Page 730 - SAIT Compendium 2016 Volume1

CASE DIGEST 2011–2012
– attending bimonthly sales meetings with sales staff of clients, holding area meetings, providing support and assistance to sales representatives and sales management staff of clients, making product presentations, promotions scheduling and conducting training and eldwork with representatives of clients.
During the years under consideration by the Tax Court, it was established that the nature of business never changed, except for the 2005 and 2006 years of assessment, when the labelling of its business activities was described in the tax returns ‘marketing’ – Judge Mbha determined that it is ‘marketing consulting’.
The taxpayer employed one person on a half-day basis, as a personal assistant during the relevant tax years, and also employed subcontractors to perform its functions in certain areas of South Africa in order to extend the scope of its activities. In performing these functions, the taxpayer and its subcontractors acted on the instructions of their principals. They made recommendations to the principals relating to the performance of their functions but did not advise them on any other matter. The appellant was remunerated on the basis of the sales generated by its activities and in some cases there was a basic retainer which applied until the sales reached an agreed volume.
Issues:
The taxpayer in its accounting nancial statements accompanying its tax returns for the 2000-2004 years of assessment described its business as one of ‘trade marketing consultancy’. The revenue of the taxpayer was described in these nancial statements as ‘consultancy fees’. In respect of the 2000-2004 years of assessment, the taxpayer accepted, as re ected in its returns of income (IT14s) for those years, that it was not a small business corporation, and SARS properly assessed the appellant, for the 2000 to 2004 years of assessment, as a company rendering a personal service and not as a small business corporation.
In respect of the 2005 and 2006 years of assessment, the taxpayer submitted its tax returns on the basis that it is a small business corporation in terms of s 12E. In the annual nancial statements for those years, the main income of the company was described as ‘fees received, which ... represents the invoiced value of services provided to clients’, and in the tax returns the appellant’s business is stated as ‘Marketing’. The appellant was accordingly assessed for the 2005 and 2006 tax years, as a small business corporation.
The issue before the Tax Court was whether the taxpayer meets all the requirements for classi cation as a small business corporation (‘SBC’) in terms of s 12E of the Income Tax Act 58 of 1962 (‘the Act’).
Another issue before the Tax Court was SARS’ contention that the appellant did not qualify for the classi cation as an SBC as it provided a personal service as de ned in s 12E(4)(d), and derives more than 20% of its receipts and accruals from the provision of that service and from investment income, as prescribed by s 12E(4)(a)(iii) of the Act.
The taxpayer, on the other hand, asserted that it did not derive any income from the provision of a personal service and that its investment income for the relevant years was minimal.
Decision
Meaning of ‘consulting’
Judge Mbha accepted that, generally, the meaning of words in a statute is derived from the common law. He stated [at 19]:
‘The basic rule of interpretation is that the meaning must, unless a statute provides otherwise, or unless it would result in an absurdity, be taken to be the ordinary meaning of the word which can be found in a dictionary of established authority.’
SARS endorses this approach in Interpretation Note 9, dated 13 December 2002, para 2.3(b).
Judge Mbha stressed that, if there is any doubt about the ordinary meaning of a word used in a particular context, certain rules must be applied. He emphasised two rules relevant to this speci c case [at 21]:
‘A word included in the group of words must be regarded as being of the same type as the other words in that group (eiusdem generis); on the other hand, if a word is not included in the group, it must not be regarded as subject to the same prescriptions as that group (exclusio alteris).’
The word ‘consulting’ as used in s 12E(4)(d) is not de ned in the Act or in any other applicable law in South Africa, hence Judge Mbha held that the two rules above must be applied and its meaning determined by reference to authoritative works.
The de nitions of ‘consulting’ in the standard dictionaries consulted by the Tax Court revealed that there are several meanings to the nouns derived from the verb ‘consult’, namely consulting, consultant and consultation, and to the verb itself. Judge Mbha held [at 23] that these fell into three major categories:
– Those derived from the transitive verb ‘consult’, which means to seek advice or an explanation from a person with
knowledge, from a dictionary or other sources;
– those derived from the intransitive verb ‘consult’, which means to offer advice or information by such person; and
– those related to the idea of consultation as a form of discussion between persons having different interests in a
particular situation.
Judge Mbha held that:
‘...the meaning of “consulting” as referred to in s 12E(4)(d), falls into the second category, as the activities referred to in the rst and third groups do not normally involve any commercial transactions, and would therefore not be relevant for taxation purposes. It is necessary to establish the intention of the legislature when passing the relevant provision. The legislature’s intention embodied in s 12E of the Act can clearly be seen from the contents of SARS’ Interpretation Note 9, which was issued at the time of the introduction of that section [s 12e]. Accordingly, in interpreting the term “consulting”, as applicable to a personal service provided by a small business corporation for the purposes of s 12E(4), the term “professional person” is crucial in de ning that term.’
The view that a person providing a consulting service must of necessity be a professional person, or someone of that nature is supported by the application of the eiusdem generis rule of interpretation. The elds of activity listed as personal services in s 12E(4)(d) fall into two categories, the rst of which is accounting, actuarial science, architecture,
722 SAIT CompendIum oF TAx LegISLATIon VoLume 1