TAX

Facts and issue: The first applicant, JBSA Props, is the sole shareholder of the second applicant, Wilmeg Investments. The first applicant bought the second applicant out of business rescue for a sum of about R600 million. The applicant seeks an order that, pending the final determination of  proceedings to be brought by SARS to set aside the second applicant’s business rescue plan, or pending the final determination of proceedings to be brought by the first and second applicants seeking a declaratory order enforcing the business plan as the applicants interpret it, SARS is interdicted from pursuing the VAT debt it claims from the second applicant and from making any agency appointments entitling it to be paid monies lodged in the second applicant’s accounts with the second and third respondents.

Discussion: SARS made it clear that it has no intention of seeking an order setting aside the approval of the business plan. In the circumstances the central issue is whether the applicants have established prima facie that the second applicant’s obligations to pay VAT generated by its trading during the course of business rescue were compromised in terms of the approved business plan. It is the applicants case that the failure of SARS to attend the meeting of creditors signified its acceptance of the business plan. That is a claim of acquiescence. What section 154(1) requires is that the creditor should have acceded to the discharge of the debt; not that it should have acquiesced in the discharge of the debt. There is no room for a contention that there was acquiescence in this case. At the time that the business plan was sent to creditors, some nine days before the meeting, SARS had not received a request that it should compromise its post-commencement claims. The absence of SARS from the meeting was equally consistent with, for instance, its officers taking the view that what was proposed with regard to its post-commencement claim was unenforceable in law, as a result of which it was not necessary to vote against the plan.

Findings: SARS had played no part in the formulation of the plan. It had not created a situation which rendered it duty-bound to register its dissent. The situation was of the making of the business rescue practitioners and, presumably, the first applicant in its capacity as offeror for the shares. It is common cause that at the time that the business plan was to be voted upon the second applicant owed a post-commencement VAT debt to SARS. There could in law be no compromise of the claim against the second applicant for post-commencement VAT unless SARS acceded to that compromise. On the evidence, SARS did not accede to that compromise. The applicants have accordingly failed to establish the prima facie case they require in order to justify the relief they seek.

Order: The application is dismissed.

Facts: Ms Steenkamp was employed as an accountant by Medtronic Africa. Although employed by Medtronic Africa, she performed functions for Medtronic International as well. Her duties entailed all VAT-related work, and the management of audits from tax authorities. During that period Ms Steenkamp embezzled just over R537 million from the Medtronic Group. She did this by exploiting SARS and the Group’s weak accounting systems. She was later arrested and imprisoned. Medtronic Africa and Medtronic International each applied to SARS’ voluntary disclosure unit for relief in terms of the Voluntary Disclosure Programme (VDP). This they did in terms of sections 225 to 230 of the Tax Administration Act 28 of 2011 (TAA). Their voluntary disclosures related to the VAT underpayments. During the negotiations under the VDP, Medtronic Africa and Medtronic International made separate requests to SARS for the waiver of interest arising from the VAT underpayment.

Appeal: Two voluntary disclosure agreements (VDAs) were concluded, one in respect of each company. After conclusion of the VDA, Medtronic International submitted a request for remission of interest in terms of section 39(7) of the Value Added Tax Act 89 of 1991. SARS refused to consider this request. The High Court remitted the matter to the Commissioner to consider Medtronic International’s request. In this appeal against a judgment of the Supreme Court of Appeal (SCA) the issue is whether a taxpayer, who – in terms of section 230 of the TAA – has concluded a VDA with SARS can seek remission of interest in terms of section 39(7) of the VAT Act where that taxpayer has agreed to pay the interest in terms of the VDA. The majority in the Supreme Court of Appeal did not give a categorical answer to this question.

Discussion: The TAA’s silence on remission of interest in terms of section 39(7) of the VAT Act does not of necessity lead to a conclusion that it permits remission post conclusion of a VDA. A taxpayer concludes a VDA with the section 39(1)(a)(ii) provision on interest with her or his eyes wide open. There can be only one conclusion, and that is that the taxpayer accepts this provision and considers her- or himself bound by it. That being the case, Medtronic International’s contention that – in the event of interest being remitted in terms of section 39 of the VAT Act – it is open to it to walk away from part of this unequivocal covenant is glaringly absurd. It is so that the same section 39 also provides for remission of interest. However, there is simply an illogicality, if not contradiction, for a taxpayer to think that – although the VDP, which culminates in a VDA, requires her or him to commit categorically to pay a specified rate and amount of interest – there is still room to walk away from that categorical commitment.

Findings: It simply leads to a glaring absurdity to permit a taxpayer to conclude a VDA which makes provision for interest and, at the same time, to allow the taxpayer subsequently to deal with issues relevant to interest separately. This destabilises the VDP framework. Finality of VDAs will be up in the air. Regard should be had to these words from Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13: “(a)n interpretation will not be given that leads to impractical, unbusinesslike or oppressive consequences or that will stultify the broader operation of the legislation . . . under consideration”. Medtronic International’s interpretation is at variance with this salutary principle and must fail.

Order: The appeal is upheld and the order of the SCA replaced with an order upholding the appeal and replacing the order of the High Court with an order dismissing the application.

Madlanga ADCJ (unanimous)

Facts and issue: This is a review application of a decision by the commissioner of SARS. The applicant is seeking a judicial review of SARS’s decisions. It is the applicant’s case that the decisions amount to a failure on the part of SARS to record so-called ETI credits on the applicant’s statement of account.  The applicant directed to SARS a notice per s11(4) of the Tax Administration Act 28 of 2011. SARS responded, providing a comprehensive response on why the ETI credits were not recorded on the applicant’s statement of account. The applicant does not seek to set aside the decision recorded in SARS’s reply, but rather the decisions or, more precisely, the indecisions.

Discussion: The commissioner opposed the relief applied for and raised two preliminary but critical issues. Firstly, in terms of s 105 of the TAA, the applicant, as a taxpayer, can only bring an application of this nature in the High Court if they are able to demonstrate “exceptional circumstances” for avoiding the “default route” of approaching the Tax Court. It was submitted on behalf of the commissioner that under s 105 of the TAA the High Court lacks jurisdiction to hear the matter. It would also imply that the applicant has not used any of the internal remedies outlined in Chapter 9 of the TAA. There are no exceptional circumstances justifying a departure from the default route. The subject matter and the relief applied for is best left for adjudication to the Tax Court, which has a closer connection to the matter. The review does not concern only an issue of legality. By submitting “replacement” returns, the applicant, in effect, objected to its own self-assessment, which objection was not upheld by SARS. If the correct default route had been followed, the usual objection and appeal processes would have been triggered, the factual outcome of which we would never know. To succeed, the applicant must, in addition, persuade the court of exceptional circumstances that warrant the substitution of SARS decision with that of its own.

Findings: Given that the matter only proceeded in respect of the preliminary points, court is precluded at this stage from making any final determination regarding the applicant’s entitlement to what is commonly referred to as a substitution order. However, the nature of the relief applied for is a relevant and vital factor in deciding how the court should exercise its jurisdiction. The relief applied for by the applicant is couched in the form of a review application, but, in reality, the applicant seeks declaratory relief and a monetary judgment. The relief that the applicant seeks, which aims to substitute SARS’s decision, in as far as a decision was taken, falls within the jurisdiction of the Tax Court. The complexity of the arguments raised before the court regarding the correct process of submitting re-assessments and raising objections thereto and the consequence flowing from it only emphasizes why this application should have been brought before the Tax Court.

Order: The application is struck from the roll for a lack of jurisdiction.

Facts and issue: This is an application that relates to the calculation of the royalty payable to the State for the extraction of aggregates as a non-refined mineral resource. All minerals belong to the nation and the State is the custodian of the nation’s mineral resources. The respondent (SARS) administers the Mineral and Petroleum Resources Royalty Act, 28 of 2008, that governs the imposition of the royalty. The applicants seek a declarator declaring that “bulk” as used in respect of “aggregates” in Schedule 2 to the Act means the condition in which shot rock exists at the quarry face prior to processing. Accordingly, “aggregates” as at muck pile is the condition stipulated by Schedule 2.

Discussion: The application turns on the correct legal interpretation of the word “bulk” as used in Schedule 2 of the Mineral and Petroleum Resources Royalty Act, 2008 in relation to aggregates. The question is whether the word “bulk” refers to aggregates upon extraction (i.e. at the muck pile), or whether it refers to the beneficiated state of the aggregates stockpile at the time of the transfer.  SARS contends that “bulk” in terms of its dictionary meaning indicates that the condition of aggregates does not change in the process of beneficiation. Bulk remains bulk at whatever stage of beneficiation the aggregate is found at the time of transfer. This is the core of the legal issue raised by this matter. The applicants contend that the milieu in which the word “bulk” is used in the Act is not to be determined by its meaning in general parlance. The word “bulk” is used in the Act in the context of the mining industry. If the milieu affects the meaning, then the correct milieu must be identified. It is therefore an issue to determine what the general meaning of “bulk” in the mining industry would be rather than in general parlance.

Findings: The interpretation advanced by SARS loses sight of the difference in price between aggregates at the muck pile and those that have undergone beneficiation. While minerals containing ore are recognised as increasing in value through the process of beneficiation, somehow this is not seen to be possible as far as aggregates are concerned. This loses sight of the benefits of beneficiation applied to aggregates. The interpretation assigned to the word “bulk” by SARS does not withstand a proper interpretation exercise of the term with reference to text, context and purpose. SARS’ interpretation defeats the purpose of the Act and renders redundant section 6(2)(b), which evidently finds application to aggregates that have undergone beneficiation and are sold in a different condition beyond the muck pile. The term “bulk” in Schedule 2 of the Act bears the meaning contended for by the applicants.

Order: A declarator is issued that “bulk” as used in respect of aggregates in Schedule 2 to the Mineral and Petroleum Resources Royalty Act, 28 of 2008 means the condition in which shot rock (i.e. blasted rock) exists at the muck pile prior to processing. Aggregates as at the muck pile is the condition stipulated by Schedule 2.

Facts and issue: Section 104(1) of the Tax Administration Act 28 of 2001 (TAA) allows a taxpayer aggrieved by an assessment made by the SARS, to object to such an assessment. Rule 7(2) of the rules promulgated under section 103 of the TAA sets out the requirements for the lodging of such an objection. SARS may in terms of rule 7(4) treat as invalid an objection which does not comply with these requirements. In such circumstances, the taxpayer has a remedy in rule 52(2)(b), which entitles a taxpayer to apply to a tax court for an order that an objection treated by SARS as invalid under rule 7, is valid. This is such an application.

Discussion: Dr X is a specialist neurologist. Dr X renders services to the second applicant (the company) and is the company’s public officer. The taxpayers seek a declaratory order that an objection which they filed with SARS on 14 August 2023 (the Second Objection) and which was invalidated by SARS due to non-compliance with rule 7(2)(b), is valid. The taxpayers contend that the Second Objection meets requirements of rule 7(2)(b). They argue that in invalidating the Second Objection, SARS wrongly conflated the test for a valid objection. The taxpayers’ argument in relation to rule 7(2)(b)(iii) conflates procedure with merit. The procedural requirements for submission of a valid objection in terms of rule 7(2)(b) are conceptually different to the determination of the merits of an objection in terms of rule 9. It is only an objection which has been determined by SARS in the first place to be valid, in other words compliant with rule 7(2) and its requirements, that may be the subject of a determination by SARS to allow or disallow the objection in terms of rule 9 with the test for whether an otherwise valid objection should be disallowed or not.

Findings: There is no dispute that Dr X did not submit any documents to substantiate the Second Objection insofar as it relates to the donations tax levied by SARS. The objection in this regard does not comply with the requirements of rule 7(2)(b)(iii). The findings by SARS ought to have alerted the taxpayer to the need for detail, specifics and supporting documentation in any future objection to the assessments raised by SARS. To comply with the requirements of rule 7(2)(b), the taxpayers were required to deal in detail in their objection with each and every one of the unexplained deposits and accruals into their bank accounts for each year of the audit period. The main objections by the taxpayers in their Second Objection to the income tax, donations tax and VAT assessments raised by SARS, do not comply with the validity requirements of rule 7(2)(b). The taxpayers were under a duty to co-operate with and not to obstruct SARS during the performance of the audit process. Their conduct does not demonstrate such co-operation.

Order: The application in terms of rule 52(2)(b) is dismissed.

Facts: Diageo is a public company incorporated in South Africa. Diageo manufactures a range of liqueurs which are also marketed as "Cape Velvet" products. This matter concerns the classification of only one of those liqueurs, namely, Cape Velvet Cream Original. The commissioner is tasked with the implementation of the Customs and Excise Act 91 of 1964 and is empowered to determine the classification of all imported and manufactured products, including alcoholic beverages, such as liqueurs, for the purpose of levying excise duties. Regarding Cape Velvet Cream Original, the commissioner determined that the product is a spiritous beverage containing wine spirits to which other "alcoholic ingredients" have been added. The alcoholic ingredient is the vanilla that is added to and mixed separately with other ingredients to create the flavouring, which is then added to the wine spirit base to create Cape Velvet Cream Original. The vanilla on its own has an alcohol content by volume (ABV) of 0,6%. After all its ingredients, including the vanilla, were mixed, the flavouring itself has a lower volume of 0,002%.

Appeal: The classification of the product by the appellant, the Commissioner for SARS, was taken on appeal by the respondent, Diageo, to the High Court. The High Court dismissed Diageo’s appeal and upheld the commissioner’s classification of the product. That decision then was taken on appeal by Diageo to the full court. The full court reversed the decision of the High Court. It set aside the commissioner’s determination and effectively found in favour of a classification contended for by Diageo. This appeal concerns the dispute about the correct classification of the liqueur product for purposes of excise duty payable under the Customs and Excise Act 91 of 1964.

Discussion: Diageo argued that the actual flavouring, which includes the vanilla, and has a significantly lower volume of 0,002%, is the ingredient added to the wine spirit base. While the full court mentioned the applicable legal principles, it (unfortunately) did not apply them. It seemingly set out to purposively interpret Additional Note 4(b). But it concentrated solely on its conception of the note’s secondary purpose and background, instead of considering its text, the context and the primary purpose (which was to explain and clarify to which liqueurs certain subheadings, specifically mentioned in that note, would be applicable) together. The full court considered the nature and characteristics of Cape Velvet Cream Original, either before its interpretation, or as part of its interpretation process, and conflated the stages because it interpreted Additional Note 4(b) with reference to the contribution of the vanilla or the flavouring, to the total alcohol content of the final product. It found effectively because that contribution to the alcohol content of the final product was little or small, that the vanilla or flavouring as an ingredient added to the wine base, was "non-alcoholic".

Findings: There is a limited difference between the parties concerning the appropriate Tariff Heading under which the product must be classified. The final determination also depends on the interpretation of Additional Note 4(b). On a proper construction of that note, both the flavouring and the vanilla are components of the product and, therefore, are ingredients that are added to the wine base of the product. That is so even though the vanilla is technically a secondary component of the product and is a primary component of the flavouring. It is not disputed that the vanilla itself is alcoholic. But, in any event, the flavouring itself is also not free of alcohol and is alcoholic. Therefore, the classification contended for by Diageo is not appropriate, and the correct classification of the product is under Tariff Subheading 2208.70.22 (and Item Heading 104.23.22), as contended for by the commissioner, and confirmed by the High Court. Consequently, the appeal to this court must succeed, and the full court's order must be set aside and replaced with one dismissing Diageo's appeal to that court.

Order: The special appeal is upheld with costs. The order of the full court is set aside and is replaced with one dismissing the appeal with costs.

COPPIN AJA (MOCUMIE JA, SCHIPPERS JA, SMITH JA and MANTAME AJA concurring)

Facts and issue: Before court is an appeal pursuant to the court a quo granting leave to appeal against its judgment dismissing the appellant’s application to set aside the determination by the respondent, SARS, that the appellant does not qualify for the diesel refunds it claimed. The appellant claimed a refund for the diesel used to conduct mining. The respondent paid the refund so claimed, but pursuant to an audit, claimed the paid refunds back.

Discussion: The appellant’s argument is that the court a quo was incorrect in accepting the respondent’s argument and finding that the appellant’s logbooks did not detail the usage of the diesel. The further finding by the court a quo and argument of the respondent that the appellant’s logbook did not detail the usage of the diesel for eligible purposes is similarly simply wrong. On behalf of the respondent, it was submitted that the provisions of Note 6 read with the rebate item 670.04 and section 75 of the Customs and Excise Act 91 of 1964 are all peremptory and any user wanting to receive the benefit of the rebate item must ensure strict compliance with these provisions. The log book submitted did not comply with the requirements because ex facie the document it cannot be determined how the diesel was used because the description in the logbook is generic. The respondent attempted to remedy FA5 by submitting the revised logbook as reflected in FA17. This did not rectify the logbook because the schedule in the logbook still failed to specify the details of the mining activities performed. But, more importantly one cannot ascertain whether the diesel claimed was in fact utilised for eligible purposes.

Findings: To qualify for the rebate, the appellant must complete a logbook with sufficient clarity. This is not a mechanical approach, but an approach whereby the object of the diesel refunds, not to be a complete reversal of the fuel levies in the mining sector, is borne out by the list meticulously circumscribing the ambit of activities that do qualify for the rebate. The logbook must contain the specified usage of the fuel in respect of a specified vehicle or equipment. The duty to ensure that the appellant is entitled to the refund lies with the appellant. There is no duty on the respondent to visit the mining operation or make its own deductions on generic inscriptions in the logbook. The appellant has been afforded the opportunity to submit further logbooks that where considered. It could have placed further documents to prove its entitlement to the rebate before the court. The award must not be reviewed and set aside on due process not being followed.

Order: The appeal is dismissed with costs.

Facts and issue: The Commissioner for SARS applied on an ex parte basis for a preservation order and for the appointment of the applicant as a curator bonis. The preservation order was granted. During the process of doing inventory at the premises of the respondent, a Bentley was discovered in the garage. The respondent remarked that it belonged to a friend but failed to provide details of the friend. The applicant instructed the Sheriff to attach the Bentley, but the Sheriff could not do so after finding that the Bentley was no longer in the garage. The applicant then made some investigations on which revealed that the Bentley was registered in the name of the respondent with money paid from the N&N Family Trust. The applicant seeks enforcement of the preservation order.

Discussion: The contention is that after the preservation order was granted, the Bentley had gone missing. It is disingenuous of the respondent to aver that the applicant waited two weeks before lodging this application. According to the applicant’s version, the respondent when asked about the Bentley indicated that it belonged to his friend who was in Cape Town. Secondly, this caused the applicant to investigate the ownership of the said vehicle. Why was the respondent not forthcoming with this information after the essence of the preservation order was explained to him? According to the respondent’s version, he gave information about the Bentley in the presence of his attorney. It begs the question, why would it be necessary for the applicant to embark on an investigation about the purchase of this Bentley if he was provided with all material information? The lack of information on its whereabouts is not a neutral factor. It is about the prejudice that the applicant as curator bonis appointed by the court at the instance of the Commissioner for SARS will suffer dissipation of the value of the vehicle.

Findings: What is apparent is that the said Bentley was in the possession of the respondent when he was interviewed about it. It is strange that no sooner did the applicant require further information on the ownership of the Bentley then it disappears from the garage. To determine whether the respondents enjoy the right of possession over the Bentley cannot be done in a vacuum, rather it must be done from the surrounding facts. The facts demonstrate that the respondent had possession over the Bentley who concedes to this fact. Therefore, the Bentley falls within the ambit of the preservation order. The applicant has made a case for urgency and that the said Bentley falls within the ambit of the preservation order as highlighted above. The respondent had the Bentley under his possession when it disappeared from his garage. The said vehicle was bought by the Trust money thus the respondents as trustees cannot absolve themselves of the responsibility to investigate the location of the said vehicle and disclose it.

Order: The respondents are directed to disclose in writing the location of the Bentley Flying Spur Azure V8. The respondents (who may be in possession or control of the Bentley) are directed to forthwith deliver the Bentley to the applicant at the address nominated by him.

Facts and issue: The application is a statutory appeal in terms of s 47(9)(e) of the Customs and Excise Act 91 of 1964. The applicants (GMV) seek an order that the applicants’ appeal against a letter of demand (LOD), issued by the respondent (Commissioner or SARS), and against the decision of the respondent’s internal Appeal Committee, be upheld. The applicants seek an order in the alternative that the respondent's determination that the applicants have not complied with Note 6(f)(ii)(cc) of Part 3 of Schedule 6 to the Customs Act (dealing with the requisite mining authorisation), be set aside.

Discussion: The impugned decisions resulted from an audit performed by SARS after GMV claimed diesel refunds in terms of section 75(1A) of the Customs Act, pursuant to its mining operations. SARS disallowed the refunds and raised the LOD on the basis that GMV is not entitled to the diesel refunds because GMV did not comply with one or more requirements set out in Note 6 of Part 3 of Schedule 6 of the Customs Act (Note 6). SARS raised the LOD and claimed an amount of approximately R75 million (plus interest) from GMV. The issue of logbooks was expressly raised by the Appeal Committee and in the answering affidavit. The Appeal Committee afforded the applicants an opportunity to provide the required documents. The applicant elected not to do so. SARS argues that in the absence of compliance with the requirements of Notes 6(a) and 6(q), SARS cannot grant GMV any diesel refund as claimed. On the evidence presented, the applicants have not persuaded court that they have complied with the requirements of Note 6(q) of Part 3 of Schedule 6 to the Customs Act, dealing with keeping of books, accounts and other documents.

Findings: The GMV did not provide SARS with the usage and dispensing records sought to substantiate the diesel refunds as requested by the Appeal Committee. In the absence of compliance with the requirements of Notes 6(a) & 6(q), SARS cannot grant GMV any diesel refund as claimed. The Appeal Committee did not act ultra vires as contended by the applicants. GMV does not carry on the mining activities (which would qualify for a refund of levies), as the holder or cessionary of a mining authorisation granted or ceded to GMV, as required by Note 6(f)(ii)(cc). It follows that GMV was not entitled to the refund.

Order: The application is dismissed.

Facts and issue: This is an application brought by Company A (applicant) seeking an order separating the issues pending tax appeal. The applicant is appealing against additional assessments which SARS raised against it (Company A), which was based on contracts entered between Company A and PRASA. The issues for determination are whether the applicant have made out a case for separation in terms of Tax Court Rule 42(1), read with High Court Rule 33(4).

Discussion: The applicant’s submission that the separation if granted in its favour would be dispositive of the tax appeal is misplaced in that the assessment by SARS was based on invoices issued and payments received. Assuming of course without concluding that from the engineering report, there was to be any change in amounts between Company A and PRASA there is available remedy and recourse to make adjustments both in terms of the VAT Act and the Income Tax Act. The current assessment will remain, and the taxpayer may advance new information to its argument during an appeal which if supported and accepted may results in a reduced assessment. But the current assessment does not fall away, it remains valid until the taxpayer is able to present evidence supported in terms of the ITA, which evidence will trigger a reduced assessment. These are issues, the taxpayer will have to ventilate at the tax appeal. As such the tax appeal will not be disposed only because there exists a possibility of new information. The new information if any may still be an issue contended and or central in the tax appeal.

Findings: The principle in taxation is that one is taxed either on receipt or accrual whichever comes first. In this case the taxpayer was assessed and taxed on receipt, that the payments received was not for the taxpayer’s benefit is a factual enquiry that can only be proved by evidence being led particularly as SARS already has evidence in the form of invoices issued and payments deposited into Company A’s business account. The taxpayer will also have to lead evidence to show that it held the funds on behalf of PRASA and for the benefit of PRASA and most importantly in which capacity were the funds held. It is not just a question of law but rather a factual enquiry as there is a specific conduct and behaviour expected for someone who claims to be a holder for the benefit of and on behalf of a third party. It is this conduct that requires that evidence be led by the taxpayer. There is a risk that there will be a duplication of evidence in respect of the separated issues and in the rest of the appeal. It is the existence of this duplication even if potential that separation will not be granted.

Order: The application for separation of issues is dismissed with costs.

Facts: The first applicant (Alliance Fuel) operates a fuel plant at the premises. The Commissioner for the South African Revenue Services (SARS) obtained a warrant from the Magistrate’s Court to enter and search the premises in terms of section 88 of the Customs and Excise Act 91 of 1964. After the commissioner’s officers and expert entered and searched the premises, the commissioner detained both premises in terms of section 88. Essentially, the dispute between the parties is whether the commissioner is entitled, in terms of section 88, to restrict Alliance Fuel’s employees’ access to the premises. SARS disputes that Alliance Fuel is a trading company. It alleges that it is a dormant company. It is only registered for income tax. It is not registered for VAT, pay as you earn (PAYE) or any customs activity. It has only rendered one income tax return declaring its income to be nil. Since Alliance Fuel barely denies these allegations, the court determines the dispute on SARS’s version.

Application: The applicants have framed their cause of action as spoliation. They allege that they were in undisturbed possession of the Meyerton and Louis Trichardt properties when the Commissioner dispossessed them by placing guards at the entrances and excluded the applicants from accessing the properties. The applicants seek unrestricted access to the premises.

Discussion: SARS raises the applicants’ failure to comply with the prescribed formalities. As contended on behalf of SARS, the one hour and eighteen minutes notice period Alliance Fuel gave to SARS is extremely short. The applicants have not advanced reasons as to why the notice period should be truncated in the interests of justice. The circumstances that led to SARS seizing the premises, and the legal basis on which it has done so, renders the truncation of the notice period, especially to such an extremely short notice period, not to be in the interests of justice. The applicants’ have no right to conduct an illicit fuel trade on the seized premises as alleged by SARS. The alleged illicit fuel trade seems to be intricate. The applicants have failed to give a valid section 96 notice. They have also not made out a proper case for the prescribed notice period to be reduced in terms of section 96(1)(c)(ii). The applicants’ failure to comply with the section 96(1) requirements dealt is fatal to the application.

Findings: SARS contends that the only reasonably practicable method of effecting the detention was to secure the premises as a whole and place security guards to control access thereto. On the Commissioner’s version, an unlawful kerosene and diesel mixing plant is operated at both premises. The premises are principally interconnected tank farms for mixing these two types of fuel and storing them. Regard is had to the context, purpose and text of section 88. There isn’t a more practical method of securing the detention of the tank farms without detaining the two premises. The farms consist of storage tanks which are connected to each other with pipes. As a result, it is impossible to secure or seal a single tank. To establish whether the storage tanks, interconnected as they are for the purpose of adulterating fuel as alleged, and thus liable to forfeiture, it is necessary and practical to secure the whole premises. Given the alleged operations and their scale, the Commissioner would not be able to properly achieve the objectives of section 88 if he detained only the tanks that were found to be adulterated because what is being investigated is not so much the storage of fuel but the allegation that the applicants are operating an unlawful mixing plant.

Order: The application is dismissed.

MODIBA J

Facts: Thistle is a registered inter vivos discretionary trust and a South African tax resident. Thistle is a beneficiary of 10 vesting trusts described as the Zenprop Group. Zenprop is a property developer and property owner. In the course of its business, it frequently buys and sells properties. In the 2014, 2015 and 2016 tax years, Zenprop disposed of assets and realised capital gains, the proceeds of which it distributed to Thistle. Thistle, in turn, distributed the proceeds of those capital gains to the natural persons who were its beneficiaries. The proceeds of the capital gains were all passed through the multi-tiered trust structure to the ultimate beneficiaries within the same tax years in which they were realised. Acting on legal advice received, Zenprop and Thistle did not account for the capital gains in their tax returns for the 2014, 2015 and 2016 tax years. They were advised that the relevant amounts were capital gains which, in terms of the common law conduit principle, and the relevant provisions of the Income Tax Act 58 of 1962 (ITA), were taxable as capital gains in the hands of the ultimate beneficiaries. The beneficiaries accounted for the capital gains in their tax returns and paid the capital gains tax for which they would have been liable in respect of these capital gains.

Appeal: SARS conducted a tax audit of Thistle. It took the position that on a proper application of the ITA, liability for the capital gains realised by Zenprop had passed from Zenprop to Thistle as the direct beneficiary of Zenprop, but did not pass further from Thistle to its beneficiaries. It accordingly held Thistle liable for capital gains tax in respect of the amount of the capital gains distributed to it by Zenprop. An additional assessment followed, which Thistle successfully appealed to the Tax Court. The Supreme Court of Appeal upheld SARS’ argument that the capital gains realised by the disposal of properties by Zenprop were taxable in the hands of Thistle and not in the hands of the ultimate beneficiaries (the court also dealt with the imposition of understatement penalties).

Discussion: Thistle argues that the conduit principle is a rule of common law that applies to the taxation of trusts. Therefore, it must not only inform the interpretation of the relevant provisions of the ITA but also apply to the taxation of the relevant capital gains, unless the ITA has clearly excluded or qualified such application. Thistle contends that there is nothing in the ITA that excludes or qualifies the application of the conduit principle to the capital gains in this case. Apart from the conduit principle, Thistle relies on the deeming provision in section 25B of the ITA. It argues that in terms of section 25B the capital gain of Zenprop is deemed to be the capital gain of Thistle when it was distributed to Thistle and then deemed to be the capital gain of the beneficiaries when it was distributed further from Thistle to the beneficiaries. SARS submits that section 25B does not apply to capital gains, only to other income that is relevant for income tax purposes. It emphasises that section 25B was introduced into the ITA at a time when capital gains tax did not exist in South Africa and accordingly could not, originally, have been intended to apply to capital gains.

Findings: Paragraph 80(2) of the Eighth Schedule of the Act deals with capital gain in respect of the disposal of an asset by a trust. The wording of paragraph 80(2) shows that the provision applies the conduit principle only to the first beneficiary trust in a multi-tiered trust structure. It is not reasonably possible to interpret paragraph 80(2) to allow the conduit principle to run through a multi-tiered trust structure to attribute liability for capital gains tax in respect of the disposal of an asset to a beneficiary beyond the first beneficiary of the trust that realised the capital gain by disposing of that asset. The legislative history of paragraph 80(2) and the 2008 memorandum both confirm that paragraph 80(2) was amended into its present form for the purpose of preventing the conduit principle operating through multiple discretionary trusts in a tiered trust structure. Paragraph 80(2) thus admits of only one interpretation – that, in relation to capital gains tax, the conduit principle does not apply throughout a multi-tier trust structure and capital gains are taxable once distributed to a second-tier trust.

Order: The appeal is dismissed.

CHASKALSON AJ (MAJIEDT J, MATHOPO J, MHLANTLA J, THERON J and TSHIQI J concurring)

BILCHITZ AJ (with MADLANGA J) dissenting from para [94]