ought to be taken
out of the hands of the company and be run by a partnership between Meyerowitz, Silke and
Spiro. The taxpayer did not think that he ought to make his minor children partners of Spiro, so
he asked his father to create a trust which could then enter into a partnership with Spiro. This
was duly done.]
714 Income Tax in South Africa: Cases and Materials

Had he [the taxpayer] entered into the partnership [with Spiro] there could have been no objec-
tion. He would, as a partner, have continued to receive the fruits of his labour. But he went fur-
ther and introduced the Trust as a partner in his stead, with the result that, although as co-editor
of The Taxpayer, he continued to spend his time, energy and skill in producing the magazine, the
income from that source did not come his way. It went instead to the Trust, the beneficiaries of
which had no part in its production . . .
The position with regard to the appellant’s book was similar . . .
It was quite in order for the appellant to arrange that the fruits of his labour in this field should
go to Visandra. He and his wife were the only shareholders in the company; the income would
have accrued to them jointly; and he would have been liable to tax on the whole of it. However,
this income was also diverted to the Trust, with the result that the Trust in this instance also re-
ceived income which was in its entirety the product of the appellant’s labours.
It was to prevent the avoidance of tax liability by assigning income in this manner that s 90 was
enacted – see the judgment of Watermeyer CJ in CIR v King.58 Schreiner JA, dealing with the
section as it was then worded, stated its effect in these words:59
‘Now normally and naturally the owner of an income-producing asset receives the income and the
labourer receives the reward of his labour. Any departure from this order of things, if done with the
object of prejudicing the fiscus, is the subject of legitimate objection by the Commissioner, which is met
by the machinery of the section. In such cases, and in my view in such cases alone, it can be said that
the Commissioner is seeking to tax the taxpayer on what is “in reality his income”, to use the expression
employed by the Chief Justice. It is in reality his income because it should have accrued to him, and it
can only be said that it should have accrued to him if it was the fruit of his capital or of his labour or
both.’
As I shall point out later s 90 has since been amended, and its scope enlarged, by Act 78 of 1959.
It is possible that the formation of Visandra and the cession to it of the appellant’s interests in
his books were not comprehended in the scheme at the time when these transactions were en-
tered into. But however adventitious these circumstances may be, it seems to me that once they
are pressed into the service of the scheme they become part and parcel of it. I would like, in this
connection, to quote with approval what Donovan LJ says in Crossland (Inspector of Taxes) v
Hawkins.60 The case is in many respects similar to the present one, and his remarks are particu-
larly apposite. He says:61
‘I do not think that the language of s 397 requires that the whole of the eventual arrangement must be in
contemplation from the very outset . . .’
In the judgment of the Special Court, Watermeyer J after listing the transactions entered into by
the appellant with regard to his books, goes on to say
‘As a result of this series of transactions the income which the appellant would have received for his work
and labour was transferred to his children, and the effect of the transactions was to avoid liability by the
appellant for tax on that income . . . The word “scheme” is a wide term and I think that there can be little
doubt that it is sufficiently wide to cover a series of transactions such as those mentioned above.’
I agree with this conclusion.
The Special Court came to a similar conclusion regarding the series of transactions involving The
Taxpayer. With this I also agree.
Counsel for the appellant submitted that in the case of The Taxpayer the effect of the transactions
was to avoid an accrual of income, not to the appellant, but to the Taxpayer company. The appel-
lant had divested himself entirely of the income-producing asset, and from the outset the in-
come from that source accrued to the Trust, as one of the partners in ‘Legal Publications’. It was
never the appellant’s income. The reply to this, on behalf of the Commissioner, was that ‘Legal
Publications’ was not a partnership in the true sense of the word, but something quite abnormal,
consisting in the main of ‘partners’ who were trusts created for the benefit of minor children.
The income of the Meyerowitz Trust was in its entirety the product of the appellant’s personal
________________________

58 1947 (2) SA 196 (A) at 210 and 212.

59 At 216.
60 1961 (2) All ER 812.
61 At 817.
 Tax avoidance and evasion 715

labours. The Commissioner was therefore entitled to regard that income as having been diverted
by means of an artificial manoeuvre from the appellant himself to his minor children. In my view
this is a correct appraisal of the situation and effectively disposes of the argument on behalf of
the appellant.
...
It was submitted in support of the judgment that the power which s 90 confers on the Commis-
sioner is to ‘annihilate’ only so much of the scheme as is objectionable. This was the interpret-
ation given by the Privy Council, in Newton and Others v COT 62 to the provisions of a section in the
Australian Income Tax Act which renders ‘absolutely void as against the Commissioner’ any
arrangement which has the effect of avoiding liability for tax . . . It should be pointed out that s
90, since its amendment in 1959, is couched in far wider terms than its Australian counterpart.
Not only is the Commissioner entitled to determine the liability to tax ‘as if the transaction, op-
eration or scheme had not been entered into or carried out’, but he may also, since the amend-
ment, do so ‘in such manner as in the circumstances of the case he deems appropriate for the
prevention or diminution of such avoidance, postponement or reduction’. While Newton’s case
may afford some guidance . . . it has no bearing on the words which confer this additional power
on the Commissioner.
In my opinion the Commissioner was entitled to ignore completely ‘The Taxpayer (Pty) Ltd’. It
is true that the Special Court found that when it was formed there was no purpose of tax avoid-
ance. But although it may have come upon the scene with good intentions, it ceased almost at
once to be an innocent bystander. It became a party to the scheme when it ceded its only asset to
the partnership: it was essential to the scheme that it should do so. I must confess that I can see
no real distinction between the role played by the Taxpayer company in this scheme of things
and the role played by Visandra in the other scheme. The company died, as it were, in the ser-
vice of the scheme and it seems to me to be illogical to hold that the Commissioner ought not to
have ignored the company but ought to have resurrected it for the purpose of determining the
appellant’s liability to tax. To now seek to re-invest the company with the income from The Tax-
payer is to imply – contrary to the finding of the Special Court – that the cession of its rights to
the partnership was a legitimate transaction and played no part in the avoidance-of-tax scheme.
In any event I consider that it was at least appropriate ‘in the circumstances of the case’ for the
Commissioner to have taxed the income from The Taxpayer in the hands of the person to whom
it in reality belonged. To restore the company notionally to the register and then to attribute to it a
notional income would in these circumstances be an extremely artificial and unrealistic manner
of determining the appellant’s liability to tax. I cannot think that s 90 intended such a result.
The appeal is therefore dismissed with costs . . .
VAN BLERK JA, OGILVIE-THOMPSON JA, WILLIAMSON JA, and HOEXTER AJA concurred.

Notes
What the taxpayer had tried to do was to divest himself of the considerable royalties
generated by his writing in such a way that his children received the income and paid less
tax on it than he would have done.
Once the court had found that the taxpayer had a sole or main purpose of tax avoid-
ance, the question was whether the formation or operation of various legal entities – the
Taxpayer (Pty) Ltd, Visandra (Pty) Ltd and the Meyerowitz Trust – were ‘abnormal’ in
regard to the rights and obligations created or the means or manner of carrying them
out. The court found that there was indeed abnormality; the essence of the abnormality
was that ‘normally and naturally the owner of an income-producing asset receives the
income and the labourer receives the reward of his labour’.
Once this was established, the question was – how many of the aforementioned legal
entities which the taxpayer had interposed between himself and his children could be
________________________

62 1958 (2) All ER 759.

716 Income Tax in South Africa: Cases and Materials

ignored by the Commissioner in terms of his powers under s 103(1)? The taxpayer argued
that the first entity he had formed, namely The Taxpayer (Pty) Ltd, had not been formed
for the purpose of tax avoidance, but for the commercial reason of protecting him from
personal liability if the venture failed, and therefore that this company was not part of any
later ‘scheme’. The Special Court accepted that the taxpayer had not formed this company
for tax avoidance purposes. Nevertheless, the Appellate Division held that that this compa-
ny ‘ceased almost at once to be an innocent bystander. It became a party to the scheme . . .’
and therefore the Commissioner was entitled to ignore its existence.63 (The company’s fatal
error seems to have been that it ceded its only asset – its rights under the contract with
Juta’s – for a derisory sum to the partnership and thereby ‘died in the service of the
scheme’.) The court held that the Commissioner was therefore entitled to ignore the
existence of The Taxpayer (Pty) Ltd and tax the income from royalties ‘in the hands of the
person to whom it in reality belonged’, namely the taxpayer.64
This decision shows that if a taxpayer enters into a transaction, without any purpose of
tax avoidance and without any ‘abnormality’, the transaction can nevertheless be at-
tacked by the Commissioner under s 103(1) if it later becomes a party to a scheme.

§6 Section 103(1) does not apply unless there was the requisite sole
or main purpose and, in addition, the requisite abnormality; one
without the other does not suffice
Where persons incorporate their business and their sole or main purpose for doing so was not the
avoidance of tax, s 103(1) is not applicable, even if the transaction was ‘abnormal’.

[363]
SIR v Geustyn, Forsyth & Joubert
1971 (3) SA 567 (A)
From 1961 onwards Geustyn, Forsyth and Joubert practised in partnership as consulting
engineers. The practice expanded fast, and by May 1966 employed a staff of 60, includ-
ing 17 engineers. The partners decided to form a company to take over the partnership
business. On 25 May 1966 the respondent company was incorporated, and took over the
assets and liabilities of the partnership as at that date. In addition the company agreed to
pay the partnership R240 000 for goodwill, and to employ the three partners at a salary
of R10 000 each. All the shares in the company were issued to the three former partners
equally, and they became the sole directors. The amount of R240 000 in respect of good-
will was credited to their loan accounts. No service agreements were entered into
between the company and the former partners.
Issue: on the facts, were the elements of s 103(1) present?
Held: in the negative. Assuming, without deciding, that the transaction was indeed ‘ab-
normal’, the taxpayer had proved that tax avoidance was not the sole or main purpose,
and s 103(1) therefore did not apply.
Ogilvie-Thompson CJ: To warrant a determination by the Secretary of liability for tax in terms of
s 103(1), there must be established:
(a) a transaction, operation or scheme entered into or carried out;
(b) which has the effect of avoiding or postponing liability for tax on income or reducing the amount
thereof; and which
(c) in the opinion of the Secretary, having regard to the circumstances under which the transaction, opera-
tion or scheme was entered into or carried out, –
________________________

63 1963 (3) SA 863 (A) at 875.

64 Ibid.
 Tax avoidance and evasion 717

(i) was entered into or carried out by means or in a manner which would not normally be em-
ployed in the entering into or carrying out of a transaction, operation or scheme of the nature
of the transaction, operation or scheme in question; or
(ii) has created rights or obligations which would not normally be created between persons
dealing at arm’s length under a transaction, operation or scheme of the nature of the transaction, operation or
scheme in question; and that
(d) the avoidance, postponement or reduction of the amount of such liability was, in the opinion of the Sec-
retary, the sole or one of the main purposes of the transaction, operation or scheme . . .
Difficulty not infrequently arises in differentiating between questions of fact and questions of
law; . . . [A]ny party seeking to set aside the decision of a Special Court given under s 103(4) of
the Act must show that decision to be ‘erroneous in law’. Consequently . . . he can only succeed
if he shows that the Special Court’s conclusion is one which could not reasonably have been
reached . . .
It is common cause that on the facts of the present case the first two requisites – ie those lettered
65
(a) and (b) supra – of s 103(1) of the Act are established (see Smith v CIR). In submitting that
the only reasonable conclusion to be drawn from the facts is that the third of the above-
mentioned requisites is also established, counsel for the Secretary criticised the formation of a
company by the partners and pointed to various features of the case, more especially the follow-
ing: the disparity between the partnership’s earnings and the salary of R10 000 pa which each of
the partners accepted from the respondent; the R240 000 goodwill; the absence of any security
therefor or of any stipulation governing payment at any particular time; the absence of any ser-
vice contracts binding the former partners to continue to work for respondent. The cumulative
effect of these considerations is such – so the submission ran – as irresistibly to reveal the trans-
action in issue as being both abnormal in terms of s 103(1)(i) and establishing rights or oblig-
ations which ‘would not normally be created between persons dealing at arm’s length’ within the
meaning of those words as they appear in s 103(1)(ii) of the Act.
Generally speaking, there is nothing abnormal in transferring an existing partnership business
to a company: indeed, such a transaction may, I think, fairly be regarded as relatively common-
place in the commercial world. That professional men carrying on their profession in partner-
ship should transfer their practice to an unlimited company may no doubt at first sight appear to
be somewhat extraordinary. In the present case, however, the undisputed facts place a different
complexion on the matter. Not only has the South African Association of Consulting Engineers
– of which, as already mentioned, the afore-named three erstwhile partners are members – ex-
pressly sanctioned its members forming unlimited companies to conduct their practices, but
more than half the Association’s membership has already adopted that form of practice. Similar-
ly, it is said that more than half of the twenty-eight known non-members of the Association who
are practising as consulting engineers are at present registered companies . . . Moreover, the
stated case shows that the erstwhile partners regarded as considerable the advantages to be de-
rived from incorporation, as contrasted with partnership which was liable to dissolution conse-
quent upon death, resignation and the like. Such advantages inter alia embraced the facility of
participation in consortiums of engineers engaged upon large projects, the ability to increase
the participation in profits by qualified engineer-employees while, at the same time, eliminating
the necessity to restrict the number of partners to the legal limit of twenty . . . The figure of
R240 000 for goodwill was arrived at by aggregating three years’ profits, a computation which, in
itself, is not criticised by the Secretary. The absence both of any security furnished by respondent
and of any service contracts binding the erstwhile partners to continue to work for respondent is
explicable by reason of the inherent circumstances that the aforenamed erstwhile partners made
over their practice to respondent, of which they remained in full control.
Having regard to the various considerations indicated in the preceding paragraph hereof, a
conclusion that the transaction in issue was not abnormal within the meaning of s 103(1)(i) is
not, in my judgment, a conclusion which could not reasonably be reached by the Special Court.
Whether the same can rightly be said to obtain in relation to s 103(1)(ii) of the Act presents
more difficulty. Section 103(1) is couched in very comprehensive terms, but, in forming his
________________________

65 1964 (1) SA 324 (A) at 333E.

718 Income Tax in South Africa: Cases and Materials

opinion in relation to sub-paras (i) and (ii) of the section, the Secretary is required to have
regard
‘to the circumstances under which the transaction, operation or scheme was entered into or carried out.’
The criterion of ‘persons dealing at arm’s length’ mentioned in s 103(1)(ii) is, however, not easy of
application in a case such as the present. For the section enjoins the application of that criterion in
relation to a transaction, operation or scheme ‘of the nature of the transaction, operation or
scheme in question’. Yet the Court is in the present case ex hypothesi concerned with partners who
have, in the circumstances outlined above, made over their practice, not to an independent third
party with whom they would ordinarily deal ‘at arm’s length’, but to an unlimited company of
which they are the sole shareholders and directors and whereof they have full and complete con-
trol. However, inasmuch as it is not essential for the decision of this case to pronounce upon this
particular aspect of the matter (which was not exhaustively argued before us), I prefer to express
no conclusion upon the point. I shall accordingly assume, without deciding, in favour of the Sec-
retary that, despite the Special Court’s afore-cited conclusion that the transaction was ‘not abnormal
as contemplated by s 103 of the Act’, it erred in law in not finding that the transaction in issue
‘created rights or obligations which would not normally be created between persons dealing at arm’s
length’
within the meaning of those words as the occur in s 103(1)(ii) of the Act.
Notwithstanding this assumption, the appeal can only succeed if it be shown that the Special
Court could not reasonably have concluded that the fourth requirement of s 103 of the Act viz
that the avoidance, postponement or reduction of tax ‘was the sole or one of the main purposes
of the transaction’) had not been established. In this regard the Secretary is, as already men-
tioned, greatly aided by the presumption created by s 103(4) for, inasmuch as it is common
cause that the transaction in issue would result in the avoidance, postponement or reduction of
liability for tax, there was thus an onus upon respondent to prove the contrary to the Special
Court . . .
...
. . . While it may well be that ‘effect’ and ‘result’ as respectively used in sub-secs (1) and (4) of
s 103 of the Act have the same meaning, it is clear that the former sub-section distinguishes be-
tween ‘effect’ and ‘purpose’. The vital inquiry on this part of the case relates to the question of
whether or not avoidance, postponement or reduction of tax was ‘the sole or one of the main
purposes’ of the conversion of the partnership into a company. The intent or purpose which any
particular transaction is entered into is a question of fact (see CIR v Richmond Estates (Pty) Ltd;66
SIR v Cadac Engineering, supra,67 . . .) As indicated earlier in this judgment, there existed various
reasons, quite unrelated to the incidence of tax, in favour of converting the partnership into a
company . . . Under those circumstances, it is not possible for this Court to say that the conclu-
sion reached by the Special Court that tax avoidance was ‘not a factor which was taken into consid-
eration’ in converting the partnership into a company is a conclusion which could not reason-
ably be reached by it. It follows that this Court cannot disturb the judgment of the Special Court.
For the aforegoing reasons, the appeal is dismissed . . .
HOLMES JA, JANSEN JA, RABIE JA, and CORBETT AJA concurred.

Notes
This was the first test case on the question whether the incorporation of professional
practices could fall foul of s 103(1). For many years, the professions had prohibited their
members from incorporating their practices; they had to operate in a one-man practice or
else in partnership, but were not permitted to practise as a company. Then, in 1968, the
Companies Act was amended by the enactment of s 53(b) which allowed for a new category
of company especially designed to overcome the objections to professionals’ practising as a

________________________

66 1956 (1) SA 602 (A) at 606-607.

67 At 520A.
 Tax avoidance and evasion 719

company. In a s 53(b) company, its members enjoy all the benefits of incorporation except
that of limited liability; its directors are personally liable for the company’s debts.
When professional partnerships were first permitted to form s 53(b) companies, it was
uncertain whether their formation could be attacked by the Commissioner under
s 103(1), since there were substantial income tax advantages in conducting a professional
practice as a company rather than a partnership. Hence, a sole or main purpose of tax
avoidance – one of the requisites of s 103(1) – might well be present. This would be a
question of fact in each case, and it is important to note that, in terms of s 103(4), if the
Commissioner proves that the transaction operation or scheme has the effect of avoiding
tax, a sole or main purpose of tax avoidance is presumed, unless the taxpayer proves
otherwise. In Geustyn, Forsyth & Joubert, the taxpayers were able to show that their main
purpose in incorporating their practice was not to avoid tax, but to gain the commercial
advantages associated with incorporation.
If the taxpayer had the requisite purpose of tax avoidance, the next issue would be
whether the sale of the business from the partnership to the company could fall foul of
the ‘abnormality’ test in s 103(1)(b). The usual terms of such a contract – such as the
terms set out in the judgment in Geustyn, Forsyth & Joubert – are, on their face, not nor-
mally found in an arms-length sale of a business. The question confronting the court was
how ‘abnormality’ was to be judged, and in particular how the ‘arms-length’ test in
s 103(1)(b)(ii) was to be applied, where the erstwhile partners and the new s 53(b)
company were not, in fact, at arms-length. This question was left open in Geustyn, Forsyth
& Joubert, and was dealt with by the Appellate Division in the later case of [365] Louw.
In Geustyn, Forsyth & Joubert the court assumed, without deciding, that the transaction
was indeed ‘abnormal’, but held that the taxpayer had proved that tax avoidance was not
the sole or main purpose, and therefore s 103(1) did not apply. That decision therefore
illustrates that, no matter how ‘abnormal’ a transaction may be, it escapes s 103(1) if
there was not a sole or main purpose of tax avoidance. Conversely – as [364] Hicklin
made clear – even if a taxpayer has a sole or main purpose of tax avoidance, his transac-
tion will escape s 103(1) if it is not ‘abnormal’ within the meaning of that section.
Note that this case was decided under s 86 in terms of which there was no appeal against
a decision of the special court on a question of fact; an appeal lay only on a question of law.
A finding by the special court on a question of fact could be overturned on appeal only if
the decision of the special court was one which could not reasonably have been reached.
The mere fact that the appeal court disagreed with the special court’s finding of fact was
not sufficient. Section 86 A applied to judgments of the special court given before
8 October 1976, and s 86 to those given on or after that date. Under s 86A there is a full
right of appeal on matters of both law and fact. Hicklin, below, was decided under s 86A.

Section 103(1) does not apply to a transaction entered into for the sole or main purpose of tax
avoidance if the transaction was not ‘abnormal’.

[364]
Hicklin v SIR
1980 (1) SA 481 (A)
Hicklin and others were directors and shareholders of Reklame Bestuur (Edms) Bpk
(‘Reklame’). By 1 March 1967 it had accumulated undistributed profits of some R97 000,
which were not subject to undistributed profits tax as they fell under a statutory exemp-
tion. Hicklin and his co-directors did not want to distribute these profits as dividends, as
their shareholders would have been liable to tax on such dividends. A third party, Ryan
Nigel Corporation Ltd (‘Ryan Nigel’), was on the look-out for companies with large
720 Income Tax in South Africa: Cases and Materials

undistributed profits in order to carry out dividend-stripping68 on these companies. An

agreement was concluded (‘the RN agreement’) whereby the members of Reklame sold
their shares in that company to Ryan Nigel. As a result of the agreement, the control of
Reklame passed out of the hands of Hicklin and his associates to Ryan Nigel. The Special
Court found that Hicklin had been a party to Ryan Nigel’s dividend-stripping operation in
relation to Reklame. The Special Court, relying on s 103, assessed Hicklin and his associ-
ates as though they, and not Ryan Nigel, had received Reklame’s distributable profits.
Issue: was the Commissioner entitled to apply s 103(1) to the loan to Hicklin of
Reklame’s profits, and the sale of Hicklin’s shares to Ryan Nigel?
Held: section 103(1) was not applicable; even if Hicklin had the sole or main purpose
of tax avoidance, the loan of the profits and the sale of the shares was not ‘abnormal’.
Trollip JA: The four requirements of s 103(1) that have to be fulfilled before its provisions can
be invoked by the respondent are conveniently summarized as (a), (b), (c) and (d) in Geustyn’s
case69 and Gallagher’s case.70 According to those decisions, although the application of the provi-
sions of s 103(1) is made dependent initially upon ‘the opinion of the Secretary’, the Special
Court may re-hear the whole case and either uphold that opinion or overrule it and substitute its
own opinion. But whereas, under the old s 86, this Court on appeal could hitherto only interfere
with the Special Court’s decision and substitute its own opinion if that decision was erroneous in
law (see the above cases of Geustyn and Gallagher), it can under the new s 86A now interfere and
substitute its own opinion if the decision is erroneous in law or fact or both.
...
‘Liability’ in s 103(1) does not refer to an accrued or existing one, for such a liability cannot be
avoided by any transaction, etc (see CIR v I H B King; Commissioner for Inland Revenue v A H King.71
And, in any event, so to confine its meaning would deprive the elaborate provisions of s 103(1)
of all practical effect. That could never have been the Legislature’s intention. Consequently in
the cases of King 72 and Smith v CIR,73 ‘liability’ was held to connote ‘an anticipated liability’. As
Steyn CJ put it in the latter case:
‘The ordinary natural meaning of avoiding liability for a tax on income is to get out of the way of, escape
or prevent an anticipated liability.’
(See too Newton v COT of the Commonwealth of Australia.)74 That means a liability for tax that the
taxpayer anticipates will or may fall on him in the future.
Now such a liability may vary from an imminent, certain prospect to some vague, remote possibility.
Compare the queries thereanent raised by Lord Wilberforce in Mangin v IRC 75 in respect of the
tax avoidance s 108 of the New Zealand Tax Act of 1954. In Newton’s case, supra, Lord Denning
spoke of ‘a liability which is about to fall on you’, which suggests one of some imminence. How-
ever, it is unnecessary and hence inadvisable to decide here whether a vertical line should be
drawn somewhere along that wide range of meanings in order to delimit the connotation of ‘an
anticipated liability’. It suffices to say merely that, in my view, the liability of appellant and the
other shareholders to tax on Reklame’s distributable profits, albeit a liability contingent upon
their declaring them as dividends, was clearly ‘an anticipated liability’ within the contemplation
of s 103(1) . . .
________________________

68 In a dividend-stripping operation, company A (a dealer in shares) purchases all the shares of company B
which has large undistributed profits. Company A then arranges for company B to distribute all its accu-
mulated profits by way of dividends; all these dividends accrue to company A. Company A claims the pur-
chase price of the shares in company B as a tax deduction. The dividends received by company A are
exempt from tax when received by it.
69 1971 (3) SA at 571-572E.
70 1978 (2) SA 463 (A) at 470D-H.
71 1947 (2) SA 196 (A) at 207.
72 At 207.
73 1964 (1) SA 324 (A) at 333E-G.
74 (1958) 2 All ER 759 (PC) at 763F-G, per Lord Denning.
75 [1971] 1 All ER 179 (PC) at 189H.
 Tax avoidance and evasion 721

It is appropriate and convenient to deal next with requirement (d). Was the avoidance of that
anticipated liability the sole or one of the main purposes of the RN agreement? The test being
subjective – see Gallagher’s case76 – the inquiry is what purpose or purposes did the shareholders
have in mind in entering into the RN agreement. I have little doubt that, while such avoidance
was not their sole purpose, as the Special Court found, it was one of their main purposes . . . [A]s
that agreement had the effect or result of such tax avoidance, as has already been found in re-
gard to requirement (b), the onus was on appellant to prove that that was not one of their main
purposes – see s 103(4)(a) quoted above. Certainly, that onus was not discharged. Requirement
(d) was therefore also fulfilled.
In regard to the effect and purpose of the RN agreement, the Special Court proceeded on the
basis that ‘the distributable profits were in reality the income of the shareholders’. Similarly,
respondent’s counsel contended that, by entering into and implementing the RN agreement,
appellant and his co-shareholders in reality received the distributable profits of Reklame, even
though they had not been declared as dividends. In essence, counsel’s contention was this. Be-
fore and also at the time of clearing Reklame of its assets and liabilities for the sale of its shares,
the shareholders caused Reklame to lend them, inter alia, the whole of its distributable profits.
The purchase price of the shares received by them from Ryan Nigel was used by them to liqui-
date those loans. So in effect and reality, said counsel, the shareholders received those distribut-
able profits.
In my view, that approach by the Special Court and counsel was wrong, at any rate at this stage of
the enquiry. The former’s approach erred because it ignored the factors that Reklame had its
own juristic personality, separate and distinct from its shareholders (cf Ochberg v CIR)77 and that
in law therefore its distributable profits did not belong to the shareholders until declared as
dividends (see King’s case).78 And counsel’s argument wrongly ignored the form, substance, and
legal effect of the loans to the shareholders and the RN agreement. After all, the loans and RN
agreement were not simulated or sham transactions. On the contrary, they were genuine and
bona fide. Now, at the stage when one is still inquiring whether or not the requirements of
s 103(1) have been fulfilled, none of those factors can be ignored; they must be duly accorded
their full legal effect. It is only if and when the requirements of s 103(1) are all fulfilled, that the
form, substance or legal effect of those factors may be wholly or partly ignored. For then, in accor-
dance with s 103(1), the appellant’s liability for tax must be determined either ‘as if the transac-
tion, operation or scheme had not been entered into or carried out’ or ‘in such manner as in
the circumstances of the case’ is deemed appropriate for preventing the avoidance of the tax
liability. But until that stage of the inquiry is reached – and as will presently emerge, it will in the
present case not be reached – it must be premised that Reklame’s distributable profits belong to
it and not to its shareholders; that the shareholders in fact did not receive them; that they were
subsequently declared by Ryan Nigel as dividends to itself; that under the RN agreement the
shareholders received the money from Ryan Nigel as the purchase price for the sale of their
shares; and that they used the money to liquidate their loan indebtedness to Reklame.
It is true of course that the shareholders could have repaid their loans by declaring Reklame’s
reserves and assets as dividends, thereby incurring the ensuing tax liability. But they were not
obliged to do that. They were perfectly entitled to try to avoid such tax liability by adopting some
other legitimate course (see CIR v Estate Kohler).79 It does not necessarily follow that, because a
transaction, operation or scheme was aimed at and had the effect of avoiding an anticipated
liability for tax, it is hit by the provisions of s 103(1). For they are inapplicable if that transaction,
etc falls within the limits of normality of means, manner, rights and obligations prescribed by
s 103(1)(i) and (ii) – see Smith’s case.80
I turn now to consider this latter, crucial part of the problem – whether requirement (c) in
s 103(1)(i) or (ii) relating to normality was fulfilled. A few preliminary observations about pa-
ras (i) and (ii) of the sub-section. When the ‘transaction, operation or scheme’ is an agreement,
________________________

76 1978 (2) SA at 471B-E.

77 1931 AD 215 at 232.
78 1947 (2) SA 196 (A) at 213, 217.
79 1953 (2) SA 584 (A) at 591F-592H.
80 1964 (1) SA 324 (A) at 332E-G.
722 Income Tax in South Africa: Cases and Materials

as in the present case, it is important, I think, to determine first whether it was one concluded ‘at
arms’ length’. That is the criterion postulated in para (ii). For ‘dealing at arms’ length’ is a use-
ful and often easily determinable premise from which to start the inquiry. It connotes that each
party is independent of the other and, in so dealing, will strive to get the utmost possible ad-
vantage out of the transaction for himself. Indeed, in the Afrikaans text the corresponding
phrase is ‘die uiterste voorwaardes beding’. Hence, in an at arms’ length agreement the rights
and obligations it creates are more likely to be regarded as normal than abnormal in the sense
envisaged by para (ii). And the means or manner employed in entering into it or carrying it out
are also more likely to be normal than abnormal in the sense envisaged by para (i). The next obser-
vation is that, when consid-ering the normality of the rights or obligations so created or of the
means or manner so employed, due regard has to be paid to the surrounding circumstances. As
already pointed out s 103(1) itself postulates that. Thus, what may be normal because of the
presence of circumstances surrounding the entering into or carrying out of an agreement in one
case, may be abnormal in an agreement of the same nature in another case because of the ab-
sence of such circumstances. The last observation is that the problem of normality or abnormali-
ty of such matters is mainly a factual one. The Court hearing the case may resolve it by taking
judicial notice of the relevant norms or standards or by means of the expert or other evidence
adduced thereanent by either party. It is unnecessary to decide what happens if at the end of the
day, because of the lack of its own knowledge or such evidence, the Court cannot resolve the
problem.
[Applying these principles to the facts, Trollip JA found that the features of Reklame’s financial
position were not brought about by its shareholders for the purpose of selling their shares to
Ryan Nigel. It just happened to be the position at that time, and it was inevitable that the terms
of the sale would be conditioned by those features. This, he held, was relevant to the normality
of the rights and obligations under the RN agreement. In entering into the agreement, both
parties dealt with each other at arm’s length. The rights and obligations in terms of the RN
agreement were not abnormal. Hence requirement (c) in s 103(1)(i) and (ii) was not fulfilled,
and the invocation by the Commissioner of s 103(1) was not justified.]
The conclusion is therefore that requirement (c) in s 103(1)(i) and (ii) was not fulfilled . . . The
appeal therefore succeeds . . .
MULLER JA, DIEMONT JA, GALGUT AJA and BOTHA AJA concurred.

Notes
In [363] Guestyn, Forsyth and Joubert, the transaction was held not to fall foul of
s 103(1) because, even if it were abnormal, there was no sole or main purpose of tax
avoidance. Conversely, in Hicklin, the transaction was not caught by s 103(1) because,
although there was a sole or main purpose of tax avoidance,81 the court found that the
transaction was not abnormal.
The reason the Commissioner tried to invoke s 103(1) in this case was that Hicklin had
received a capital amount for the sale of his shares, thereby avoiding the tax that would
have been paid if Reklame had distributed its profits to him by way of dividends. Ryan
Nigel paid no tax on the dividends it received because dividends received by a company
were exempt from tax. The result was that the accumulated profits of Reklame went
untaxed.
Of decisive importance was the fact that Hicklin and his associates had not brought
about Reklame’s situation, with its large reserves of undistributed profits, for the purpose
of selling their shares. Hicklin and Ryan Nigel had dealt with each other at arm’s length.
Ryan Nigel drew up the agreement and offered it to the taxpayer on a take-it-or-leave-it

________________________

81 The transaction had the effect of avoiding tax, and the taxpayer was therefore presumed, unless he proved
otherwise, to have had a sole or main purpose of tax avoidance; this onus of proof was not discharged; see
1980 (1) SA 481 (A) at 493H.
 Tax avoidance and evasion 723

basis. Moreover, there was nothing commercially abnormal in the ‘rights and obligations’
created by the agreement, nor in the ‘means or manner’ of carrying it out. Therefore,
even though the taxpayer had entered into the agreement to avoid tax, the transaction
was ‘within the limits of normality of means, manner, rights and obligations prescribed
by s 103(1)(i) and (ii),’82 and s 103(1) was therefore not applicable.

Where the act of incorporating a business does not fall within s 103(1), it is possible that a later
transaction involving the company may do so.

[365]
CIR v Louw
1983 (3) SA 551 (A), 45 SATC 113
The taxpayer was a registered civil engineer, who was in partnership with others. In 1966
he and his partners incorporated the practice; this involved entering into an agreement
(‘the vendor’s agreement’) to sell the practice to an unlimited liability company in
which they held shares, for a sum equivalent to the excess of its assets (including
goodwill valued at one year’s net profit) less liabilities. The business grew and
additional shareholders and directors joined the company. In December 1974, following
the enactment of the Companies Act 1973, the company was converted to a s 53(b)
company.
In about 1971-1972 the directors’ loan accounts went into debit by reason of loans
made to them by the company. Such loans continued, and by the end of the 1976 tax
year, the total owed by the taxpayer was R266 702 and the total for all the directors was
R1 253 867.
Before incorporation the net profits of the practice accrued to the partners as income.
After incorporation, the profits accrued to the company. The erstwhile partners were
remunerated for their services in the form of salaries and dividends. The total amount
received by the taxpayer in this way was substantially less than the income that had ac-
crued to him as a partner.
The Commissioner, acting under s 103(1), issued assessments for the three years in
issue, in which he included in the taxpayer’s income a share of the company’s income,
proportionate to his shareholding, less dividends received by him from the company.
From the additional tax payable by the respondent was deducted an amount represent-
ing a pro rata share of the tax payable by the company.
Issue: did (1) the incorporation of the practice and the transfer of the partnership’s
assets to the company, or (2) the subsequent loans from the company to the directors,
infringe s 103(1)?
Held: the incorporation of the practice and the sale of the assets to the company did
not infringe s 103(1); but the subsequent loans to the directors did do so, and the Commis-
sioner was entitled to apply s 103(1) to those loans.
Corbett JA: I proceed now to consider the various requirements laid down by s 103 for the exer-
cise by the Commissioner of his powers under that section . . .
The first requirement is a transaction, operation or scheme entered into or carried out. In his
letter of 6 July 1978 . . . the Commissioner listed the transactions, operations or schemes which,
in his view, either singly or in combination, rendered respondent liable to have s 103 applied in
his case. The first three of these all relate to what I shall, for sake of brevity, term ‘the incorpora-
tion of the practice’, and all occurred more or less simultaneously in May-June 1966. The fourth,

________________________

82 At 494H.
724 Income Tax in South Africa: Cases and Materials

the lending of money by the company to its directors and shareholders, was something which
occurred while the practice was being carried on by the company and which commenced only in
about 1971-72, ie some five or six years after incorporation. It was contended on behalf of the
Commissioner, before the Special Court and before us, that the lending of moneys to directors
was an integral part of the original scheme to incorporate the practice. Melamet J rejected this
contention, stating –
‘On the evidence this submission is untenable – there is no evidence to suggest that at the time of the in-
corporation of the partnership, loans to the shareholders or the directors, in future, were discussed or
contemplated.’
This finding was attacked on appeal. It was argued on behalf of the appellant that despite the
lapse of time it must inevitably have been at least a possibility in the minds of respondent and his
co-partners at the time of incorporation that loans would later be made to directors of the com-
pany. It was further submitted that in general the fact that there is a time lapse between the first
steps in a transaction and the final implementation thereof is of no consequence, and in this
connection reference was made to the cases of Meyerowitz v CIR 83 and Ovenstone v SIR.84
I am not persuaded that the view of the court a quo on this aspect of the matter was incorrect.
The contention that loans to directors must have been present in the minds of respondent and
his co-partners – at least as a possibility – is based on pure speculation. There was no suggestion
of this in respondent’s evidence. Indeed the proposition was never even put to respondent in
cross-examination by the representative of the Commissioner. Moreover, the evidence shows that
the incorporation of a practice was in itself a scheme recognized in professional circles and, in
many instances, adopted by firms of consulting engineers and other professional groups; and
that incorporation held out various advantages over the system of practising in partnership. (I
shall elaborate on this later.) The granting of loans to directors was not an integral part of such
an incorporation scheme; nor would the granting of such loans be necessary in order to achieve
these advantages. In my view, all the indications, including the lapse of time, lead to the conclu-
sion that the loans were probably independent transactions.
The cases of Meyerowitz and Ovenstone do not, in my opinion, assist the appellant. We were re-
ferred to a passage in the judgment in Meyerowitz’s case.85 As I understand this passage, and the
quotation from the judgment of Donovan LJ in Crossland (Inspector of Taxes) v Hawkins,86 they
emphasize that the ultimate step in a scheme need not be in contemplation from the very outset:
it may be decided on later. If there is sufficient unity between this ultimate step and what has
gone before, having regard to the ultimate objective, then together they may be regarded as
being part and parcel of a single scheme. In the instant case, for the reasons already indicated,
that unity is lacking.
...
In my view, therefore, the incorporation of the practice must be treated as a scheme in itself and
the granting of loans to directors as a separate, independent scheme or series of transactions.
Naturally each is a transaction, operation or scheme capable of being hit by s 103 – this was
common cause – and consequently the further requirements of the section must be considered
in relation to each. Furthermore, when attention is given to the loans, the granting thereof must
be viewed against the background of the incorporation of the practice and the particular cir-
cumstances thereof . . .
The second requirement is that the effect of the transaction, operation or scheme should be to
avoid or postpone liability for income tax or reduce the amount thereof. It is common cause that
the sale of the partnership practice to the company resulted, as far as the respondent was con-
cerned, in a postponement of liability for income tax. The postponement would presumably
relate to that portion of the firm’s income which after and by reason of the incorporation of the
practice was no longer taxable in the respondent’s hands. And it was regarded as a postpone

________________________

83 1963 (3) SA 863 (A).

84 1980 (2) SA 721 (A).
85 At 782H to 873D.
86 [1961] 2 All ER 812 at 817.
 Tax avoidance and evasion 725

ment (and not an avoidance) apparently because of the likelihood that ultimately such moneys
would accrue to the respondent or his estate in a taxable form. As far as the scheme consisting of
the incorporation of the practice is concerned, this second requirement is satisfied. This, too,
was the finding of the Special Court.
The third requirement . . . is that of what I shall, for the sake of brevity, call ‘abnormality’. . .
Prior to the hearing before the court a quo it was agreed by the parties in writing that a number
of matters were common cause and did not require proof . . .
Having regard to these concessions on his part, appellant’s case, both before us and before the
court a quo, was that the abnormality of the incorporation of the practice of Van Wyk and Louw
lay not in the means or manner employed but in the rights and obligations created under the
scheme. In this regard appellant’s counsel referred specifically to the following features:
(1) the sale of the assets of the partnership, including its goodwill, to the company on credit
without requiring the payment of interest.
(2) The provision in the vendors agreement that the balance of the purchase price would be
payable as the financial circumstances of the purchaser permitted.
(3) The lending of large sums of money to the shareholders free of interest and without any
definite conditions for repayment.
(4) The conclusion of service contracts between the company and its shareholders in terms
whereof no set remuneration was stipulated and respondent himself received a salary which
was much smaller than the income which accrued to him for performing the same services
while the partnership still existed.
Feature (3) relates solely to the directors’ loans, which I shall consider separately. The remaining
features relied upon by appellant raise the problem, adverted to but not resolved, in Geustyn’s
case (supra)87 as to how in a case such as this one applies the criterion as to whether the transac-
tion, operation or scheme –
‘. . . has created rights or obligations which would not normally be created between persons dealing at
arm’s length under a transaction, operation or scheme of the nature of the transaction, operation or
scheme in question . . . (s 103(1)(b)(ii)).’
88
As was pointed out in Geustyn’s case in a case such as the one there under consideration, and
likewise in the present case, the court is –
‘. . . ex hypothesi concerned with partners who have . . . made over their practice, not to an independent
third party with whom they would ordinarily deal “at arm’s length”, but to an unlimited company of which
they are the sole shareholders and directors and whereof they have full and complete control.’
In such a case should the court, in applying the ‘normality’ yardstick, take account of the special
relationship between the erstwhile partners and the company which they have formed, or ignore
it and apply the yardstick as though the company were a stranger? I do not see how the court can
ignore this special relationship and yet give proper effect to the concluding words of
s 103(1)(ii), viz ‘under a transaction, operation or scheme of the nature of the transaction, operation
or scheme in question . . .’ (My italics.) For it is of the very nature of the incorporation scheme that
the company to which the practice is sold by the partners will have as its shareholders and direc-
tors the self-same partners and will be controlled by them. Those are the realities of the situ-
ation. Moreover, it must be borne in mind that in a case such as the present the transaction is a
multipartite one to which all the partners and the company are parties; and each partner con-
tracts both with the company and his fellow partners and seeks to extract from the transaction
the best possible advantage for himself . . .
With this in mind, it does not seem to me that the features stressed by appellant’s counsel consti-
tute the creation of abnormal rights or obligations . . .
[After analysing the facts the judge continued:] In my view, the court a quo correctly found that
there was no abnormality in the incorporation of the practice and the rights and obligations
created under the scheme of incorporation.

________________________

87 At 574H to 575A.
88 Loc cit.
726 Income Tax in South Africa: Cases and Materials

The fourth requirement is that the avoidance or postponement of liability for income tax was
‘the sole or one of the main purposes of the transaction, operation or scheme’. In determining
whether this requirement is satisfied the court applies a subjective test, ie it takes as its criterion
the purpose which those who carried out the scheme intended to achieve by means of the
scheme (see SIR v Gallagher.89) In view of the fact that it was common cause that the incorporation
of the practice had the effect of postponing liability for income tax, a rebuttable presumption
arose that such postponement was the sole or one of the main purposes of the scheme com-
prised by the incorporation of the practice (s 103(4)(a) and the passage quoted from the judg-
ment in Geustyn’s case (supra)). The onus of achieving such rebuttal lay upon respondent. Did
he discharge this onus? The Special Court found that he had done so. On appeal it was argued
that in so finding the Special Court erred.
Respondent devoted a substantial portion of his evidence to an explanation of the reasons why
he and his co-partners in the firm of Van Wyk and Louw decided to incorporate the practice . . .
. . . According to Louw, the main advantage of an unlimited company over a partnership lay in
the continuity which the legal personality of a company provided. This obviated the problems
which would otherwise (ie under a partnership) arise when a member of the firm died or retired
from the practice and greatly facilitated the admission of new members. This continuity was also
very advantageous when it came to the firm undertaking long-term assignments and entering
into contracts, such as leases, which were to endure for some time. Other advantages were that
incorporation enabled the firm to enter into consortium arrangements . . . to provide a pension
scheme for its employees and to give non-professional employees an interest in the practice by
way of an issue of shares . . . Another advantage of incorporation was that it enabled the firm to
build up reserves which were not taxable in the hands of the members of the firm. . . . As regards
the income tax liability of members of the firm, it was realised that if the company declared no
dividends, or a limited amount by way of dividend (the balance being carried to reserve), there
were tax advantages in incorporation: liability was pro tanto postponed . . .
The court a quo accepted the respondent’s evidence on this issue and concluded that it estab-
lished that the postponement of income tax . . . was not the sole or one of the main purposes of
the scheme . . .
[The judge considered the evidence on this issue and continued:] I am on the whole not con-
vinced that the Special Court came to a wrong conclusion on this issue. It follows that this require-
ment for the application of s 103 was also lacking as far as the incorporation of the practice was
concerned.
I turn now to the directors’ loans. . . .
[The judge here considered the evidence in regard to the loans having been made interest free
and without security, viewed in conjunction with the salaries paid to the directors and the com-
pany’s policy regarding dividends.]
Finally, there are three further points which emerge from an examination of the evidence on
record. Firstly, it seems from the company accounts for the tax years under review that in each
year the bulk of the surplus funds of the company not required for business purposes, ie for
investment or as working capital or for the payment of dividends, was loaned to directors. Sec-
ondly, there is no evidence to suggest that any of the directors were at any time called upon by
the company to repay their loans, or any portion thereof . . .
As I have already stated, the granting of these directors’ loans undoubtedly constituted either
individual transactions or, possibly, a scheme in terms of s 103. The question is whether these
loans, seen in their context, were such that the other requirements justifying the application of
s 103 were present . . . I am of the opinion that it is open to the Commissioner to contend that
the loans granted to directors were themselves transactions which, in their factual context, justi-
fied the application of s 103. Necessarily the way in which respondent should be taxed in the
event of s 103 being applied merely to the loans would differ materially from the way in which he
would have been taxed had the entire scheme for the incorporation of the practice been assaila-
ble under s 103. . . .

________________________

89 1978 (2) SA 463 (A) at 471B.

 Tax avoidance and evasion 727

. . . In all the circumstances and bearing in mind the healthy financial position of the company
and the reserves which it maintained over and above the loans to directors I am of the opinion
that the possibility of the loans being called up was remote in the extreme. The fact that no
security for the loans was required by the company, that there were few, if any, restrictions
placed on the use to which the directors could put the moneys concerned, that, apparently, in
some instances the loans were used to purchase houses, that in the period under consideration
no director was called upon to repay any portion of his loan account indicate, to my mind, that
the directors themselves did not regard the calling up of the loans as a serious possibility . . .
Having weighed all these consideration, I am of the opinion that had the loans to directors not
been made respondent and his co-directors would have received equivalent amounts, or at any
rate amounts equivalent to a substantial proportion of such loans, in the form of either salary or
dividend. It is not necessary at this stage of the enquiry to endeavour to quantify the amount
which would probably have been received by respondent in this way. The conclusion that he
would probably have received such amounts is sufficient to show that the effect of the loan
transactions was to avoid or postpone (probably only postpone) liability for income tax.
The next question, viz whether the loan transactions created rights or obligations which would
not normally be created between persons dealing at arm’s length under a transaction of the
nature of the transaction in question, must also in my view be answered in the affirmative. The
Special Court concluded that they did not. The court pointed out that it had not been shown on
the evidence that the grant of loans to the directors, free of interest, where the company, as
here, is not borrowing the moneys, falls without the limits of normality of means, manner, rights
and obligations, as contemplated by s 103(1), (i) and (ii). The court held further:
‘There is no evidence, further, to show that the conduct of a director in accepting a small salary, to be deter-
mined each year, to assist in building up the capital of the company, is an abnormal action and one that
would not occur normally in a private company in which the shareholders were attempting to build up
capital to enable the company to compete with large public companies alternatively to provide for the
contingency of a period in which work was slack. There is no evidence that the salary which the appellant
earned was small in relation to salaries earned by other construction or civil engineers – the evidence re-
lates to his previous earnings as a partner of the firm. Assuming that there was evidence that the salary was
small, there is no evidence that this is an unusual action on the part of a shareholder or a director in a
company, as the present, seeking to build up reserves.’
With respect, what this reasoning overlooks or fails to take into consideration, are the factors,
mentioned above, (i) that the so-called ‘liquid reserves’, partly created by the relatively small
annual amounts allocated by the directors by way of salary and dividend, were not kept in the
coffers of the company, but advanced to the directors as interest-free, unsecured loans; (ii) that
these loans were relatively large sums of money, . . .; (iii) that the salary and dividend received by
a director was merely sufficient to cover his living costs and that the surplus income which he
would otherwise and in the normal course have received and invested came to him in the form
of a loan; (iv) that the loans were not made in specific amounts under specific authority . . .; and
that it appeared to be unlikely that the loans would ever be called up or that they were ever in-
tended to be called up.
Having regard to all these circumstances I am of the opinion that the directors’ loans, seen in
the context of the amounts allocated to directors by way of salary and dividend, were ‘abnormal’,
both as to the means or manner employed in granting them and as to the rights and obligations
created thereby.
The final question is whether the avoidance or postponement of income tax was the sole or one
of the main purposes of the granting of the loans. Since, as I have held, the granting of the loans
had the effect of avoiding or postponing liability for income tax, a rebuttable presumption arises
that this was the sole or one of the main purposes of granting these loans, in effect in lieu of
salary and/or dividend. The inference that such was at least one of the main purposes seems
inescapable. At any rate respondent did not, in my opinion, rebut this presumption.
For these reasons I hold that the Commissioner was entitled to apply the provisions of s 103 to
the directors’ loans granted to respondent in the tax years under review, but that the Commis-
sioner was not entitled to apply s 103 to the entire incorporation scheme . . . This court cannot
pronounce upon or deal with issue (4) otherwise than to remit the case to the Commissioner in
order to enable him to apply s 103 to the loans simpliciter and assess respondent’s additional in-
come tax liability accordingly. To that end he would no doubt determine, inter alia, what
728 Income Tax in South Africa: Cases and Materials

amount, but for the loans, respondent would probably have received by way of additional salary
and/or dividend in each of the tax years in question. These amounts need not necessarily be the
equivalent of the full amounts of the loans; but in the first place that is a matter for the Commis-
sioner to decide . . .
It is accordingly ordered as follows. The appeal is allowed with costs . . .
MILLER JA, HOEXTER JA, GALGUT AJA and NICHOLAS AJA concurred.

Notes
Like [363] Guestyn, Forsyth and Joubert, this case was concerned with the incorporation
of a professional practice. But Louw had a further element – the fact that, after incorpor-
ation, the company had lent large sums of money, interest-free to the directors. The
Commissioner, knowing that the earlier Appellate Division decision in Guestyn, Forsyth &
Joubert made it difficult for him to contend that the incorporation of the practice of itself
infringed s 103(1),90 argued that the incorporation and the subsequent loans were part of
a single scheme, which must stand or fall together. He was clearly laying the foundation
for an argument that the court should ignore the incorporation of the practice or the
sale of the business to the company, and tax the persons involved as though they were
still partners.
In the event, the court held that the incorporation of the practice was a scheme in
itself, separate from the granting of the loans to the directors.91 It found that the taxpay-
er’s sole or main purpose in incorporating was not tax avoidance.92 On the issue whether
the terms of the sale of the practice created ‘abnormal’ rights and obligations, the court
laid down the important principle that, in judging the ‘normality’ of the means and
manner and the rights and obligations involved in the transaction, the court must not
ignore the ‘special relationship’ between the parties, namely that partners were selling
their practice to a company of which they were the directors. Provided that each partner
sought to extract from the transaction the best possible advantage for himself, it would
be a transaction ‘at arm’s length’ and would not be ‘abnormal’.93 (This was the issue that
the court had left open in [363] Guestyn, Forsyth and Joubert.) Consequently, on the
facts, the terms of the sale of the practice to the company were not ‘abnormal’.
The court went on to consider the loans to the directors, made after incorporation. It
found that these loans had the effect of postponing tax.94 It was therefore rebuttably
presumed that the taxpayer had a sole or main purpose of tax avoidance, and this pre-
sumption had not been rebutted.95 The court found further that these loans had created
rights or obligations which would not be created between persons dealing at arm’s
length, and were abnormal both in the rights and obligations which they created and in
the means and manner employed in granting them.96 Consequently, the court found that
the granting of the loans infringed s 103(1) and it remitted the case back to the Commis-
sioner to allow him to apply his powers under s 103(1) to the loans (but not to the incorpor-
ation of the practice).97
________________________

90 In Geustyn the court had found that, on the facts of that case, the formation of a company and the sale of
the business to a company did not infringe s 103(1) because, even if the terms of the sale were ‘abnormal’,
the taxpayer did not have a sole or main purpose of tax avoidance.
91 (1983) 45 SATC 113 at 136.
92 Ibid at 140.
93 Ibid at 138.
94 Ibid at 144.
95 Ibid at 145-146.
96 Ibid at 145.
97 Ibid at 146.
 Tax avoidance and evasion 729

It is submitted that the court could have reached the same conclusion on the loans by
a far shorter route, by holding that they were sham or disguised transactions; that in
substance the loans were the distribution of profits and that they must therefore be
treated at common law98 from the point of view of both the company and the recipients,
as a dividend.

§7 Section 103(1): powers of the Commissioner

Once the elements of s 103(1) are established, the Commissioner can determine the taxpayer’s tax
liability as if the transaction, operation or scheme had not been entered into or carried out, or in such
manner as he deems appropriate for preventing or diminishing the avoidance, postponement or
reduction of tax.

[366]
Hicklin v SIR
1980 (1) SA 481 (A)
For the facts of this case, see extract [364].
Trollip JA: It is only if and when the requirements of s 103(1) are all fulfilled, that the form,
substance or legal effect of those factors [a loan and an agreement] may be wholly or partly ig-
nored. For then, in accordance with s 103(1), the appellant’s liability for tax must be determined
either ‘as if the transaction, operation or scheme had not been entered into or carried out’ or
‘in such manner as in the circumstances of the case’ is deemed appropriate for preventing the
avoidance of the tax liability.

Notes
The Commissioner’s first-mentioned power under s 103(1), namely to determine tax
liability ‘as if the transaction, operation or scheme had not been entered into or carried
out’ has been called a power to ‘annihilate’ the transaction for tax purposes. The weak-
ness of such a power is that ‘ignoring of the transactions – or the annihilation of them –
does not of itself create a liability to tax’.99 Far more effective is the second of the Com-
missioner’s powers, namely to determine the taxpayer’s liability for tax ‘in such manner
as . . . he deems appropriate for the prevention or diminution of such avoidance, post-
ponement or reduction’. This wide-ranging power goes far beyond merely ignoring or
annihilating transactions entered into by the taxpayer. The outer limits of this power
have not yet been explored by the courts.

§8 Section 103(2): agreement affecting a company or a change

in shareholding or members’ interest, resulting in the receipt
of income, which was entered into for the purpose of utilising
an assessed loss; set-off of loss disallowed
Section 103(2) empowers the Commissioner to disallow the setting-off of an assessed loss
or balance of assessed loss against the company’s ‘tainted’100 income where he is satisfied
that the objective elements (including the requisite agreement, a change in shareholding
or members’ interests followed by the requisite ‘result’) and the subjective elements (the
requisite purpose of the taxpayer) laid down s 103(2) are present.
________________________

98 S 8B (since repealed) did not apply during the tax years in issue.
99 Newton v FCT [1958] AC 540 (PC).
100 See [331] Broomberg, Tax Strategy for an explanation of this term.
730 Income Tax in South Africa: Cases and Materials

[367]
New Urban Properties Ltd v SIR
1966 (1) SA 217 (A), 27 SATC 175
The taxpayer company was a dealer in land. By 30 June 1958 it was hopelessly in-
solvent. In that year its income tax assessment showed an accumulated assessed loss of
£767 709, which included an assessed loss of £268 000 brought forward from the preced-
ing year.
In January 1959 there was a change of shareholding in the taxpayer company. The new
shareholders purchased sufficient shares to give them de facto control and they became
the new directors.
The new shareholders controlled five other land-dealing companies. They acquired
shares in the taxpayer because of its large assessed loss and with the intention of channel-
ling income from their own companies into the taxpayer company, so that such income
would be set off against the assessed loss, thereby avoiding tax which that income would
otherwise have attracted.
Between January and June 1959, that is to say, after the change in shareholding, the
taxpayer company entered into several contracts, as a result of which income was re-
ceived by it.
In its income tax return for the year ended 30 June 1959, the company’s sole income
was approximately £5 640, which was derived by it as a result of the above contracts. The
taxpayer company claimed to set off this income against the balance of assessed loss
which had been brought forward from the previous year. The Secretary disallowed the
set-off on the ground that the income in question had been derived by the company in a
manner covered by s 90(1)(b) and issued an assessment which did not reflect a balance
of assessed loss.
Issue: was the taxpayer entitled to carry its assessed loss as at 30 June 1958 forward in
terms of s 11(3), or did s 90(1)(b) [now s 103(2)] have the effect of extinguishing that
loss?
Held: On the facts, s 90(1)(b) [now s 103(2)] was applicable, with the result that the
balance of assessed loss carried forward from the previous year was prohibited from
being set off against the taxpayer’s trading income derived in the current year. The
practical effect was to extinguish the assessed loss. The change in its shareholding had
made it impossible for the taxpayer to earn income that was beyond the reach of
s 90(1)(b) [now s 103(2)].
Beyers JA: In January 1959 there was a change of shareholding in the taxpayer company. Certain
five parties, four of them individuals, the other a company owned by the individuals, purchased
406,100 of the company’s shares at one-halfpenny per share . . . The effect of this was to put
these persons in de facto control of the company. The four individuals concerned became the
new directors thereof.
The new shareholders had not previously held shares in the taxpayer company. Their purpose in
now acquiring shares therein was plain. They were the owners of five other land-dealing compa-
nies, and bought a controlling interest in the taxpayer company because of its large assessed loss.
They hoped to channel income from their own companies into the taxpayer company, with the
object of setting it off against the assessed loss, thereby avoiding tax which that income would
otherwise attract. . . .
During the period January to June 1959, that is to say, after the change in shareholding, the
taxpayer company did the following things;
(a) It entered into contract with the five other companies, as a result of which it received, as
managing agent of such companies various amounts of income by way of administration
fees and collection charges.
 Tax avoidance and evasion 731

(b) It bought from one such company a property, which it let, and derived a small rental there-
from.
(c) It borrowed a sum of money from one of the new directors and lent it to a company in
which the new shareholders had a substantial interest. It received interest on this money.
(d) It investigated certain land propositions, in which connection it made two written offers to
purchase land – in the one case for land which could be divided into a township and in the
other case for stands in a Germiston township. These offers were not accepted.
...
In its income tax return for the year ended 30th June 1959, the company reflected, as its sole
income, the income derived by it from the sources mentioned above, a sum of approximately £5
640, and claimed to set it off against the balance of assessed loss brought forward from the pre-
vious year.
The Secretary disallowed a set-off of the balance of assessed loss against this income on the
ground that the income had been received by the taxpayer company in a manner which offend-
ed against the provisions of s 90(1)(b) of the Income Tax Act. It is provided in that section that:
‘Whenever the Secretary is satisfied that any agreement or any change in the shareholding in any compa-
ny, as a direct or indirect result of which income has been received by or has accrued to the company dur-
ing any year of assessment has at any time before or after the commencement of the Income Tax Act 1946,
been entered into or effected by any person solely or mainly for the purpose of utilising any assessed loss
or any balance of assessed loss incurred by the company, in order to avoid liability on the part of that
company or any other person for the payment of any tax, duty or levy on income, or to reduce the amount
thereof, the set off of any such assessed loss or balance of assessed loss against any income shall be
disallowed.’ . . .
According to [the decisions in [268] Louis Zinn and [267] SA Bazaars] . . . s 11(3) [see now
s 20(1)(a)] envisages a continuity in setting off an assessed loss in every year succeeding the year
in which it was originally incurred, so that in each succeeding year a balance can be struck to the
satisfaction of the Secretary which can then be carried forward from year to year until it is ex-
hausted; if, for any reason, the assessed loss cannot be so set off and balanced in any particular
year, there is then no ‘balance of assessed loss’ for that year which viewed from that year of as-
sessment) can be carried forward to the succeeding year, or (viewed from the succeeding year of
assessment) there is no ‘balance of assessed loss which has been carried forward from the pro-
ceeding year of assessment’, in other words, the essential continuity has been fatally interrupted.
In the SA Bazaars case, supra, that interruption occurred through the taxpayer’s causing to trade
in a particular year. In the present case it has occurred through the operation of s 90 (1)(b)
which prohibited the balance of assessed loss from being set off against the only income received
by the appellant, in respect of the only trading activities conducted by it, as will appear later. In
other words, although the respective causes of interruption were different, the result under
s 11(3) was the same in each case. . . .
In my opinion the balance of assessed loss failed to survive the 1959 tax year, and was correctly
regarded by the Secretary as not being available for set-off in future years.
The appeal is dismissed with costs.
BOTHA JA, WILLIAMSON JA, WESSELS JA, and TROLLIP AJA concurred.

Notes
This decision seeks to interpret s 103(2) so as to dove-tail with s 20(1)(a). According to
the decisions in [268] Louis Zinn and [267] SA Bazaars, s 20(1)(a) requires ‘continuity’
in the carrying-forward of an assessed loss, in the sense that, if a ‘balance of assessed loss’
cannot be struck in any tax year, the loss is thereby annihilated and there is no ‘balance
of assessed loss’ to carry forward into the next tax year. The decision in [329] New Urban
Properties seeks to harmonise with this logic, by holding that the necessary ‘continuity’
will also be destroyed if, owing to the application of s 103(2), there is no ‘untainted’
income against which the assessed loss can be set-off. In these circumstances, too, the loss
is annihilated, and there is no ‘balance of assessed loss’ which is capable of being carried
forward into the next tax year.
732 Income Tax in South Africa: Cases and Materials

Overall, therefore, these three decisions, read together, lay down that there are two
circumstances which may make it impossible to strike a ‘balance of assessed loss’ in a
particular year, thereby resulting in the permanent annihilation of that loss, with the
consequence that there is no ‘balance of assessed loss’ which can be carried forward into
the following year:
(a) if the necessary element of ‘continuity’ which was required by the decisions in SA
Bazaars and Louis Zinn was interrupted because the taxpayer ceased to trade for an
entire tax year; or
(b) if, in a particular tax year, s 103(2) is operative, thereby preventing any setting-off of
the ‘balance of assessed loss’ against the taxpayer’s trading income for that year.
The decision in New Urban Properties held, although the respective causes of interruption
were different, the result under s 11(3) [see now s 20(1)(a)) was the same in each case.
In other words, in both (a) and (b) above, no ‘balance of assessed loss’ can be struck for
that tax year, and the loss is thereby extinguished and cannot be carried forward into a
future year.

[368]
ITC 1123
(1968) 31 SATC 48
The taxpayer company had previously been engaged in manufacture, but became unable
to pay its debts and went into liquidation. The liquidators disposed of all the company’s
movable assets and eventually only its immovable property remained. On 25 September
1962 R made an offer to the liquidators to purchase all the company’s shares for
R45 000, being the value of the immovable property. The liquidators accepted the offer
and it was sanctioned by the court which also set aside the liquidation of the company.
The R45 000 was paid to the company’s creditors. Originally, R’s purpose in acquiring
the shares was to get control of the immovable property and to lease it. Later, but before
he made the formal offer for the shares, he decided to reactivate the company. After he
had made the offer to purchase the shares, but before it had been accepted, R was ap-
proached by K & K, the result of which was that he accepted them as co-shareholders in
the company. However, they were unable to work together, and by agreement K & K
purchased the immovable property from the company for R45 000. As a result, R became
the sole shareholder of the company at a time when the company had no finance, no
assets or liabilities, no premises and no business.
R obtained a bank overdraft of R80 000 for the company, which he guaranteed and
the company commenced business. It did not resuscitate any manufacturing process, and
its trading activities produced a net income of R10 220 in 1964 and R11 372 in 1965. This
income fell into two categories: (a) transactions with company’s under R’s control which
produced commission, interest, administration fees and profit on the sales of articles
produced by those companies; (b) transactions with outside parties. The company sought
to set off against this income the balance of assessed loss carried forward from previous
years. The Commissioner applied s 103(2) and refused to allow the set-off for the 1964
and 1965 years of assessment.
Issue: was the Commissioner entitled, in terms of s 103(2), to refuse to allow the com-
pany’s income in 1964 and 1965 to be set off against the balance of its assessed loss
brought forward from previous years?
Held: in the affirmative. The elements of s 103(2) were present. Section 103(2) applied
not only to income diverted from another person to the company, but also to income gen-
erated by the company’s own activities.
 Tax avoidance and evasion 733

Trollip J: Section 103(2) provides that the set-off of a previous assessed loss must be disallowed
whenever the Secretary is satisfied about three essentials: (1) that a change of shareholding
in the company has taken place; (2) that as a direct result thereof income has been received
by or has accrued to that company during the year of assessment; and (3) that the change in
shareholding was effected solely or mainly for the purpose of utilizing the company’s assessed
loss in order to avoid liability on the part of the company or any other person for tax on such
income. Section 103(4) says that in an appeal against the Secretary’s decision to disallow any
such set-off, if it is proved that the change in shareholding would result in the avoidance of liab-
ility for any tax it shall be presumed, until the contrary is proved, that the change in sharehold-
ing was effected for that purpose.
It was common cause in the present appeal that there had been a change of shareholding in the
company, so the first essential of s 103(2) was proved. The only issues were whether that change
resulted in the Company’s receiving the income shown in its accounts, and whether the change
was effected for the purpose of avoiding liability for tax on such income.
...
After the agreement of 28th February, 1963, between R and K & K the way was now open for R to
use the company entirely as he wanted to.
The first thing R did after becoming sole shareholder of the company was to arrange to put it in
funds. At his instance the bank agreed to give it overdraft facilities for up to R80 000, which R
guaranteed. It thereupon commenced to carry on business, and derived income from the two
categories referred to above.
At the hearing of the appeal, it was conceded on behalf of the appellant that the set-off of the
income derived from category (a) against the assessed loss was correctly disallowed by the Secre-
tary under s 103(2) for it was income diverted to the company by R from the other com-panies
controlled by him in order to avoid liability for tax in those companies. It was con-tended, how-
ever, that the set-off should have been allowed in respect of the income derived from category
(b). In view of the failure of the appellant to prove the amount of net income relating to (b), the
onus being on it under s 82, we entertain grave doubts whether this appeal could succeed even if
the appellant’s argument on the principles relating to the income derived from (b) is correct.
However, as we have come to the conclusion that that argument cannot in any event be sus-
tained, there is no need to pursue that enquiry any further.
From the above summary it emerges that there were actually two changes in the shareholding
in the company: firstly, when R and K & K acquired the shares about 11th December 1962
and, secondly, when R acquired the majority shareholding from the latter two in about
February 1963, to become the sole shareholder. Mr Behrens, for the Secretary, relied mainly
on the latter. In regard to that transaction we think that R’s sole purpose in then acquiring
that shareholding from K & K was to try to utilize the company’s assessed loss to avoid liability
for tax on the part of (i) the company itself and (ii) certain of his other companies. In regard
to (ii), that is proved by the concession made on appellant’s behalf that the income on transac-
tions with such companies (see (a) above) was hit by s 103(2). For such income would have
been liable to tax in the hands of such companies if it had not been diverted as a result of the
change in shareholding to the company. In regard to (i), it has been stated above that as early
as 25th September 1962, when R tendered to purchase the shares himself, his dual purpose was,
firstly, to acquire control of the immovable property then still held by the company and,
secondly, to activate the company into doing some business and so try to use the assessed loss
to avoid tax on its ensuing income. In February 1963, when he acquired the majority sharehold-
ing, the company was no longer going to hold the immovable property; it was to go to K & K;
and the company was to be a mere empty shell. The inference therefore is, and we so find, that
probably R’s only purpose in then acquiring the majority shareholding was to try to use the as-
sessed loss to avoid the tax which the company would otherwise have had to pay on its own ensu-
ing income. The third essential requirement of s 103(2) – see (3) above – has therefore been
proved. But if we should be wrong in that conclusion, we have no doubt that the appellant, on
which the onus rested, failed to prove that that was not his sole or main purpose in acquiring
shares.
734 Income Tax in South Africa: Cases and Materials

It remains to consider whether the second requirement of s 103(2) has been fulfilled, namely,
whether the income from the company’s transactions with outside persons – see (b) above – was
received by the company `as a direct or indirect result’ of that change in shareholding.
Mr Swersky relied on paragraph 1620 of Meyerowitz and Spiro’s Taxpayer’s Permanent Volume on
Income Tax in South Africa and South West Africa where the authors express . . . . the meaning of
s 103(2) as follows:
‘It is considered that the section is only applicable where there has been a diversion of income because of
an agreement or change of shareholding, since it is only in this circumstance that there can be an avoid-
ance of liability for tax by any person . . . But where there has been no diversion and the company earns
income because, for example, the new shareholders are able to and do conduct the business more effi-
ciently, or because the company enters into a new field of business more efficiently, or because the com-
pany enters into a new field of business or undertakes a new enterprise the section, it is considered, does
not apply. Without a diversion of income there can in the circumstances be no avoidance of liability for
tax and therefore no purpose to do so.’
That the section was intended to apply where income was diverted from another person to a company
in order to avoid liability for tax on the part of that person is clear from its very language. But its
wording is wide and there is no warrant for limiting its application to such cases. It refers in the first
place to ‘income . . . received by or . . . accrued to that company during any year of assessment . . .’
That is wide enough to include income produced by its own activities in contradistinction to
income diverted to it. Secondly, the section speaks of avoiding liability for tax ‘on the part of that
company’ in addition to and in contradistinction to avoiding liability for tax ‘on the part of . . . any
other person’; that shows that not only diverted income but income produced by the company’s
own activities can fall within the ambit of the section if its other requirements are fulfilled. Otherwise,
to take a clear example, the income from a new and unrelated type of business started by the new
shareholders of the company, they having acquired the shares solely or mainly for tax avoidance,
would escape liability for tax on such income by its being set off against the assessed loss produced
by the old and discontinued business of the company under its erstwhile shareholders. The section
seems to have been designed, as Mr Behrens submitted, to prevent that very thing from happening.
Consequently the views expressed by the authors in the textbook quoted by Mr Swersky cannot, with
respect, be accepted as correct.
Of course, for the income from the company’s own activities to be hit by s 103(2), it must have
been received by or it must have accrued to it ‘as a direct or indirect result’ of the change in
shareholding. Whether that is so or not is a question of fact. In the present case, when R ac-
quired the majority shareholding and became the sole shareholder in the company in February
1963, it was an empty shell. Its business of manufacturing had ceased. R then arranged for it to
be provided with fresh funds and he launched it on an entirely new kind of business, that of
buying and selling machinery and equipment, lending money on interest and discounting bills,
from which the income in question was received. That was all done in consequence of the
change in shareholding in the company whereby he became the sole shareholder. We think,
therefore, that such income was received by the company as a direct, or at least indirect, result of
that change in shareholding. As was stated in New Urban Properties Ltd v SIR 101 in regard to an
appellant company in precisely similar circumstances:
‘The truth of the matter is that after the change in its shareholding the appellant was not in a position to
earn income beyond the reach of s 90(1)(b)’.
That section was the predecessor of s 103(2). It follows that the second requirement of s 103(2)
has also been proved and that, in our view, the Secretary’s decision to disallow the company’s
income in question to be set off against its assessed loss was correct in all aspects. The appeal is
therefore dismissed and the assessments are confirmed.

Notes
The significance of this case is that it rejected Meyerowitz and Spiro’s view that s 103(2)
applies only to income that was diverted to the company. The court held that, provided
________________________

101 1966 (1) SA 217 (A), 27 SATC 175 at 225.

 Tax avoidance and evasion 735

the three elements of s 103(2) summarised by Trollip J in the first paragraph of the
above extract were present, s 103(2) applies not only to income that was diverted to the
company in question (such as income that had been diverted to the company from other
companies under R’s control) but also to income generated by the company’s own
activities.

Section 103(2) does not prevent an assessed loss from being set-off against ‘untainted’ income; the
new balance of the assessed loss can then be carried forward into the next tax year where it can again
be set off against untainted income.

[369]
Broomberg, ‘Tax Strategy’102
If there has been a change of shareholding or an agreement in relation to any company which
renders the company liable to attack under s 103(2) then any income accruing to the company
as a result of the transaction in question will be regarded as ‘tainted’ income, and it cannot be
set off against the assessed loss of the company. However, the matter goes further; for if a com-
pany does not earn any ‘untainted’ income for the whole of a year, then the assessed loss of the
company is irretrievably lost.
It follows that, when a planner is negotiating a contract that involves a change in shareholding in
a company with an assessed loss, or an agreement concerning an assessed-loss company, it is
essential that the target company be left in possession of some pre-existing assets which are
capable of generating ‘untainted’ income. This is an insurance policy, because even if a success-
ful attack under s 103(2) prevents the set-off of ‘new’ income against the assessed loss, the
assessed loss will be preserved by reason of the continued flow of the untainted income; and this
position can be maintained until the problems of s 103(2) are overcome; perhaps by the estab-
lishment of a brand-new business, or in any other manner which does not involve the diversion
of income to the company.

________________________

102 Broomberg, E B, Tax Strategy, 2 ed at 218-219.

 TABLE OF CASES

Page
A
‘A’ Company, COT v 1979 (2) SA 409 (ZA); 41 SATC 59 ......................................................... 434, 442
Abbot v Philbin (Inspector of Taxes) [1960] 2 All ER 763 (HL) ..................................................... 129
ABC Trust, The v CSARS (2005) TPD (Unreported) ....................................................................... 217
Aberdeen Construction Group Ltd v IRC [1978] AC 885 ................................................................ 704
African Life Investment Corporation (Pty) Ltd v SIR
1969 (4) SA 259 (A); 31 SATC 163 .. 233, 266, 303, 319, 325, 327, 333, 334, 336, 337, 342, 564, 681
African Oxygen Ltd, CIR v 1963 (1) SA 681 (A);
25 SATC 67 ....................................................... 333, 470, 494, 498, 539, 541, 546, 547, 549, 550, 568
African Products Manufacturing Co Ltd, CIR v 1944 TPD 248; 13 SATC 164 ............................... 592
Alabama Coal, Iron and Colonisation Co Ltd v MyLam (1936) 11 TC 232 ..................................... 246
Allied Building Society, CIR v 1963 (4) SA 1 (A) .......................................422, 478, 487, 500, 513, 517
Amalgamated Zinc (de Bavay’s) Ltd v FCT 3 ATC 297 ..................................................................... 449
Anderson & Coltman Limited v Universal Trading Co 1948 (1) SA 1277 (W) ............................... 119
Angliss & Co Ltd v FCT 46 CLR 417..................................................................................................... 69
Anglo-Persian Oil Co Ltd v Dale (Inspector of Taxes)
(1931) 16 TC 253; [1932] 1 KB 124 ............................................................................... 541, 543, 548
Armstrong v CIR 1938 AD 343; 10 SATC 1.............................................................. 53, 55, 96, 635, 636
Aron Salomon v A Salomon & Co Ltd [1897] AC 22 (HL) ................................................................ 10
Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314 .............................................................. 163
Atkinson v FCT (1951) 84 CLR 298 ................................................................................................... 216
Atlantic Refining Company of Africa (Pty) Ltd v CIR 1957 (2) SA 330 (A) ............................ 506, 556
Automated Business Systems (Pty) Ltd v CIR 1986 (2) SA 623 (T) ......................................... 615, 618
Aveling, SBI v 1978 (1) SA 862 (A); 40 SATC 1 ..........................................262, 324, 327, 335, 337, 339
Aveling, SBI v 42 SATC 7 .................................................................................................................... 324

B
B v COT Southern Rhodesia 1958 (1) SA 172 (SR); 21 SATC 353 .................................................. 591
Baikie v CIR 1931 AD 496; (1931) 5 SATC 193 ......................................................................... 241, 440
Bairstow, Edwards (Inspector of Taxes) v [1955] 3 WLR 410; [1955] 3 All ER (HL) ............. 315, 339
Bank of Lisbon & SA Ltd v The Master 1987 (1) SA 276 (A) ........................................................... 187
Bank Windhoek Bpk v Rajie en ‘n ander 1994 (1) SA 115 (A) ........................................................ 701
Barclay Curle & Co Ltd, IRC v [1969] 1 All ER 732 (HL) ........................................................ 609, 610
Barkett v SA Mutual Trust & Assurance Co Ltd 1951 (2) SA 353 (A) ................................................ 12
Barkhuizen v Napier 2007 (5) SA 323 (CC) (2007 (7) BCLR 691; [2007] ZACC 5) ........................ 11
Barnato Holdings Ltd v SIR
1978 (2) SA 440 (A); 40 SATC 75 ........................................................................... 325, 326, 333, 337
Barnet London Borough Council: Ex parte Shah, R v [1982] 1 All ER 698 (CA) ............................ 21
Barnett v COT 1959 (2) SA 713 (FC) ................................................................................................. 168
Barr, Crombie & Co Ltd (1945) 26 TC 406 ....................................................................................... 357
Barron v Sacher 1947 (2) SA 1049 ..................................................................................................... 652
737
738 Income Tax in South Africa: Cases & Materials

Page
Bastian Financial Services (Pty) Ltd v General Hendrik Schoeman Primary School
2008 (5) SA 1 (SCA) ........................................................................................................................... 9
Bato Star Fishing (Pty) Ltd v Minister of Environmental Affairs 2004 (4) SA 490 (CC);
(2004 (7) BCLR 687; [2004] ZACC 15) .......................................................................................... 10
BC Plant Hire CC v Grenco (SA) (Pty) Ltd (Unreported, Cape High Court, 2003) ...................... 690
Beach Station Caravans Ltd, Cooke (Inspector of Taxes) v [1974] 3 All ER 159 ............................ 609
Bentleys, Stokes & Lowless v Beeson (HM Inspector of Taxes)
(1952) 33 TC 491 (CA); [1952] 2 All ER 82 (CA) ................................................................. 508, 520
Berea Park Avenue Properties (Pty) Ltd v CIR 1995 (2) SA 411 (A) ....................................... 256, 317
Berea West Estates (Pty) Ltd v SIR 1976 (2) SA 614 (A) .... 244, 254, 256, 259, 265, 298, 306, 312, 315
Berold, CIR v 1962 (3) SA 748 (A); 24 SATC 279 ......................................136, 166, 173, 175, 176, 178
Bertie van Zyl (Pty) Ltd and Another v Minister for Safety and Security and Others
2010 (2) SA 181 (CC) (2009 (10) BCLR 978) ................................................................................ 12
Black, CIR v 1957 (3) SA 536 (A); 21 SATC 226........................................ 39, 43, 45, 46, 74, 76, 77, 78
Blakiston v Cooper [1909] AC 104 ..................................................................................................... 370
Bloch v SIR 1980 (2) SA 401 (C); 42 SATC 7..................................................................... 324, 325, 336
Blue Circle Cement Ltd v CIR 1984 (2) SA 764 (A) .................................................................. 607, 613
Blumberg & Sulski v Brown & Freitas (1922) TPD 130..................................................................... 651
Boarland v Kramat Pulai Ltd [1953] 2 All ER 1122........................................................................... 235
Booysen’s Estate, COT v 1917 TPD 278 ....................................................................................... 98, 580
Booysens Estates Ltd, COT v 1918 AD 576;
32 SATC 10 .............................................. 190, 192, 211, 223, 250, 251, 268, 275, 303, 322, 331, 342
Borstlap v SBI 1981 (4) SA 836 (A); 43 SATC 195 .................................................... 224, 421, 423, 501
Bos v CSARS (2008) 70 SATC 187 (Transvaal Provincial Division) ................................................. 354
Bosch v CSARS 2013 (5) SA 130 ................................................................................................. 700, 702
Bourke’s Estate v CIR 1991 (1) SA 661 (A); 53 SATC 86 .................................................. 362, 365, 537
Bowden v Russel & Russel (1965) 42 TS 301 (Ch) ............................................................................ 520
Boyd v CIR 1951 (3) SA 525 (A); 17 SATC 366 ............................................... 52, 53, 56, 83, 86, 87, 88
BP South Africa (Pty) Ltd, CSARS v 2006 (5) SA 559 (SCA) ............................................ 484, 541, 571
BP Southern Africa (Pty) Ltd v CSARS (2007) 69 SATC 79 (SCA) .................................................. 567
Brajkovich v FCT 89 ATC 5227 (Full Federal Court of Australia) ................................................... 344
Brent v FCT (1971) 125 CLR 418 (High Court of Australia)............................................................ 199
British Australian Wool Realisation Association Ltd, COT v 1931 AC 224 .............................. 248, 300
British Dyestuffs Corp (Blackley) Ltd v IRC 12 TC 596 .................................................................... 402
British Insulated & Helsby Cables v Atherton [1926] AC 205 .......................................... 540, 543, 548
British United Shoe Machinery (SA) (Pty) Ltd, COT v
1964 (3) SA 193 (FC); 26 SATC 163 ........................................................................................... 50, 81
Brookes Lemos Ltd v CIR 1947 (2) SA 976 (A); 14 SATC 295 ......................... 150, 152, 153, 157, 185
Brumby (Inspector of Taxes) v Milner [1976] 3 All ER 636 (HL) ................................................... 382
Brummeria Renaissance (Pty) Ltd, CSARS v
[2007] SCA 99 (RSA) ................................................ 111, 115, 134, 139, 140, 141, 193, 195, 196, 209
Bryant v Minister of Labour & Minister of Justice [1943] TPD 205 ........................ 653, 656, 659, 661
BSA Co Investments Ltd, COT v 1966 (1) SA 530 (SRAD)............................................................... 504
Buglers Post (Pty) Ltd v SIR 1974 (3) SA 28 (A) ............................................................................... 654
Building Contractors v COT 1941 SR 233; 12 SATC 182 .................................................................. 148
Burgess v CIR 1993 (4) SA 161 (A); (1993) 55 SATC 185 ......................................................... 227, 484
Burmah Steamship Co Ltd v CIR (1930) 16 TC 67; 1931 SC 156 ............................ 354, 357, 358, 365
Burman v CIR 1991 (1) SA 533 (A); 53 SATC 63 .............................................................. 432, 554, 559
Butcher Bros (Pty) Ltd, CIR v 1945 AD 301;
13 SATC 21 ....................................................... 102, 162, 195, 368, 369, 393, 400, 404, 406, 410, 411

C
Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA) ......................117, 120, 122, 136, 143, 144
Cadac Engineering Works (Pty) Ltd, SIR v
1965 (2) SA 511 (A); 27 SATC 61 .................................... 330, 468, 470, 494, 541, 546, 549, 552, 573
Californian Copper Syndicate v IR
(1904) 41 Sc LR 691; (1904) 5 TC 159 ............ 212, 242, 243, 251, 252, 261, 268, 275, 281, 296, 402
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Caltex Oil (SA) Pty Ltd v SIR 1975 (1) SA 665 (A);
(1975) 37 SATC 1 .............................................................123, 146, 363, 426, 428, 437, 440, 441, 446
Cameron v Prendergast [1940] AC 549 ............................................................................................. 377
Cape Consumers (Pty) Ltd, CSARS v 1999 (4) SA 1213 (C) ............................................................. 158
Cape Explosives Works Ltd v South African Oil & Fat Industries Ltd 1921 CPD 244 ..................... 72
Carletonville Motors (Pty) Ltd, CIR v 1962 (3) SA 581 (A); 26 SATC 195 ...................................... 623
Cathcart, COT v 1965 (1) SA 507 (SRAD); 27 SATC 1 ..................................................................... 456
Charkay Properties (Pty) Ltd, SIR v 1976 (4) SA 872 (A) ................................................................. 610
Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 ([2009] 4 All ER 677 (HL)................. 13
Chipkin (Natal) (Pty) Ltd v CSARS [2005] 3 All SA 26; 67 SATC 243 (SCA) .................................. 412
CIR v Kuttell 1992 (3) SA 242 (A); 54 SATC 298 ..................................................................... 19, 20, 89
CIR v Lever Bros & Unilever Ltd (1946) 14 SATC 1 ........................................... 41, 50, 56, 93, 94, 595
Cohen v CIR 1946 AD 174; 13 SATC 362 ....................................................................................... 19, 21
Cohen v CIR 1962 (2) SA 367 (A) ...................................................................................................... 258
Cole Bros Ltd v Phillips (Inspector of Taxes) [1982] 2 All ER 247 .................................................. 608
Collett v Priest 1931 AD 290 ............................................................................................................... 529
Commissioner for Her Majesty’s Revenue and Customs v Smallwood
[2010] EWCA Civ 778 ............................................................................................. 25 26 27 28 30 32
Commonwealth Aluminium (1977) 7 ATR 376 ................................................................................ 444
Concentra (Pty) Ltd v CIR (1942) CPD 509; (1942) 12 SATC 95 ............................................ 426, 440
Conhage (Pty) Ltd (formerly Tycon (Pty) Ltd), CIR v 1999 (4) SA 1149 (SCA) ..... 694, 697, 701, 709
Conshu (Pty) Ltd v CIR 1994 (4) SA 603 (A) .................................................................................... 529
Cowley, CIR v 1960 (2) SA 700 (A); 23 SATC 276 ..................................................................... 191, 376
Crane, SIR v 1977 (4) SA 761 (T); 39 SATC 191 ............................................................................... 506
Creer, FCT v (1986) 65 ALR 485 (FC) ....................................................................................... 489, 572
Crowe v CIR 1930 AD 122; 4 SATC 133 ............................................................................. 191, 193, 400
Crown Mines Ltd v CIR 1922 AD 91; (1970) 32 SATC 190 .............................................................. 444
Crown Mines Ltd, CIR v 1923 AD 21.................................................................................. 132, 198, 378
CSARS v Bosch [2014] ZASCA 171; [2015] 1 All SA 1 (SCA); 2015 (2) SA 174 (SCA) ...................... 14
CSARS v Founders Hill (Pty) Ltd [2011] ZASCA 66 ......................................................... 249, 251, 256
Commissioner, SARS v Brummeria Renaissance (Pty) Ltd 2007 (6) SA 601 (SCA),
69 SATC 205 ................................................................................................................... 142, 380, 646
CSARS v Mobile Telephone Networks Holdings (Pty) Ltd [2014] ZASCA 4................................... 472
CSARS v NWK Ltd 2011 (2) SA 67 (SCA) ................. 388, 388 695,695 696, 697, 698, 699, 700, 701, 702, 705

D
Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530 ..................................... 414, 690, 695, 701
Datakor Engineering (Pty) Ltd, CIR v 1998 (4) SA 1050 (SCA) ...................................................... 162
Davis v COT 1938 AD 301; 9 SATC 380................................................................................... 49, 65, 66
Dawson v Counsell (HM Inspector of Taxes 1922 TC 149................................................................ 680
De Beers Consolidated Mines Ltd v Howe [1906] AC 435 ........................................................... 57, 63
De Beers Holdings (Pty) Ltd v CIR 1986 (1) SA 8 (A) .............................................. 234, 274, 468, 471
De Villiers v CIR 1929 AD 227; 4 SATC 86 .........................................129, 132, 198, 279, 377, 382, 394
Deary v Deputy CIR 1920 CPD 541 .................................................................................................... 374
Delagoa Bay Cigarette Co, CIR v 1918 TPD 391; 32 SATC 47 ................................................. 107, 216
Delfos, CIR v 1933 AD 242; 6 SATC 92 .............................. 104, 112, 114, 127, 131, 137, 165, 195, 429
Dempers, Estate v SIR 1977 (3) SA 410 (A); 39 SATC 95 ................................ 637, 638, 639, 643, 644
Dirmeik, CIR v 1996 (2) SA 736 (C) .................................................................................................. 483
Dixon, FCT v [1952] 86 CLR 540 (High Court of Australia).................................................... 205, 215
Donoghue v Allied Newspapers Ltd [1938] Ch 106 .......................................................................... 200
Dooland, Moorhouse (Inspector of Taxes) v [1955] 1 All ER 93; [1955] Ch 284 ................... 203, 207
Doughty v COT 1927 AC 327.............................................................................................................. 241
Drakensburg Garden Hotel (Pty) Ltd, CIR v 1960 (2) SA 475 (A) ................................................... 459
Duke of Westminster, IRC v [1936] AC 1 .................................................................. 686, 689, 697, 703
Dunn & Co, COT v 1918 AD 607 ....................................................................................... 75, 79, 80, 92
Du Plessis v Joubert 1968 (1) SA 585 (A) ........................................................................................... 701
Durban City Council v Association of Building Societies 1942 AD 27 ............................................ 642
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Durban North Traders Ltd v CIR 1956 (4) SA 594 (A) ............................................................ 331, 337
Duro Travel Goods Pty Ltd, Commr of Taxation v (1953) 87 CLR 524; 5 AITR 492 ...................... 550

E
Ebrahim v Minister of the Interior 1977 (1) SA 665 (A) .................................................................... 10
Edgars Stores Ltd v CIR 1988 (3) SA 876 (A); 50 SATC 81 .............................................. 433, 438, 445
Edgars Stores Ltd, CIR v (1986) 48 SATC 89..................................................................................... 437
Eisner v Macomber (1919) 252 US 189 (United States Supreme Court) ......................................... 192
Elandsheuwel Farming (Edms) Bpk v SBI 1978 (1) SA 101 (A);
39 SATC 163 ............. 212, 256, 257, 261, 269, 273, 275, 287, 290, 292, 294, 301, 306, 307, 317, 341
Ellert v CIR 1957 (1) SA 483 (A) ........................................................................................................ 655
Elma Investments CC, CIR v (1996) 58 SATC 295 ............................................................................ 483
English, Scottish & Australian Bank Ltd v CIR [1932] AC 238........................................................... 93
Epstein, CIR v 1954 (3) SA 689 (A); 19 SATC 221 ............. 43, 45, 46, 48, 49, 56, 59, 64, 69, 77, 82, 85
Erf 3183/1 Ladysmith (Pty) Ltd v CIR
1996 (3) SA 942 (A); 58 SATC 229 .................................. 159, 386, 688, 694, 695, 697, 701, 710, 712
Ernst v CIR 1954 (1) SA 318 (A); 19 SATC 1 ..................................................................... 654, 655, 660
Essential Sterolin Products (Pty) Ltd v CIR 1993 (4) SA 859 (A) ........................................... 39, 42, 44
Europa Oil (NZ) Ltd v CIR [1976] 1 NZLR 546 ............................................................................... 670
Europa Oil (NZ) Ltd, CIR v [1971] 1 NZLR 641 .............................................................................. 670
Everett, FCT v (1980) 10 ATR 608 (High Court of Australia) ................................................ 57, 82, 85

F
FA & AB Ltd v Lupton (Inspector of Taxes) [1972] AC 634 .................................................... 227, 230
Farmer v Scottish North American Trust [1912] AC 118 ................................................................. 479
Feldman Ltd v SIR 1969 (3) SA 424 (A); 31 SATC 121............................................................. 453, 578
Felix Schuh (SA) (Pty) Ltd, CIR v 1994 (2) SA 801 (A)............................................................. 136, 431
Fick v Bierman 2 SC 26 ....................................................................................................................... 181
Financier v COT 1950 (3) SA 293 (SR) .................................................................................... 479, 515
First National Bank of SA Ltd t/a Wesbank v CSARS 2002 (4) SA 768 (CC) ...................................... 3
Fleming & Co (Machinery) Ltd, IRC v (1951) 33 TC 57 .................................................................. 357
Flemming v KBI 1995 (1) SA 574 (A) ................................................................................................. 604
Foley v Fletcher 28 LJ 100 ................................................................................................................... 372
Forest v COT (SR) 1944 SR 1; 13 SATC 139 (High Court of Southern Rhodesia) ......................... 241
Forrest, CIR v 8 TC 704 ....................................................................................................................... 501
Fourie NO v Edeling NO [2005] 4 All SA 393 (SCA) ....................................................................... 110
Francis George Hill Family Trust v South African Reserve Bank 1992 (3) SA 91 (A) ..................... 414
Freeman, COT (NSW) v (1956) 6 AITR 225 ....................................................................................... 41

G
G v CIR (New Zealand) [1961] NZLR 994 (Supreme Court of New Zealand) ........................ 210, 214
G, COT v 1981 (4) SA 167 (ZA); 43 SATC 159 ...................................106, 108, 110, 111, 209, 217, 218
Gallagher, SIR v 1978 (2) SA 463 (A) ......................................................................... 707, 720, 721, 726
Geldenhuys v CIR 1974 (3) SA 256 (C); 14 SATC 419 ...................................... 105, 107, 148, 209, 219
General Motors SA (Pty) Ltd, CIR v 1982 (1) SA 196 (T); 43 SATC 249......................................... 193
General Reinsurance Co Ltd v Tomlinson [1970] 2 All ER 436....................................................... 303
Genn & Co (Pty) Ltd, CIR v 1955 (3) SA 293 (A);
20 SATC 113 ..................................... 136, 160, 208, 449, 462, 468, 484, 500, 515, 544, 546, 583, 594
George Forest Timber Co Ltd, CIR v
1924 AD 516; 1 SATC 20 ......................................... 150, 191, 209, 223, 231, 241, 262, 267, 287, 300,
359, 400, 425, 491, 505, 537, 539, 553, 560, 568, 573
Geustyn, Forsyth & Joubert, SIR v
1971 (3) SA 567 (A) ..................................................................................708, 711, 716, 719, 720, 728
Giesken & Giesken, Rex v 1947 (4) SA 561 (A)......................................................... 655, 659, 662, 678
Giuseppe Brollo Properties (Pty) Ltd, CIR v 1994 (2) SA 147 (A)........................................... 478, 487
Glass, COT v 1962 (1) SA 872 (FC) .................................................................................................... 234
Glen Anil Development Corporation v SIR 1975 (4) SA 715 (A) .................................................... 708
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Glenboig Union Fire Clay Co Ltd v CIR 12 TC 427 .................................................................. 357, 567
Golden Dumps (Pty) Ltd, CIR v 1993 (4) SA 110 (A); 55 SATC 198 ....................... 432, 436, 439, 445
Golden Horse Shoe (New) Ltd v Thurgood [1934] 1 KB 548 (CA) ................................................ 538
Goodrick v CIR 1959 (3) SA 523 (A) ......................................................................................... 310, 335
Greases (SA) Ltd v CIR 1951 (3) SA 518 (A); 17 SATC 358 .................................................... 151, 157
Great Western Ry Co v Bater 8 TC 235 .............................................................................................. 392
Greenband Properties (Pty) Ltd v CIR (1981) 43 SATC 151 (C)..................................... 286, 293, 302
Grieve v CIR [1984] 1 NZLR 101 ....................................................................................................... 670
Griffiths (Inspector of Taxes) v JP Harrison (Watford) Ltd 1963 AC 1 .................. 107, 110, 217, 219
Guardian Assurance Co South Africa Ltd, CIR v 1991 (3) SA 1 (A) ................................................ 227
Guardian Assurance Holdings (SA) Ltd, SIR v
1976 (4) SA 522 (A); 38 SATC 111 ................................................................. 474, 501, 504, 523, 561
Gud Holdings (Pty) Ltd v CSARS (2007) 69 SATC 115 (N) ............................................................. 120
Guiseppe Brollo Properties (Pty) Ltd, CIR v 1994 (2) SA 147 (A)........................................... 478, 487

H
H v Commissioner of Taxes 23 SATC 292 ......................................................................................... 683
H v COT 24 SATC 738 .......................................................................................................................... 19
Hallstroms Proprietary Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 ... 490, 572, 573
Hanekom v Builders Market Klerksdorp (Pty) Ltd 2007 (3) SA 95 (SCA) ........................................ 12
Harris v Minister of the Interior 1952 (2) SA 428 (A) ...................................................................... 529
Hartzenberg, SIR v 1966 (1) SA 405 (A)............................................................................................ 690
Hawkins, Crossland (Inspector of Taxes) v [1961] 2 All ER 812.............................................. 714, 724
Hayes v FCT (1956) 96 CLR 47; 11 ATD 68 (High Court of Australia) ........................................... 204
Henley v Murray [1950] 1 All ER 908 ................................................................................................ 391
Herald & Weekly Times Ltd, The v FCT 2 ATD 169 ......................................................................... 454
Heron Investments (Pty) Ltd v SIR 1971 (4) SA 201 (A); 33 SATC 181................................... 589, 593
Hersamar (Pty) Ltd, SIR v 1967 (3) SA 177 (A); 29 SATC 53 ........................................... 614, 616, 617
Hersov, CIR v 1952 (1) SA 485 (A); 18 SATC 20 .............................................................. 112, 355, 582
Hersov’s Estate v CIR 1957 (1) SA 471 (A) ........................................................................................ 129
Hicklin v SIR 1980 (1) SA 481 (A) ...............................................................521, 687, 690, 719, 722, 729
Hickson, CIR v 1960 (1) SA 746 (A); 23 SATC 243 ................................................................... 496, 497
Hiddingh v CIR 1941 AD 111; 11 SATC 205 ............................................................. 180, 182
Highland Ry Co v Special Commissioners of Income Tax 16 R 950, 2 Tax Cases 151 ................... 597
Hilewitz, CIR v (1998) 60 SATC 86 (T) ............................................................................. 464, 469, 558
Hinton (Inspector of Taxes) v Maden & Ireland Ltd [1959] 3 All ER 356 (HL) ............................ 609
Hippo Quarries (Tvl) (Pty) Ltd v Eardley [1991] ZASCA 174; 1992 (1) SA 867 (A) ...................... 701
Hogan, KBI v 1993 (4) SA 150 (A)...................................................................................................... 372
Hogg v Parochial Board of Auchtermuchty 7 Rettie 986 .................................................................. 654
Holley v CIR 1947 (3) SA 119 (A); 14 SATC 407 ............................................................................... 185
Household v Grimshaw (Inspector of Taxes) [1953] 2 All ER 12 .................................................... 581
Hudson Bay Co Ltd, The v Stephens (Surveyor of Taxes) (1909) 5 TC 424 ................................... 305
Hulett Ltd v Resident Magistrate, Lower Tugela 1912 AD 760......................................................... 171
Hulett v CIR 1944 NPD 263 ................................................................................................................ 640

I
Illovo Sugar Estates Ltd, CIR v 1951 (1) SA 306 (N)................................................. 357, 363, 364, 566
Incorporated Council of Law Reporting for England & Wales,
In re Duty on Estate of (1888) 22 QBD 279 ................................................................................... 211
Incorporated General Insurances Ltd v Shooter 1987 (1) SA 842 (AD) ......................................... 382
Inland Revenue v Fleming & Co (Machinery) Ltd (3) 33 TC 33 ..................................................... 362
Investors Compensation Scheme Ltd v West Bromwich Building Society
[1998] 1 All ER 98 (HL) .................................................................................................................. 13

J
J Beam Group Ltd, Milnes (HM Inspector of Taxes) v 50 TC 675 ................................................... 557
J v COT (1993) 55 SATC 62 (High Court of Zimbabwe) .......................................................... 669, 680
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Jaga v Dönges NO; Bhana v Dönges NO 1950 (4) SA 653 (A) ..................................................... 10, 14
James Flood (Pty) Ltd, FCT v (1953) 88 CLR 492 ............................................................................. 427
Jay’s the Jewellers Ltd v IRC [1947] 2 All ER 762; 29 TC 274 .......................................... 153, 154, 156
Jewish Colonial Trust v Estate Nathan 1940 AD 163 ......................................................................... 642
Joffe & Co (Pty) Ltd v CIR 1946 AD 157;
13 SATC 354 ............................................................ 419, 424, 430, 448, 453, 456, 457, 473, 562, 587
Joffe v CIR 1950 (3) SA 309 (C) ......................................................................................................... 393
John Bell & Co (Pty) Ltd v SIR 1976 (4) SA 415 (A);
38 SATC 87 ....................................................... 227, 252, 259, 267, 287, 290, 295, 301, 302, 308, 310
John Cullum Construction Co (Pty) Ltd, SIR v 1965 (4) SA 697 (A) .............................................. 594
Johnson Matthey plc, Lawson (Inspector of Taxes) v [1992] 2 All ER 647 (HL)............................ 468
Jones v CIR [1920] 1 KB 711 .............................................................................................................. 374
Jones v FCT (1932) 2 ATD 16 ............................................................................................................. 345
Jones: Trautwein v FCT (1936) 56 CLR 196 ...................................................................................... 345
Joss v SIR 1980 (1) SA 674 (T); 41 SATC 206............................................................ 171, 175, 176, 178

K
K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd [1985] HLA 48 ((1985) 157 CLR 309) 10
Kelly & Myerson, CIR v 1947 (2) SA 1243 .................................................................................. 398, 401
Kemp, Estate v McDonald’s Trustee 1915 AD 491 ............................................................................ 185
Kerguelen Sealing & Whaling Co Ltd v CIR 1939 AD 487; 10 SATC 363 .............................. 17, 72, 73
Kluh Investments (Pty) Ltd v CSARS [2014] ZAWCHC 141 .................................... 650, 672, 674, 675
Kilburn v Estate Kilburn 1931 AD 501 ............................................................................... 690, 697, 702
King, CIR v 1947 (2) SA 196 (A); 14 SATC 184..........................182, 279, 501, 640, 711, 714, 720, 721
Kirk, COT v [1900] AC 588 .................................................................................................................. 71
Knight v COT (Ratcliffe & McGrath) IT Decisions 1928-1930 ......................................................... 680
Kobersohn & Silverman, Rex v 1936 CPD 556 .................................................................................. 662
Kohler 1949 (4) SA 1022 (T); 16 SATC 312 .............................................................................. 169, 171
Kohler, Estate, CIR v 1953 (2) SA 584 (A) ......................................................... 173, 309, 687, 690, 721
Koöperatiewe Wynbouwers Vereniging van Zuid-Afrika Bpk v
Industrial Council for the Building Industry 1949 (2) SA 600 (A)........................................ 658, 662
Kootcher, Estate v CIR 1941 AD 256; 11 SATC 298 ............................................................................ 87
Korean Syndicate Ltd, CIR v [1921] 3 KB 258................................................................................... 300
Kotze, CIR v (1998) 64 SATC 447 (C) ............................................................................................... 380
KPMG Chartered Accountants (SA) v Securefin Ltd 2009 (4) SA 399 (SCA);
[2009] 2 All SA 523 (SCA) ................................................................................................................. 9
Kuttell, CIR v 1992 (3) SA 242 (A); 54 SATC 298 ......................................................................... 20, 89
KWV Bpk v Industrial Council for the Building Industry 1949 (2) SA 600 (A) ....................... 658, 662

L
L Feldman Ltd v SIR 1969 (3) SA 424 (A); 31 SATC 121 ......................................................... 453, 578
L v Commissioner of Taxes (1992) 54 SATC 91 (ZHC) ................................................................... 494
Lace Proprietary Mines Ltd v CIR 1938 AD 267;
9 SATC 349 ...................................................................... 114, 123, 124, 138, 146, 241, 279, 287, 300
Laerstate v The Commissioner for Her Majesty’s Revenue & Customs [Corporation Tax] ............. 32
Lamb v CIR 1955 (1) SA 270 (A); 20 SATC 1 ...................................................................................... 87
Land Dealing Company v COT 1959 (3) SA 485 (SR); 22 SATC 310 .............................................. 164
Lategan v CIR 1926 CPD 203;
2 SATC 16 .............................................................. 103, 111, 112, 113, 114, 117, 120, 121, 122, 123,
128, 131, 136, 139, 140, 141, 143, 144, 146, 149, 165, 195, 394
Le Sueur, CIR v 1960 (2) SA 708 (A) ......................................................................................... 611, 612
Leeming v Jones (1930) 15 TC 333 .................................................................................................... 225
Levene v IRC [1928] All ER Rep. 746 (HL) ........................................................................................ 19
Lever Bros & Unilever Ltd, CIR v 1946 AD 441;
14 SATC 1 .................................. 39, 40, 41, 43, 46, 47, 48, 55, 57, 59, 81, 82, 83, 85, 90, 95, 96, 206
Levy v CIR 1930 NPD 370 ................................................................................................................... 368
Levy, COT v 1952 (2) SA 413 (A); (1952) 18 SATC 127 ............234, 274, 278, 283, 321, 332, 333, 337
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Leydenburg Platinum Ltd, CIR v
1929 AD 137 ...................................................... 226, 233, 263, 279, 280, 286, 289, 299, 304, 321, 328
Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd 1918 AC 350.................... 170
LHC Corporation of SA (Pty) Ltd v CIR 1950 (4) SA 640 (A) ......................................... 309, 322, 331
Lief NO v Dettmann 1964 (2) SA 252 (A) ......................................................................................... 182
Liquidator, Rhodesian Metals Ltd v COT, Southern Rhodesia
1938 AD 282; 9 SATC 363 ............................................................................................. 39, 66, 92, 241
Livingston, IRC v (1927) 11 TC 538 ................................................................................................... 224
Local Investment Co v Commissioner of Taxes (SR) 22 SATC 4 ..................................................... 475
London Australia Investment Co Ltd v FCT 7 ATR 757 ................................................................... 343
London CC v AG [1901] AC 26 .......................................................................................................... 140
Lord Vestey’s Executors v IRC [1949] All ER 1108........................................................................... 686
Louis Zinn Organisation (Pty) Ltd, CIR v 1958 (4) SA 477 (A); 22 SATC 85 .................. 445, 525, 731
Louw, CIR v 1983 (3) SA 551 (A); 45 SATC 113................................................................ 719, 723, 728
Lovell & Christmas Ltd v COT [1908] AC 46 ...................................................................................... 45
LTA Construction Bpk v Administrateur, Transvaal 1992 (1) SA 473 (A) ...................................... 178
Lunnon, CIR v 1924 AD 94; 1 SATC 7 ............................................................... 196, 214, 215, 360, 384
Lurcott v Wakely & Wheeler [1911] 1 KB 905 ............................................588, 591, 593, 594, 596, 606
Lydenburg Platinum Ltd, CIR v 1929 AD 137; 4 SATC 8... 226, 233, 263, 280, 286, 289, 299, 304, 321
Lysaght, IRC v [1928] AC 234 (HL) .................................................................................................... 21

M
M Ltd v COT 1958 (3) SA 18 (SR); 22 SATC 27................................................................ 41, 45, 74, 77
Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL) .......................................................... 414
MacKay v Fey NO and Another 2006 (3) SA 182 (SCA) ................................................................... 701
Malan v KBI 1981 (2) SA 91 (C); 1983 (3) SA 1 (A); 45 SATC 59 ........................... 253, 257, 283, 317
Malcolmess Properties (Isando) (Pty) Ltd, CIR v 1991 (2) SA 27 (A); 53 SATC 153 ..................... 287
Mallalieu v Drummond (Inspector of Taxes)
[1983] 2 All ER 1095 (HL) ............................................... 448, 467, 495, 503, 508, 521, 523, 544, 546
Mallett v Staveley Coal & Iron Co [1928] 2 KB 405........................................................................... 543
Malone Trust v SIR 1977 (2) SA 819 (A) ........................................................................................... 255
Manganese Metal Co (Pty) Ltd, CIR v 1996 (3) SA 591 (T) ..................................................... 353, 536
Mangin v IRC [1971] AC 739 ..................................................................................................... 703, 720
Manyasha v Minister of Law and Order 1999 (2) SA 179 (SCA) ........................................................ 10
Marais v CIR 1943 CPD 150 ................................................................................................................ 102
Marine & Trade Insurance Co Ltd v Katz NO 1979 (4) SA 961 (A) ................................................ 374
Martin v FCT (1953) 90 CLR 470 ....................................................................................................... 345
Matla Coal Ltd v CIR 1987 (1) SA 108 (A); 48 SATC 223 ................................................. 146, 192, 206
McClelland v COT [1971] 1 All ER 969 ............................................................................................. 303
McMillan v Guest [1942] 1 All ER 606 (HL) ..................................................................................... 391
McNicol v Finch [1906] 2 KB 352 .............................................................................................. 615, 616
Meeks, COT (NSW) v 19 CLR 568 ....................................................................................................... 71
Megs Investments (Pty) Ltd, CSARS v 2005 (4) SA 328 (SCA) ................................................. 232, 530
Melbourne Trust, COT v [1914] AC 1010 ................................................................................. 242, 303
Melmoth Town Board v Marius Mostert (Pty) Ltd 1984 (3) SA 718 (A) ........................................... 13
Meyerowitz v CIR 1963 (3) SA 863 (A); 25 SATC 287 ....................................................... 713, 716, 724
Michau v Maize Board 2003 (6) SA 459 (SCA); 66 SATC 288 .......................................................... 695
Millin v CIR 1928 AD 207; 3 SATC 170 ..........................................................50, 56, 80, 83, 84, 96, 580
Milstein, CIR v 1942 TPD 57 .............................................................................................................. 374
Mitchell v BW Noble Ltd [1927] 1 KB 719; 11 TC 372 ............................................................. 543, 598
Modderfontein B Gold Mining Co Ltd v CIR 1923 AD 34; 32 SATC 202 ................................ 215, 360
Modified Investments (Pty) Ltd, CIR v 1982 (1) SA 331 (T); 43 SATC 257 .......................... 288, 291
Moodie v CIR, Transkei 1993 (2) SA 501 (TkA) ............................................................................... 187
Mooi v SIR 1972 (1) SA 675 (A); 34 SATC 1 ....................... 114, 124, 128, 138, 146, 147, 148, 368, 376
Moolman v CIR 1954 (2) SA 560 (A) ................................................................................................. 370
Moore v CIR 1938 TPD 369; 10 SATC 20....................................................................................... 55, 86
744 Income Tax in South Africa: Cases & Materials

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Moore v Griffiths (Inspector of Taxes) [1972] 3 All ER 399 (Ch);
[1972] 1 WLR 1024; [1972] 48 Tax Cas 338 .................................................. 133, 134, 206, 381, 383
Moorreesburg Produce Co Ltd v CIR 1945 CPD 289; 13 SATC 306 ................................................ 410
Moreau v FCT 39 CLR 65.................................................................................................................... 430
Moriarty v Evans Medical Supplies [1957] 3 All ER 718 ................................................................... 401
Morley v Tattersall [1938] 3 All ER 304; 108 LJ KB 11.............................................................. 153, 154
Mount Morgan GM Co v CIT 33 CLR 76 ............................................................................................. 80
MP Finance Group CC (in liquidation) v CSARS 2007 (5) SA 521 (SCA) ............... 108, 111, 217, 219
Mudd v Collins (1925) 133 LT 186 .................................................................................................... 207
Murgatroyd v Evans-Jackson [1967] 1 All ER 881 (Ch); 43 TC 89 ................................................... 495
Murray Ltd, COT Western Australia v 42 CLR 332 ............................................................................. 84
Myerson & Kelly, CIR v 1947 (2) SA 1243 (A); 14 SATC 300 ........................................................... 399

N
Nasionale Pers Bpk v KBI 1986 (3) SA 549 (A) ................................................................. 425, 434, 437
Nasionale Pers Bpk, KBI v 1984 (4) SA 551 (C) ................................................................................ 441
National Education Health and Allied Workers Union v University of Cape Town
[2002] ZACC 27; 2003 (3) SA 1 (CC) ............................................................................................. 14
Natal Estates Ltd v SIR 1975 (4) SA 177 (A);
37 SATC 193 ................................................................... 165, 226, 232, 242, 247, 250, 252, 259, 264,
266, 273, 287, 288, 290, 298, 302, 308, 309, 311, 313, 328
Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) ..................... 9
Nathan v FCT (1918) 25 CLR 183 ...................................................................................... 41, 43, 87, 92
National Bank of Australia Ltd v FCT 15 ATD 220 ........................................................................... 330
National Bank of South Africa Ltd v Cohen’s Trustee 1911 AD 235........................................ 181, 187
National Co-operative Dairies Ltd v CIR (1992) 54 SATC 1 (A) ...................................................... 620
Nchanga Consolidated Copper Mines, COT v [1964] AC 948 ......................................................... 550
Nell, CIR v 1961 (3) SA 774 (A); 24 SATC 261 .............................................................................. 58, 59
Nemojim (Pty) Ltd, CIR v
1983 (4) SA 935 (A); 45 SATC 241 ..........................................348, 473, 480, 487, 500, 505, 513, 569
Nesci v Meyer 1979 (2) SA 56 (A) ...................................................................................................... 117
New Mines Ltd v CIR 1938 AD 455 .................................................................................... 286, 300, 304
New State Areas Ltd v CIR 1946 AD 610;
14 SATC 155 ............................................ 400, 422, 490, 493, 500, 506, 538, 540, 541, 572, 573, 586
549, 552, 553, 555, 557, 568, 572
New Union Gold Fields Ltd v CIR 1950 (3) SA 392 (A) ................................................................... 660
New Urban Properties Ltd v SIR 1966 (1) SA 217 (A); 27 SATC 175 .......525, 527, 529, 730, 731, 734
Newman, COT v (1921) 29 CLR 484.................................................................................................. 241
Newton v COT of the Commonwealth of Australia [1958] 2 All ER 759 (PC) ........................ 715, 720
Newton v FCT [1958] AC 540 (PC).................................................................................................... 729
Niko, CIR v 1940 AD 416; 11 SATC 124 ............................................................................................ 240
Nilsen Development Laboratories (Pty) Ltd v FCT
(1981) 11 ATR 505 (High Court of Australia)............................................................................... 427
No 166 v Minister of National Revenue 54 DTC 220 ........................................................................ 581
Norman v Golder (Inspector of Taxes) [1945] 1 All ER 352 (CA) .................................................. 495
Nussbaum, CIR v (1996) 58 SATC 283 (A) ................................................................................ 324, 340

O
Ochberg v CIR 1931 AD 215; (1931) 5 SATC 93 ..................................... 123, 125, , 238, 308, 399, 721
Ochberg v CIR 1933 CPD 256; (1933) 6 SATC 1 .............................................................................. 130
Oosthuizen v Estate Oosthuizen 1903 TS 688 ................................................................................... 651
Oryx Mining & Exploration (Pty) Ltd v Secretary for Finance (1991) 53 SATC 359 (NS) ............. 266
Ovenstone v SIR 1980 (2) SA 721 (A) ........................................................................ 175, 176, 178, 724
Overseas Trust Corporation Ltd v CIR 1926 AD 444;
2 SATC 71 ..................................................... 60, 74, 75, 79, 80, 94, 98, 211, 247, 250, 251, 254, 260,
268, 269, 273, 275, 281, 296, 317, 322, 323, 326, 331
 Table of cases 745

Page
P
Page NO v Blieden & Kaplan 1916 TPD 606 ..................................................................................... 119
Paiges v Van Ryn Gold Mine Estates 1920 AD 604 ............................................................................ 181
Palabora Mining Co Ltd v SIR 1973 (3) SA 819 (A) ......................................................................... 544
Partridge v Mallandaine 18 QBD 276................................................................................................. 217
Patel v Minister of the Interior 1955 (2) SA 485 (A)........................................................................... 14
Paul, CIR v 1956 (3) SA 335 (A) ......................................................................... 278, 283, 321, 332, 337
Payne v Deputy Commissioner of Taxation [1936] 2 All ER 793 ............................................. 147, 430
People’s Stores (Walvis Bay) (Pty) Ltd, CIR v 1990 (2) SA 353 (A);
52 SATC 9 ....................................................................... 103, 112, 113, 115, 116, 117, 121, 123, 127,
131, 136, 139, 141, 143, 144, 145, 187, 195, 196
Petrotim Securities Ltd v Ayres [1964] 41 TC 389 ............................................................................ 235
Phillips v Whieldon Sanitary Potteries Ltd 33 TC 213....................................................................... 590
Pick ’n Pay Employee Share Purchase Trust, CIR v
1992 (4) SA 39 (A);
54 SATC 271 ............................................................ 210, 212, 223, 224, 226, 250, 251, 255, 267, 269,
272, 282, 317, 318, 343, 359, 362, 467
Pick ’n Pay Wholesalers (Pty) Ltd, CIR v
1987 (3) SA 453 (A); 49 SATC 132 ................................................................. 467, 469, 504, 508, 519
Pinestone Properties CC, CIR v (2000) 63 SATC 421 ...................................................................... 408
Plate Glass & Shatterprufe Industries Finance Co (Pty) Ltd v SIR
1979 (3) SA 1124 (T); 41 SATC 103 ....................................................................................... 442, 443
Platt v CIR 1922 AD 42 ........................................................................................................................ 296
Port Elizabeth Electric Tramway Co v CIR 1936 CPD 241;
8 SATC 13 ........................................................ 422, 424, 425, 426, 429, 433, 440, 446, 453, 460, 466,
471, 480, 484, 495, 497, 498, 500, 516,
538, 542, 545, 550, 552, 583
Porterville Ko-op Landbou Maatskappy Bpk, Rex v 1952 (1) SA 44 (C) ................................. 661, 678
Prince v Mapp [1970] 1 All ER 519 (Ch); [1970] 1 WLR 260 .................................................. 495, 503
Producer v COT 1948 (4) SA 230 (SR) .............................................................................................. 479
Professional Contract Administration CC, CIR v 2002 (1) SA 179 (T); 64 SATC 119 .................... 384
Professional Suites Ltd v COT (1960) 24 SATC 573 ......................................................................... 408
Protective Mining & Industrial Equipment Systems (Pty) Ltd
(formerly Hampo Systems (Pty) Ltd) v Audiolens (Cape) (Pty) Ltd 1987 (2) SA 961 (A) ......... 10
Provider v COT 1950 SR 161; 17 SATC 40................................................................................ 450, 453
Punjab Co-operative Bank Ltd, Amritsar v Commissioner of Income Tax, Lahore
[1940] 4 All ER 87; 1940 AC 1055 .......................................................................................... 300, 331
Pyott Ltd v CIR 1945 AD 128; 13 SATC 121 ...................................... 149, 185, 192, 424, 433, 441, 442

R
R v Connare (1939) 61 CLR 596 ........................................................................................................ 345
R v Secretary of State for the Environment, Transport and the Regions,
Ex parte Spath Holme Ltd [2001] 2 AC 349................................................................................... 10
R, COT v 1966 (2) SA 342 (RAD); 28 SATC 115 ................................................................................. 54
Raad van Toesig op die Suiwelnywerheid v Ladysmith Towerkop
Ko-operatiewe Kaasfabriek Bpk 1971 (3) SA 511 (C).................................................................... 160
RACV Insurance (Pty) Ltd v Federal Commissioner of Taxation
(1974) 4 ATR 610 (Supreme Court of Victoria)............................................................................ 427
Rainy Sky SA v Kookmin Bank [2011] UKSC 50 ([2012] Lloyds Rep 34 (SC) .............................. 9, 10
Rand Mines (Mining & Services) Ltd v CIR [1997] 1 All SA 279 (A); 59 SATC 85 ......................... 568
Rand Selections Corp Ltd, CIR v 1956 (3) SA 124 (A); 20 SATC 390 ..................................... 474, 502
Rand Speculation & Finance Co Ltd v CIR 1953 (1) SA 348 (A) ............................................. 514, 549
Rand v Alberni Land Co Ltd (1920) 7 TC 629 (KB) ................................................................. 244, 245
Randles, Brothers & Hudson Ltd, Commissioner of Customs & Excise v
1941 AD 369; 33 SATC 48 ................................................................161, 387, 569, 687, 691, 695, 697
Rane Investment Trust v CSARS 2003 (6) SA 332 (SCA) ................................................................. 413
Raubenheimer, SBI v 1969 (4) SA 314 (A) ........................................................................................ 587
746 Income Tax in South Africa: Cases & Materials

Page
Re Sigma Finance Corp [2008] EWCA Civ 1303 (CA).......................................................................... 9
Re Sigma Finance Corp (in administrative receivership) and In Re the Insolvency Act 1986
[2009] UKSC 2 ([2010] 1 All ER 571 (SC) ....................................................................................... 9
Real Estate Land Co v United States 309 US 13 160 ALR ................................................................. 627
Realisation Company v COT 1951 (1) SA 177 (SR); 17 SATC 139 .......................... 243, 246, 247, 254
Reef Estates Ltd v CIR 1954 (2) SA 593 (T); 19 SATC 153 .............................................................. 422
Regent Oil Co Ltd v Strick (Inspector of Taxes); Regent Oil Co Ltd v IRC
[1965] 3 All ER 174 (HL) ...................................................................................... 490, 491, 572, 573
Reid’s Brewery Co v Male [1891] 2 QB 1 ............................................................................................. 90
Relier (Pty) Ltd v CIR (1997) 60 SATC 1 (SCA) ....................................................................... 701, 712
Rendle, COT v 1965 (1) SA 59 (SRAD), 26 SATC 326 ..................................................................... 457
Rex v Detody 1926 AD 198.................................................................................................................... 12
Rex v Schonken 1929 AD 36 ................................................................................................................. 12
Rex Tearoom Cinema (Pty) Ltd v CIR 1946 TPD 338; 14 SATC 76 ................................................ 403
Rezende Gold & Silver Mines (Pty) Ltd, COT v 1975 (1) SA 968 (RA); (1975) 37 SATC 39 ......... 440
Rhodesia Metals Ltd v COT 1938 AD 282; 9 SATC 363 ........................................................ 41, 84, 242
Rhodesia Railways Ltd v Bechuanaland Collector of Income Tax 49 TLR 376 ............................... 604
Rhodesia Railways Ltd v Collector of Income Tax, Bechuanaland Protectorate
1933 AC 368 (PC); 6 SATC 225 .............................................................................................. 546, 596
Rhodesia Railways v COT 1925 AD 438.............................................................................................. 274
Rhodesian Metals Ltd (in liq) v COT, Southern Rhodesia
1940 AD 432; 11 SATC 244 (Privy Council) ............................................41, 47, 67, 69, 76, 79, 84, 92
Richards Bay Iron & Titanium (Pty) Ltd v CIR 1996 (1) SA 311 (A) ............................................... 346
Richardson v Austin [1911] HCA 28 ((1911) 12 CLR 463 ................................................................. 11
Richmond Estates (Pty) Ltd, CIR v
1956 (1) SA 602 (A) ......... 253, 269, 277, 278, 286, 288, 289, 293, 295, 299, 304, 322, 331, 332, 718
Ridgeway Hotel Ltd, COT v (1961) 24 SATC 616 (FS) ..................................................................... 406
Rile Investments (Pty) Ltd, SIR v 1978 (3) SA 732 (A); 40 SATC 135.............................. 266, 292, 293
Rishworth v SIR 1964 (4) SA 493 (A); 26 SATC 275 ......................................................................... 181
Robin Consolidated Industries Ltd v CIR
1997 (3) SA 654 (SCA); [1997] 2 All SA 195 (A); 59 SATC 199 ............................................ 526, 531
Robinson v COT 1917 TPD 542; 32 SATC 41 ...................................................................................... 19
Robson v Theron 1978 (1) SA 841 (A) .............................................................................................. 415
Rolls Royce Ltd v Jeffrey [1962] 1 All ER 801 ............................................................................ 401, 402
Ropty (Edms) Bpk v SIR (1984) 43 SATC 141 (A) ............................................................ 282, 283, 284
Rosen, SIR v 1971 (1) SA 173 (A); 32 SATC 249 ....................................................................... 636, 638
Roshcon (Pty) Limited v Anchor Auto Body Builders CC [2014] ZASCA 40................................... 700
Royal Agriculture Society of England v Wilson (1924) 132 LT 258 ................................................ 211

S
S v Sweers 1963 (4) SA 163 (E)............................................................................................................. 10
S v Zuma 1995 (2) SA 642 (CC) (1995 (1) SACR 568; 1995 (4) BCLR 401) ..................................... 13
SA Bazaars (Pty) Ltd v CIR 1952 (4) SA 505 (A) ............................................... 523, 525, 529, 531, 731
SA Marine Corp Ltd v CIR 1955 (1) SA 654 (C); 20 SATC 15.................................................. 123, 147
Sacks v CIR 1946 AD 31 ...................................................................................................................... 229
Safranmark (Pty) Ltd, SIR v 1982 (1) SA 113 (A); 43 SATC 235 .............................................. 616, 619
Samril Investments (Pty) Ltd V CSARS 2003 (1) SA 658 (SCA) ....................................................... 358
Samuel Jones & Co Ltd v CIR 32 TC 513 ........................................................................................... 590
Schonegevel v CIR 1937 CPD 258 ...................................................................................................... 501
Scott v COT (1935) 35 SR (NSW) 215 ...................................................................................... 191, 390
Scott v FCT (1966) 117 CLR 514 (High Court of Australia) ............................................................ 213
Scribante Construction (Pty) Ltd, CSARS v 2002 (4) SA 835 (SCA) ................................ 482, 488, 492
Sentra-Oes Koöperatief Bpk v KBI 1995 (3) SA 197 (A) ................................................................... 559
Stephan v CIR 1919 WLD 1 ................................................................................ 193, 209, 263, 279, 537
Seymour v Reed [1927] AC 554; [1927] All ER Rep 294 .......................................................... 207, 216
Shah v Barnet London Borough Council & Other Appeals [1983] 1 All ER 226 (HL) ................... 19
Shapiro v CIR 1928 NPD 436 .............................................................................................................. 461
 Table of cases 747

Page
Sharkey v Wernher [1956] AC 58 ....................................................................................................... 164
Shein, COT (SR) v 1958 (3) SA 14 (Federal Supreme Court);
22 SATC 12 .................................................................................................... 45, 46, 47, 51, 56, 58, 59
Shell Southern Africa Pension Fund, CIR v 1984 (1) SA 672 (A); 46 SATC 1 ................................ 389
Sidersky, Rex v (1928) TPD 109 ......................................................................................................... 656
Sidley, SIR v 1977 (4) SA 913 (A); 39 SATC 153 ............................................................................... 638
Silverglen Investments (Pty) Ltd, SIR v 1969 (1) SA 365 (A); 30 SATC 199 ............................ 101, 114
Singh v The Commonwealth [2004] HCA 43 ((2004) 222 CLR 322) ................................................ 12
SIR v Eaton Hall (Pty) Ltd 1975 (4) SA 953 (A) ............................................................................... 363
SIR v Kempton Furnishers (Pty) Ltd 1974 (3) SA 36 (A) ................................................................. 631
Skjelbreds Rederi A/S and Others v Hartless (Pty) Ltd 1982 (2) SA 710 (A) ................................. 701
Smant, SIR v 1973 (1) SA 754 (A); 35 SATC 1 ................................................................................... 183
Smit, SIR v 1965 (3) SA 591 (A) ......................................................................................................... 192
Smith v Anderson (1880) 15 ChD 247, 15 Ch 258 ................................................ 45, 78, 210, 264, 281
Smith v CIR 1964 (1) SA 324 (A) ....................................................................................... 717, 720, 721
Smith v SIR 1968 (2) SA 480 (A) .................................................................468, 536, 566, 579, 586, 588
Smith, CIR v 2002 (6) SA 621 (SCA); 65 SATC 6 .............................................................................. 667
Solaglass Finance Co (Pty) Ltd v CIR 1991 (2) SA 257 (A); 53 SATC 1 ................... 432, 467, 469, 505
Soldier v COT 1943 SR 130................................................................................................................... 19
Somers Vine, SIR v 1968 (2) SA 138 (A); 28 SATC 179 .................................................................... 391
South African Airways (Pty) Ltd v Aviation Union of South Africa 2011 (3) SA 148 (SCA);
[2011] 2 BLLR 112 (SCA).................................................................................................................. 9
South African Marine Corporation Ltd v CIR 1955 (1) SA 654 (C); 20 SATC 15 ........................... 430
South African Reserve Bank v Shuttleworth [2015] ZACC 17 ...................................................... 1, 2, 3
South Deeps Ltd, COT v (1918) AD 605 ................................................................................... 263, 297
South Metropolitan Gas Co v Dodd 13 TC 211 ................................................................................. 627
Southern v Borax Consolidated Ltd [1940] 4 All ER 412 ................................................................. 550
Squatting Investment Co Ltd, The v FCT (1953) 85 CLR 570.......................................................... 213
St John’s School (Mountford & Knibbs) v Ward (Inspector of Taxes) [1974] STC 69 .................. 609
St Lucia Usines Co v Treasurer of St Lucia 1924 93 LJPC 212 ......................................................... 195
Standard Bank of SA Ltd, CIR v 1985 (4) SA 485 (A);
47 SATC 179 .....................................................................................449, 466, 473, 478, 480, 483, 511
Standard Bank of South Africa v Oneanate Investments (Pty) Ltd (in liq.)
1998 (1) SA 811 (SCA) .................................................................................................................... 178
Stander v CIR 1997 (3) SA 617 (C);
59 SATC 212 .............................................................................................130, 136, 140, 143, 195, 378
Stellenbosch Farmers’ Winery, CIR v 1945 CPD 377; 13 SATC 381 ................................................ 544
Stellenbosch Farmers’ Winery Ltd v CSARS [2012] ZASCA 72 ........................................................ 361
Stephan v CIR 1919 WLD 1; 32 SATC 54 .......................................................................................... 297
Stephen Fraser & Co v Clydesdale Transvaal Collieries Ltd 1903 TH 121 ....................................... 119
Stevens v CSARS 2007 (2) SA 554 (SCA) ........................................................................................... 388
Stevens v Hudson Bay Company 101 LJ 96 ........................................................................................ 231
Stone v SIR 1974 (3) SA 584 (A);
36 SATC 117 .................................................................................... 424, 431, 505, 551, 555, 558, 560
Stott, CIR v 1928 AD 252;
3 SATC 253 .............................. 226, 247, 248, 251, 262, 265, 281, 295, 298, 359, 306, 308, 310, 312
Strathmore Consolidated Investments Ltd, CIR v
1959 (1) SA 469 (A) ........................................................................................ 233, 301, 304, 322, 331
Strathmore Exploration Ltd, CIR v 1956 (1) SA 591 (A) .................................................. 262, 314, 402
Strathmore Holdings (Pty) Ltd v CIR 1959 (1) SA 460 (A).............................................................. 311
Strong & Co of Romsey Ltd v Woodifield
[1906] AC 448; [1904-1907] All ER Rep 953 ................................................................. 447, 454, 503
Stroud Riley & Co Ltd v SIR 1974 4 SA 534 (E); 36 SATC 143 ......................................................... 445
Struben Minerals (Pty) Ltd, SIR v 1966 (4) SA 582 (A); 26 SATC 248 ..................................... 192, 370
Sub-Nigel Ltd v CIR 1948 (4) SA 580 (A);
15 SATC 381 ............................................. 419, 429, 437, 446, 449, 460, 471, 497, 500, 524, 537, 549
748 Income Tax in South Africa: Cases & Materials

Page
Summit Industrial Corporation v Claimants against the Fund Comprising the Proceeds
of the Sale of the MV Jade Transporter 1987 (2) SA 583 (A) ........................................................ 10
Sun Insurance Office v Clark 1912 AC 454 ........................................................................................ 150
Sun Newspapers Ltd v FCT (1938) 61 CLR 337; 1 AITR 403 ........................................................... 598
Sunnyside Centre (Pty) Ltd, CIR v 1997 (1) SA 68 (A) .................................................................... 530

T
‘T’ Co Ltd v COT 1966 (2) SA 16 (R); 28 SATC 67 ............................................................................ 74
‘T’ Company Ltd, COT v 1980 (4) SA 738 (ZA), 42 SATC 167 ........................................................ 442
Taeuber & Corssen (Pty) Ltd v SIR 1975 (3) SA 649 (A); 37 SATC 129 .................. 239, 354, 355, 565
Tate & Lyle Ltd, Morgan (Inspector of Taxes) v
1953 Ch 601; [1954] 2 All ER 413 (HL); [1955] AC 21 ................................................ 235, 468, 503
Taxpayer v COT (Botswana) 43 SATC 118 ........................................................................................ 184
Taylor v Good (Inspector of Taxes) [1974] 1 All ER 1137 (CA) .............................................. 246, 305
Tellier, CIR v 383 US 687 .................................................................................................................... 581
Tennant v Smith (Surveyor of Taxes) [1892] AC 150 (HL) .......................131, 134, 137, 140, 193, 195
Tesco Supermarkets Ltd v Natrass [1971] 2 All ER 127 ............................................................ 278, 332
Oceanic Trust Co Ltd NO v CSARS (2012) 74 SATC 127 (Western Cape High Court) ............ 22, 30
Thompson v Minister of National Revenue 2 DTC 812 (SCC)........................................................... 19
Thor Chemicals SA (Pty) Ltd, CIR v (2000) 62 SATC 308 (N)......................................................... 584
Ticktin Timbers CC v CIR 1999 (4) SA 939 (SCA); [1999] 4 All SA 192 (SCA);
61 SATC 399 ............................................................................................................ 466, 479, 483, 487
Ticktin Timbers CC, CIR v 1997 (3) SA 625 (C) ............................................................................... 480
Tod, CIR v 1983 (2) SA 364 (N); 45 SATC 9 ..................................................................................... 324
Toohey’s Ltd v Commissioner of Taxation for NSW (1922) 22 SR (NSW) 432 .............................. 670
Transvaal Associated Hide & Skin Merchants v Collector of Income Tax, Botswana
(1967) 29 SATC 97 (Court of Appeal, Botswana).......................................................... 46, 51, 65, 68
Transvaalse Suikerkorporasie Bpk, KBI v 1985 (2) SA 668 (T); 47 SATC 34 .................................. 355
Trent Investments (Pty) Ltd v FCT 1976 (6) ATR 201...................................................................... 326
Trust Bank of Africa Ltd, SIR v 1975 (2) SA 652 (A);
37 SATC 87 .............................................. 226, 260, 266, 277, 280, 282, 301, 309, 310, 328, 362, 462
Tuck v CIR 1988 (3) SA 819 (A); 50 SATC 98 ........................................................... 203, 206, 236, 240
Tuck, CIR v 1987 (2) SA 219 (T); 49 SATC 28 .................................................................................. 355
Turnbull v CIR 1953 (2) SA 573 (A); 18 SATC 336 .................................................. 400, 489, 570, 572
Tweddle v FCT (1942) 2 AITR 360..................................................................................................... 670

U
Umtali Finance (Pty) Ltd v COT 1962 (3) SA 281 (FC) ................................................................... 501
United Aircraft Corporation, FCT v (1943) 68 CLR 535 ................................................................. 200
Usher’s Wiltshire Brewery Ltd v Bruce (1915) AC 433 ..................................................................... 447

V
Vacu-Lug (Pty) Ltd v COT 1963 (2) SA 694 (SR); 25 SATC 201 ...................................................... 401
Vallambrosa Rubber Co Ltd v Farmer (Surveyor of Taxes) 1910 SC 519 ............................... 540, 542
Van Blommestein, KBI v 1999 (2) SA 367 (SCA) .............................................................................. 186
Van den Berghs Ltd v Clark (Inspector of Taxes) [1935] 19 TC 390;
[1935] AC 431 (HL) ........................................................................................................................ 355
Van der Merwe v SBI 1977 (1) SA 462 (A) ........................................................................................ 186
Van der Walt, KBI v 1986 (4) SA 303 (T) ........................................................................................... 498
Van Glehn & Co Ltd, CIR v [1920] 2 KB 553 .................................................................................... 447
Van Heerden v Pienaar 1987 (1) SA 96 (A) ...................................................................................... 690
Vasco Dry Cleaners v Twycross 1979 (1) SA 603(A) .......................................................................... 701
Venter v Rex 1907 TS 910 ..................................................................................................................... 12
Visser, CIR v 1937 TPD 77, 8 SATC 271............................................................................................ 201
Volkswagen of SA (Pty) Ltd, CIR v (2000) 63 SATC 109 (SCA) ....................................................... 260
 Table of cases 749

Page
W
Ward & Co Ltd v COT 1923 AC 145; 39 TLR 90 .............................................................. 462, 463, 469
Warner Lambert SA (Pty) Ltd v CSARS 2003 (5) SA 344 (SCA); 65 SATC 346 ....................... 464, 570
Watermeyer, SIR v 1965 (4) SA 431 (A); 27 SATC 117 ..................................... 193, 214, 369, 373, 580
Weeks v Amalgamated Agencies Ltd 1920 AD 218 ............................................................................ 119
Welch v Helverling 290 US 111 .......................................................................................................... 581
Wensleydale’s Settlement Trustees v IRC [1996] STC 241 ............................................................ 25 30
Wesleyan and General Assurance Society, IRC v (1948) 30 TC 11 ................................................... 703
West v Phillips 37 ATC 207 ................................................................................................................. 164
Western Suburbs Cinemas Ltd, FCT v (1952) 5 AITR 300 (High Court of Australia) .................... 598
Westinghouse Brake & Equipment (Pty) Ltd v Bilger Engineering (Pty) Ltd 1986 (2) SA 555 (A) 14
Westleigh Estates Company Ltd, IRC v [1924] 1 KB 390 .................................................................. 300
WF Johnstone & Co Ltd v CIR 1951 (2) SA 283 (A); 17 SATC 235 .......................................... 335, 451
Whiteaway’s Estate v CIR 1938 TPD 482 ............................................................................................ 413
Whitworth Park Co Ltd, IRC v [1958] Ch 792 ................................................................................... 370
Widan, CIR v 1955 (1) SA 226 (A); 19 SATC 341 .............................................................. 168, 175, 176
Wilkins v Rogerson [1961] Ch 133 ..................................................................................................... 127
William Dunn & Co Ltd, COT v 1918 AD 301; 9 SATC 380 ............................................. 75, 76, 89, 98
Wilson v CIR 1926 CPD 63 .......................................................................................................... 278, 332
Witwatersrand Association of Racing Clubs, CIR v
1960 (3) SA 291 (A); 23 SATC 380 ......................................................................................... 161, 179
WJ Fourie Beleggings CC v CSARS (2007) 70 SATC 8 (Bloemfontein High Court);
[2009] ZASCA 37 (SCA) .......................................................................................................... 355, 356
Wolf, CIR v 1928 AD 177............................................................................................................. 368, 410
Woulidge, CIR v 2000 (1) SA 600 (C); 62 SATC 1............................................................................. 174
Woulidge, CIR v 2002 (1) SA 68; 63 SATC 483 (SCA) ...................................................................... 177
Woulidge, CSARS v 2002 (1) SA 68 (SCA) ........................................................................................ 136
Wright & Co v Colonial Government 8 SC 269 ................................................................................. 181
WT Ramsay v IRC [1982] AC 300 (House of Lords).................................................................... 703
Wyner, CIR v [2003] 4 All SA 541 (SCA); 60 SATC 1 ........................................................................ 315

Y
Yarmouth v France (1887) 19 QBD 647 ............................................................................................. 608
Yates Investments (Pty) Ltd v CIR 1956 (1) SA 612 (A).................................................................... 304
Zandberg v Van Zyl 1910 AD 302 ................................................569, 687, 691, 692, 695, 697, 699, 701
 TAX COURT DECISIONS

Page Page
ITC 70 (1926) 3 SATC 58 .............................372 ITC 674 (1949) 16 SATC 235 ....................... 440
ITC 77 (1927) 3 SATC 72 .........................56, 60 ITC 678 (1949) 16 SATC 348 ....................... 479
ITC 82 (1927) 3 SATC 141..............................94 ITC 697 (1950) 17 SATC 94 . 419, 420, 421, 578
ITC 100 (1927) 3 SATC 250 ...........................64 ITC 698 17 SATC 97 ..................................... 458
ITC 106 (1927) 3 SATC 336............................61 ITC 699 (1950) 17 SATC 98 ......................... 410
ITC 115 (1928) 4 SATC 66 ...........................371 ITC 701 (1950) 17 SATC 108 ....................... 137
ITC 133 (1928) 4 SATC 198..........................599 ITC 702 (1950) 17 SATC 145 ............... 104, 201
ITC 162 (1930) 5 SATC 76 ................... 600, 604 ITC 712 (1950) 17 SATC 335................................ 681
ITC 163 (1930) 5 SATC 77 ...........................600 ITC 713 (1950) 17 SATC 337 ....................... 371
ITC 166 (1930) 5 SATC 85 ........... 650, 652, 673 ITC 728 (1951) 18 SATC 94 ......................... 395
ITC 170 (1930) 5 SATC 164............................79 ITC 732 (1951) 18 SATC 108 ....................... 651
ITC 200 5 SATC 389 .......................................... 626 ITC 734 (1951) 18 SATC 202 ....................... 518
ITC 205 (1931) 6 SATC 42 ................... 624, 627 ITC 736 (1951) 18 SATC 207 ....................... 422
ITC 208 (1931) 6 SATC 55 ...................664, 668 ITC 745 (1952) 18 SATC 307 ....................... 396
ITC 235 (1932) 6 SATC 262......................59, 62 ITC 754 (1952) 18 SATC 424 ............... 628, 631
ITC 243 (1932) 6 SATC 370 .........................604 ITC 758 (1952) 19 SATC 94 ......................... 246
ITC 250 (1932) 7 SATC 46 .......................57, 63 ITC 761 (1952) 19 SATC 103 ....................... 370
ITC 266 (1932) 7 SATC 151......................59, 63 ITC 765 (1951) 19 SATC 198 ....................... 272
ITC 319 (1935) 8 SATC 176 .........................669 ITC 767 (1953) 19 SATC 206 ....................... 404
ITC 322 8 SATC 243.............................................. 631 ITC 768 (1953) 19 SATC 211 ....................... 368
ITC 368 (1936) 9 SATC 211 .........................230 ITC 770 (1953) 19 SATC 216 ....................... 230
ITC 382 (1937) 9 SATC 439 .........................266 ITC 772 (1953) 19 SATC 301 ....................... 566
ITC 417 (1938) 10 SATC 264 .......................148 ITC 775 (1953) 19 SATC 314 ............... 640, 642
ITC 445 (1939) 11 SATC 86 ...........................56 ITC 812 20 SATC 469 ................................... 506
ITC 454 (1939) 11 SATC 165..........................73 ITC 815 29 SATC 487 ................................... 458
ITC 492 (1941) 12 SATC 80 .........................355 ITC 823 (1956) 21 SATC 77 ................. 641, 642
ITC 521 (1942) 12 SATC 408 .......................148 ITC 826 (1956) 21 SATC 189 ............. 52, 55, 56
ITC 525 (1942) 12 SATC 424........................104 ITC 832 21 SATC 320 ........................... 475, 501
ITC 542 (1942) 13 SATC 116 .......................429 ITC 833.......................................................... 496
ITC 559 (1944) 13 SATC 306 .......................410 ITC 852 15 SATC 495 ............................. 629, 630
ITC 561 (1944) 13 SATC 313........................601 ITC 855 (1957) 22 SATC 195 ....................... 589
ITC 586 (1945) 14 SATC 123........................657 ITC 903 (1959) 23 SATC 516 ............... 641, 642
ITC 605 (1945) 14 SATC 361 ...............558, 602 ITC 919 (1959) 24 SATC 236 ....................... 148
ITC 617 (1946) 14 SATC 474 .......................595 ITC 933 24 SATC 347 ................................... 506
ITC 626 (1946) 14 SATC 530................590, 595 ITC 937 (1960) 24 SATC 374 ............... 664, 668
ITC 631 (1946) 15 SATC 100 ...... 625, 627, 629 ITC 953 (1961) 24 SATC 552 ....................... 479
ITC 639 (1947) 14 SATC 227................652, 679 ITC 955 24 SATC 631 ........................... 629, 631
ITC 641 15 SATC 233............................................ 679 ITC 961 (1961) 24 SATC 648 ......................... 19
ITC 643 (1947) 15 SATC 243........................603 ITC 974 (1961) 24 SATC 802 ....................... 642
ITC 657 (1948) 15 SATC 495 ...... 626, 629, 630 ITC 976 (1961) 24 SATC 812 ............... 133, 379
ITC 673 (1948) 16 SATC 230 .......................641 ITC 979.......................................................... 506

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ITC 992 (1962) 25 SATC 129 ...............579, 582 ITC 1321 (1980) 42 SATC 269 ............. 556, 558
ITC 999 25 SATC 183 ....................................506 ITC 1327 (1981) 43 SATC 47 ....................... 558
ITC 1003 25 SATC 237 ..................................506 ITC 1333 (1981) 43 SATC 90 ............... 443, 444
ITC 1017 (1963) 25 SATC 337 .....................475 ITC 1338 (1980) 43 SATC 171 ..................... 238
ITC 1021 (1963) 25 SATC 416........................94 ITC 1341 (1981) 43 SATC 215 ............. 363, 364
ITC 1031 26 SATC 63 ........................................... 629 ITC 1344 (1982) 44 SATC 19 ............... 556, 558
ITC 1033 (1959) 26 SATC 73 .......................640 ITC 1346 (1981) 44 SATC 31 ....................... 157
ITC 1052 (1963) 26 SATC 253 .....................615
ITC 1373 (1982) 45 SATC 1373 ................... 682
ITC 1101 (1966) 29 SATC 23 .......................620
ITC 1379 (1983) 45 SATC 236 ..................... 269
ITC 1103 (1967) 29 SATC 35....................46, 71
ITC 1117 (1968) 30 SATC 130 .....................437 ITC 1380 (1983) 46 SATC 68 ....................... 630
ITC 1123 (1968) 31 SATC 48........................732 ITC 1424 (1987) 49 SATC 99
ITC 1132 31 SATC 155 ..................................496 (Zimbabwe Special Court)........ 664, 669, 681
ITC 1135 (1969) 31 SATC 228 ITC 1467 (1989) 52 SATC 28 ....................... 410
(Rhodesia Special Court) ..................665, 675 ITC 1476 (1989) 52 SATC 141 ..................... 230
ITC 1138 32 SATC 3 ......................................506 ITC 1481 52 SATC 285 .......................................... 254
ITC 1158 33 SATC 177 ..................................499 ITC 1491 (1991) 53 SATC 115 ........... 46, 49, 81
ITC 1159 33 SATC 190 ................................. 629, 632 ITC 1494 (1991) 53 SATC 206 ....................... 96
ITC 1160 (1970) 33 SATC 193 .....................430 ITC 1510 (1992) 54 SATC 30 ....................... 266
ITC 1162 (1970) 33 SATC 201 .....................285 ITC 1548 (1993) 55 SATC 26 ............... 659, 660
ITC 1170 (1971) 34 SATC 76 .........................19 ITC 1549 (1993) 55 SATC 31 ....................... 238
ITC 1171 (1972) 34 SATC 80 .......................479 ITC 1630........................................................ 673
ITC 1185 (1972) ITC 1644 (1995) 61 SATC 23 ....................... 669
35 SATC 122 ............. 233, 253, 270, 283, 671 ITC 1645 (1995) 61 SATC 31 ....................... 122
ITC 1197 (1972) 35 SATC 268 .....................148 ITC 1683 (1999) 62 SATC 406 ..................... 383
ITC 1222 (1974) 37 SATC 17........................271
ITC 1701 (1999) 63 SATC 214 ..................... 669
ITC 1245 (1975) 38 SATC 13 ............ 629, 632
ITC 1706 63 SATC 334 ................................. 467
ITC 1247 (1977) 38 SATC 27 ...............616, 620
ITC 1258 (1976) 39 SATC 58 .......................668 ITC 1798 (2005) 68 SATC 9 ................. 568, 571
ITC 1259 (1977) 39 SATC 65 .......................362 ITC 1815 (2006) 68 SATC 312 ..................... 121
ITC 1264 (1977) 39 SATC 133 .....................607 ITC 1833 (2008) 70 SATC 238 ..................... 695
ITC 1279 (1977) 40 SATC 254 .....................357 ITC 1847 (2010) 73 SATC 210 ............. 118, 470
ITC 1285 (1978) 41 SATC 73........................678 ITC 4052 (since reported as
ITC 1319 (1980) ITC 617 (1946) 14 SATC 474) ................. 595
42 SATC 263 ..................... 663, 666, 667, 668 ITC 11691 24 April 2007 (not reported)..... 478