Page 714 - SAIT Compendium 2016 Volume1

CASE DIGEST 2007–2008
The taxpayer provided its permanent staff with the opportunity to visit the various resorts in its scheme by allocating each employee 17 000 points annually. The purpose of such allocation was claimed to be ‘resort education’, in other words, to enable employees to gain rst-hand knowledge of the resorts which they recommended to the taxpayer’s clients.
SARS regarded this facility as a fringe bene t falling within the scope of the Seventh Schedule to the Income Tax Act, and assessed the taxpayer for employees’ tax in respect of the cash equivalent of the bene t. Since the taxpayer had not regarded its employees as receiving any taxable fringe bene t in this regard, no employees’ tax had been deducted and paid over to SARS, and in this regard, a statutory penalty was imposed.
The Cape Tax Court held that the principles laid down in CSARS v Brummeria Renaissance (Pty) Ltd 69 SATC 205 were applicable, as the right to accommodation was one for which the employees would have had to pay, if they had not been given it for nothing. That right had a money value, and the fact that it could not be alienated did not negate that value. An ‘amount’ had thus accrued, which was subject to assessment.
It was accordingly held that the taxpayer had been properly assessed; that the penalty should, in the circumstances, be reduced by half, but that there were no grounds for remitting the interest component of the assessment.
15. In Ernst Bester Trust v CSARS (2008) 70 SATC 151 the proceeds from the sale of sand extracted from a farm were held to be income, not capital.
The same factual scenario, namely the sale of sand by a farmer, had come before the Supreme Court of Appeal in Samril lnvestments (Pty) Ltd v Commissioner, South African Revenue Service 2003 (1) SA 658 (SCA), where it was held that the multiplicity of amounts received by the taxpayer, coupled with the fact that those amounts were generated by exploiting the resources of a capital asset (namely the farm) and were ‘plainly designedly sought and worked for’, meant that the proceeds of the sales of sand were receipts of income, not capital.
Faced with this binding precedent, the court held in the present case that, despite the sand being a wasting asset, the taxpayer had sold the sand in the course of a ‘scheme of pro t-making’ (as distinct from its being a purely fortuitous windfall gain) and, secondly, that the proceeds of such sales were income, and not capital, and were therefore subject to income tax in the ordinary way.
16. Metropolitan Life Ltd v CSARS (2008) 70 SATC 162 concerned the supply of services by a supplier who was resident or carrying on business outside the Republic to a recipient who was a resident of the Republic, where the services were utilised or consumed in the Republic otherwise than for the purpose of making taxable supplies.
Faced with the competing provisions of s 11 (2) (k) and s 14 (5) (b) of the Value-Added Tax Act 89 of 1991, the court adopted a purposive approach and held that the imported services were chargeable to VAT in terms of s 7 (1) (c) of the Act, and that the zero-rate was inapplicable to this kind of service.
17. ITC 1832 (2008) 70 SATC 171 concerned the question of whether the taxpayer’s loss on the sale of shares was of a capital or a revenue nature.
On the facts, the court held that the taxpayer’s intention at the time of acquisition was to make a capital investment, and that the shares had never become stock in trade or part of a scheme of pro t-making.
It was held that the taxpayer had failed to discharge the onus of proving that it had acquired the shareholding in question either as a scheme of pro t-making or as trading stock. Consequently, the loss was not deductible in terms of s 11 (a) of the Income Tax Act 58 of 1962 of the vendor’s banking instructions.
18. The appellant in Bos v CSARS (2008) 70 SATC 187 (T) had practised for 30 years as a chartered accountant and was a long-standing partner in the rm of Price Waterhouse in 1999 when that rm and Coopers and Lybrand entered into a partnership in terms of which Pricewaterhouse Coopers came into existence and commenced practice as from 1 February 1999.
Internal disagreements regarding the date of his retirement led PwC to request the taxpayer to leave the partnership. Senior Counsel’s advice was that PwC had no right to terminate his prior agreement with PwC, that the rm had in effect repudiated the earlier agreement and that he was entitled to accept the repudiation and claim damages. The taxpayer accepted the repudiation and was paid R1 million from PwC. An agreement was entered into which characterised the payment as being compensation for premature termination of the taxpayer’s right to remain a partner.
The sole issue before the court was whether the amount of R1 million was income or capital in terms of the de nition of ‘gross income’ in s 1 of the Income Tax Act 58 of 1962.
The court applied the principle laid down in Burmah Steam Ship Co Ltd v IRC (1930) 16 TC 67 that it had to be determined in each case whether the amount in question was received to ll a hole in the taxpayer’s income or in his capital assets.
The court held that intangible rights formed part of the taxpayer’s income-earning structure, including relinquishment of a partner’s right to share in the partnership’s pro ts. Consequently, the taxpayer had discharged the onus of proving that the R1 million received by the taxpayer pursuant to the separation agreement was of a capital nature and was not part of the taxpayer’s gross income.
19. The taxpayer in Volkswagen of SA (Pty) Ltd v CSARS (2008) 70 SATC 195 (T) was a wholly-owned subsidiary of Volkswagen Aktiengessellschaft (‘VWAG’), a company registered in the Federal Republic of Germany.
The taxpayer had, between December 2001 and October 2005, declared a number of dividends in favour of its sole shareholder, VWAG, and in respect of each such declaration had led a return for payment of, and had duly paid, secondary tax on companies (‘STC’).
At the time of the conclusion of the double tax agreement (‘OTA’) between the Republic of South Africa and the Federal Republic of Germany, STC had not existed, as it was only introduced in 1993. Article 7 of the OTA limited the tax that could be imposed on dividends.
706 SAIT CompendIum oF TAx LegISLATIon VoLume 1