Page 405 - SAIT Compendium 2016 Volume2

IN 33 (4) Income Tax acT: InTeRPReTaTIon noTes IN 33 (4)
‘Whether a person is a money-lender is a question of fact. It is not enough that a person has on several occasions lent money at interest. To qualify as a moneylender it is requisite that he should be in the business of money-lending. That imports a certain degree of system and continuity about the transactions and that he is a person who is ready and willing to lend to all and sundry if they are acceptable to him. See Secretary for Inland Revenue v Crane 1977 (4) SA 761 (t) at 768C–F,7 which was cited with approval by Friedman AJA in the Solaglass case at 271C-D.8.’
In ITC 957* a company that derived interest income from loans to its shareholders was held not to be carrying on a business of moneylending. Under certain circumstances it is possible for a company to carry on a business of investment. In ITC 770 Dowling J stated the following:†
‘A business of investment in shares in companies is a well-established occupation in the business world and in my opinion it falls under all or some of the words ‘trade’, ‘business’, ‘occupation’, or ‘venture’ used in the de nition of ‘trade’, which is obviously intended to embrace every pro table activity and which I think should be given the widest possible interpretation.’
The case of C: SARS v Tiger Oats Ltd‡ involved a company’s liability for regional establishment levies on its dividend income under the Regional Services Councils Act, No. 109 of 1985. The court held that the company was carrying on business as an investor of money and was not merely a passive holder of shares. It was accordingly held liable for the RSC levies. In arriving at its decision the court took into account that the company appointed the boards of directors of its subsidiaries and acted as the group’s banker.
In ITC 1802§ the issue to be decided was whether a holding company had carried on trade during the 2001 year of assessment in order that it may –
• carry forward its assessed loss of R1 282 117 from the 2000 year of assessment under section 20(1), and
• deduct expenditure of R84 262 under section 11(a) incurred in the 2001 year of assessment.
The facts showed that –
• the holding company had no banking accounts in its own name,
• no moneys passed through it for funding its subsidiaries, nancing its own activities, meeting administration costs or
remunerating its directors,
• the payment of interest by subsidiaries had been erratic,
• there had been a failure to declare dividends, and
• there had been an absence of any loans made by or to the taxpayer to or from any of the subsidiaries.
Satchwell J held that a company ‘keeping itself alive’ by holding meetings, appointing directors or arranging for nancial statements to be prepared, cannot constitute a ‘trade’. The taxpayer did not carry on ‘trade’ through the medium of its subsidiaries since it had not provided any evidence of a ‘controlling mind’.¶ In this regard there was no activity of a continuing nature pertaining to loans made nor was there any involvement in the affairs of the subsidiaries or control or dominance exercised by the taxpayer over the subsidiaries. There was also no evidence of strategic management or direction of policy formulated by the taxpayer which was implemented by the subsidiaries. The appeal was accordingly dismissed.
Expenditure associated with share investments that produce exempt dividend income (for example, local shares) is prohibited as a deduction under section 23(f). Any expenditure incurred in the production of income in the form of foreign dividends is prohibited under section 23(q).Whether a company is carrying on business as an investor of money will depend on the facts and circumstances of the particular case. Much will depend on the scale and nature of its activities. In this regard, the Tiger Oats case should be contrasted against ITC 496, ITC 957 and ITC 1802 already cited.
4.1.4 Amounts disguised as trade income
Amounts disguised as trade income will not be accepted as having been earned from the carrying on of a trade. This was the result in C: SARS v Contour Engineering (Pty) Ltd** in which the company was purported to have derived an amount of commission income from a single transaction. The court, suspecting the amount to be ctitious, refused to accept that it had been derived from carrying on a trade.
4.1.5 The extent of effort or money expended
In ITC 777 Neser J stated the following:††
‘The extent of the effort or the amount of money expended cannot, however, be the test whether a company or person
was trying to get business. It is suf cient if there was some attempt, even if no money was expended.’
Even though the above comments may have some basis in theory, they are of little assistance to a company seeking to discharge the burden of proof resting upon it under section 102 of the Tax Administration Act. A company that has expended minimal amounts in its efforts to obtain business will nd it more dif cult to prove that it was trading. The lack of expenditure can be an indicator of inactivity.‡‡ South African courts have also had regard to the nature of the expenditure incurred in deciding whether a company has traded. For example, expenses such as audit and secretarial fees, bank charges, depreciation, interest paid and stationery are not necessarily indicative of trading. See, for example, the SA Bazaars case cited in 4.1.2 in which the company kept itself alive by paying its annual duty.§§
* (1960) 24 SATC 637 (o).
† .(1953) 19 SATC 637 (o).
‡ [2003] 2 All SA 604 (SCA), 65 SATC 281
§ (2005) 68 SATC 67 (g).
¶ Solaglass Finance Co (Pty) Ltd v CIR 1991 (2) SA 257 (a), 53 SATC 1 at 26.
** 1999 (e), 61 SATC 447 at 451
†† (1953) 19 SATC 320 (t) at 322.
‡‡ ITC 1476 (1989) 52 SATC 141 (t), C: SARS v Contour Engineering (Pty) Ltd 1999 (e), 61 SATC 447 §§ ITC 1275 at 199, ITC 1476 at 149 and the Contour case above at 456
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