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IN 67 (2) Income Tax acT: InTeRPReTaTIon noTes IN 67 (2)
The expression ‘managed or controlled’ is integral to applying paragraph (vA). The use of the co-ordinating conjunction ‘or’ between ‘managed’ and ‘controlled’ means that either term can apply. The expression is thus wider than ‘managed and controlled’.
Managed
The word ‘management’ has been de ned in the business dictionary as –*
‘the organization and coordination of the activities of a business in order to achieve de ned objectives’.
The words ‘management’ and, in context, ‘manage’ are very broad and it is not possible to list activities which do (and in contrast, do not) constitute management. Instead when assessing whether or not a particular person is managing a company it is necessary to consider all the facts of the particular case taking into account the activities for which the person is responsible, the person’s level of seniority and the scope of the person’s responsibilities. For example, an employee who is responsible only for managing a company’s mailroom would not be considered to be managing the company but in contrast the managing director of the company who has overall responsibility for running all of the company’s business activities would be considered to be managing the company.
Controlled
Control refers to de facto† control and not shareholder control. De facto control is generally but not necessarily held and exercised by the board of directors. However, the facts and circumstances of each case are critical in determining who is controlling a company because the presence and in uence of controlling individuals can have a signi cant impact.
In ITC 1741‡ the court considered the meaning of ‘control’. In that case the appellant purchased certain machinery and plant from another company [J Shop tters (Pty) Ltd] and claimed a deduction under section 12C(1) on the cost of acquisition of the machinery and plant. The Commissioner reduced the allowances under section 12C(4) and (6)§ to an amount based on the cost of the machinery and plant to the seller, contending that the buyer and the seller were connected persons in relation to each other. Under the then section 12C(6)(a)(i) a connected person in relation to a company included –
‘any other company if both such companies are controlled or owned directly or indirectly by the same persons’.
Based on the facts of the case, the appellant company and J Shop tters (Pty) Ltd were not commonly owned and the sole issue for decision was whether there was the requisite control by substantially the same persons. Factually each company had its own board of directors. However, there was a substantial difference in terms of who made the decisions and practically ran the respective companies. The evidence showed that, in the appellant company’s case, control was exercised by the board of directors (excluding Mr C who although a director did not have any ‘real’ say or power in relation to the appellant company). By contrast, in the case of J Shop tters (Pty) Ltd the evidence clearly showed that even though the board of directors had the legal ability to control the company it was not practically in control of the company. Mr C was a domineering presence who effectively made all the decisions and informed everyone afterwards. He controlled the company and the input from fellow directors, if any, was limited to that of a consulting nature.
The court held that ‘controlled’ in the absence of a statutory de nition or any other contrary indicators meant de facto control. It did not mean the potential for the exercise of legal control by the board of directors or by the shareholders at a general meeting. Thus, if the directors of a company give a particular director carte blanche to run a company, the company will be de facto controlled by that individual. In the appellant company’s case control was exercised by the board of directors but in J Shop tter’s case de facto control was exercised by Mr. C. Accordingly, the two companies were held not to be connected persons in relation to each other.
The case also highlighted that de facto control is not xed and may change from time to time. It is therefore important to evaluate de facto control at the time required by the relevant provision of the Act. The court further noted that interpreting control to be de facto control was consistent with the purpose of section 12C(4) and (6), namely, to prevent persons from manipulating assets under their control in order to increase tax allowances while in effect the assets remained under their control.¶ The purpose was still met when people who did not practically exercise control, although legally able to do so, were excluded from consideration because by virtue of their lack of involvement they could not be seeking to manipulate assets in order to increase tax allowances. The same principle applies to the de nition of a ‘connected person’ in section 1(1) which replaced the de nition in section 12C(6).
Example 24 – Connected person in relation to a company
Facts:
K, an individual, holds 100% of the equity shares in XYZ (Pty) Ltd and manages MNO (Pty) Ltd. Is MNO (Pty) Ltd a connected person in relation to XYZ (Pty) Ltd?
Result:
MNO (Pty) Ltd is managed by K, who is a connected person in relation to XYZ (Pty) Ltd under paragraph (d)(iv)(aa) (see 3.5.3). MNO (Pty) Ltd is therefore a connected person in relation to XYZ (Pty) Ltd under paragraph (d)(vA)(aa).
* www.businessdictionary.com/de nition/management.html [Accessed 14 February 2014]. † In fact, whether by right or not.
‡ (2002) 65 SATC 106 (EC).
§ As the sections read in 1992.
¶ In the absence of section 12C(4) and (6) this would have been achieved by selling the asset to a connected person at a price which was above the seller’s cost, thus entitling the purchaser to an allowance calculated on an enhanced cost price.
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