Page 690 - SAIT Compendium 2016 Volume2

IN 80 Income Tax acT: InTeRPReTaTIon noTes IN 80
5. The thief
5.1 Taxation of stolen money
A thief will be taxed on stolen money if it falls within the thief’s gross income. The opening words of the de nition of ‘gross income’ in section 1(1) contain two key requirements relevant in the context of this Note for an amount to be included in gross income. They are that an amount must –
• be received by or accrued to a taxpayer, and
• not be of a capital nature.
5.1.1 Received by or accrued to
The terms ‘received by’ and ‘accrued to’ are not de ned in the Act, but they have been the subject of judicial interpretation. In Geldenhuys v CIR Steyn J stated that the words ‘received by’ as used in the de nition of ‘gross income’ –*
‘must mean ‘received by the taxpayer on his own behalf for his own bene t’ ‘.
The words ‘accrued to’ were held by Watermeyer J (as he then was) in WH Lategan v CIR to mean –†
‘to which he has become entitled’.
In the context of stolen money there can be no accrual because a thief is not unconditionally entitled to the money. There can, however, be a receipt – see below.
In 1918 the Transvaal Provincial Division con rmed in CIR v Delagoa Bay Cigarette Co, Ltd that income was taxable even if derived from an illegal source. In that case, which involved the sale of illegal lottery tickets together with packets of cigarettes, Bristowe J stated the following:‡
‘I do not think it is material for the purpose of this case whether the business carried on by the company was legal or illegal. Excess pro ts duty, like income tax, is leviable on all incomes exceeding the speci ed minimum, and after making the prescribed calculations and deducting the exemptions, abatement and deductions enumerated in the statute. The source of the income is immaterial. This was so held in Partridge v Mallandaine (18 Q.B.D. 276), where the pro ts 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’.’
In COT v G§ it was held that money stolen by a thief was not ‘received’ by him within the meaning of the Zimbabwean Tax Act as a thief ‘takes’ rather than ‘receives’ the money. Following the decision of the Supreme Court of Appeal in the MP Finance case discussed below, this decision is not regarded as correctly re ecting the position under South African law.
In ITC 1545¶ the appellant had been taxed on the proceeds from the sale of stolen diamonds and the receipts from the growing and sale of dried ‘milk cultures’. The latter activity was described by the court as a money-making racket similar to a chain-letter scheme and was accepted as amounting to an illegal lottery. The court held that the amounts were received by the taxpayer for the purposes of the de nition of ‘gross income’ notwithstanding that they were in pursuance of a void transaction. It distinguished the facts of the case from G’s case above, noting that the instant case was not one in which there had been no receipt but merely a ‘taking’ by a thief.
In ITC 1624** the appellant, acting as agent, fraudulently overcharged its principal for wharfage fees which it claimed it had paid to Portnet on the principal’s behalf. The fraud was discovered in a later year of assessment and the appellant had refunded the overcharged amounts to its principal. The appellant argued that the amounts were not received by it as it was under an immediate obligation to repay them. Alternatively, the appellant argued that it was entitled to a deduction in the same year of assessment for the liability it had incurred to repay the amounts. The court rejected these arguments holding that the amounts were received by the appellant as part of its business receipts and that the amount was not an expenditure or loss incurred during the year of assessment in question. The court considered G’s case above but declined to follow the ratio in that case.
In ITC 1792†† the appellant, a stockbroker, had acted as agent for a principal on behalf of whom he bought and sold shares. The appellant, together with others, had become aware of the shares that his principal would be acquiring. He acquired those shares in a separate company and later sold them at a pro t to his principal. The issue was whether the appellant was liable to tax on these illegal secret pro ts. The court found, based on the law of agency, that an agent is not entitled to make secret pro ts and that those pro ts belong to the principal. It accordingly held that the amounts had not been received by the appellant on his own behalf for his own bene t. Based on the outcome of the MP Finance case below, it is considered that this case was not correctly decided. The issue is not the legal relationship between principal and agent but between the agent and the scus.
The Supreme Court of Appeal case of MP Finance Group CC (in liquidation) v C: SARS‡‡ considered the question of whether deposits taken in an illegal and fraudulent pyramid scheme constituted amounts ‘received’ within the meaning of ‘gross income’. The taxpayer argued that because the scheme was liable in law to return the deposits there was no
* 1947 (3) SA 256 (C),14 SATC 419 at 430.
† 1926 CPD 203, 2 SATC 16 at 20. The correctness of the interpretation of ‘accrued to’ in Lategan’s case was subsequently con rmed by Hefer JA in CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9 at 24.
‡ 1918 TPD 391, 32 SATC 47 at 49.
§ 1981 (4) SA 167 (ZA), 43 SATC 159.
¶ (1992) 54 SATC 464 (C).
** (1996) 59 SATC 373 (T).
†† (2005) 67 SATC 236 (G).
‡‡ 2007 (5) SA 521 (SCA), 69 SATC 141.
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