Mr DC le Roux, the deceased, was married in community of property to Mrs ME le Roux.  The marriage foundered and the deceased relocated from Gauteng to Durban, where he moved in with his cousin, Ms Delport, the applicant in this case.  Together with her partner, she cared for and nursed the deceased through the three years preceding his death from severe diabetes.  The care included attending to his recovery from a leg amputation occasioned by the diabetes.

According to the applicant, the deceased wished to prepare his last will, and a neighbour introduced him to the accountant.  Acting on the deceased’s instructions, the accountant prepared the will and presented it to the deceased, who signed it.  The accountant then had the will signed as witnesses by his partner’s wife and the neighbour, neither of whom had been present when the deceased signed it. 

How the accountant saw fit to procure, let alone condone, this fatal breach of section 2(1) of the Act is a question only he could answer.

In terms of the will, 70% of the estate would devolve upon the applicant and 10% to each of the deceased’s two children and the applicant’s partner.  The applicant contended that this apportionment was fair, given that she and her partner had cared for the deceased, during which period he had no contact at all with his wife and their two children, an assertion the children denied.  (By the time the case came to court, the wife had died).  They pointed out that the deceased had not changed the beneficiaries on his policies, which had been divided according to his wishes stated in the policies

The requirements of section 2(1) of the Act are peremptory: the will must be signed by the testator or by some other person in the presence of and by the direction of the testator; in the presence of two or more competent witnesses present at the same time; the testator and the witnesses must sign in each other’s presence; and each page must be signed by all parties.

Section 2(3), on which counsel for the applicant relied in his argument, reads:  “If a court is satisfied that a document or the amendment of a document drafted or executed by a person who has died since the drafting or execution thereof, was intended to be his will or an amendment of his will, the court shall order the Master to accept that document, or that document as amended, for the purposes of the Administration of Estates Act, 1965 (Act 66 of 1965), as a will, although it does not comply with all the formalities for the execution or amendment of wills referred to in subsection (1).”

In Logue and another v The Master and others[2], the court stated that section 2(3) requires that, in order to have a defective will validated, the applicant “must demonstrate and persuade the court that the deceased intended the document to be his will”.  It did not mean that it was unnecessary to comply with the formalities, but that it was not necessary to comply with all the formalities.

In Webster v The Master and others[3] , the following passage appeared in the headnote of the judgment:

“…s 2(3) of the Act was in most peremptory terms: when the Legislature provided that a document which was sought to be declared to be the will of the deceased in terms of s 2(3) of the Act had to be ‘drafted or executed by a person who had died since the drafting or execution thereof’, it required that the document had to be drafted by such person personally’”.

In the present matter the deceased had not personally drafted the will.  There was no certainty that he had signed the will.  The accountant had drafted the will on the deceased’s instruction but was not a witness to the will.  The peremptory requirement in section 2(3), referred to in Webster, was therefore not met.  The applicant had failed to substantiate why the formalities had not been complied with.  Section 2(3) could not be relied upon “successfully to validate a document that was drafted by a professional person who ought to have complied with the formalities of a valid will but for no valid reason failed to do so”.

Accordingly, the court found that the will was invalid for want of compliance with the statutory requirements.  This had been the view of the Master, who had rejected the will.

[1] (D1703/2021) [2022] ZAKZDHC 51

[2]  1995 (1) SA 199 (N) at 203E-F

[3] 1996 (1) SA 34 (D)

A decisive element in deciding the dispute between the dramatis personae in the matter Paulus Bernhardus Koch v Michele Weiland NO & The Master of the High Court, Cape Town[1] was Regulation 2 of the regulations promulgated in terms of the Attorneys, Notaries and Conveyancers Admission Act, 1934.  This regulation states, as the court summarised, that “no person other than an attorney, notary or conveyancer, or an agent in terms of section 22 of the Magistrates’ Courts Act, 1944 (a so-called law agent) may liquidate or distribute a deceased estate”.  This includes “the performance of any act relating to the liquidation or distribution of the estate other than the realisation, transfer or valuation of estate assets or of any right in or to such assets”.

There are four exemptions under Regulation 3: boards of executors; trust companies; public accountants; and persons duly licensed under the Licences Act, 1962 and carrying on business predominantly consisting in the liquidation or distribution of deceased estates.  Under Regulation 4, there are another seven: banking institutions under certain conditions; persons in the full-time service of a person lawfully liquidating a deceased estate, assisting or acting on that person’s behalf; persons in the full-time service of any trade union, under certain conditions; persons acting on the instructions of an attorney, notary or conveyancer; persons acting under the direction of the Master; the surviving spouse of or any person related by consanguinity up to and including the second degree to the deceased person, in so far as he or she is liquidating or distributing the estate: and, most relevant, to the present matter, any natural person nominated by a deceased person in a will and accepted by the Master, in so far as the person is personally liquidating or distributing the estate [Emphasis added].

The court decided that, although the two Acts had long since been repealed, the regulations had continued in existence in their successors, currently the Legal Practice Act, 2014.  They therefore applied in the present matter.

The court referred to Meyerowitz[2] where at paragraph 12.23 the learned author stated that an executor cannot substitute another person to act in their place, but may appoint an agent under power of attorney to administer the estate.  The power of attorney may not be irrevocable.

The first defendant was the deceased’s daughter, who was nominated as executor in the deceased’s will and duly appointed.  She and the plaintiff entered into an agreement, the salient provisions of which were that she nominated and appointed the plaintiff (in translation): “…as my authorised Agent to administer, distribute and finalise the Estate in accordance with prevailing legislation and against payment of the prescribed executors’ fee or such other fee as we agree upon between us.  Without limiting in any way my Agent’s general powers, I authorise him in particular to:

• Complete and sign any documents, returns Liquidation and Distribution accounts, tax returns and so forth
• Open bank accounts in the name of the Estate, operate thereon and close them
• Represent the Estate in any actions and/or suits instituted by or against the estate
• To complete and sign all documents regarding the transfer, cession and/or alienation of any estate assets to heirs, purchasers and/or claimants

My Agent’s lawful actions in respect of the estate and related matters are ratified herewith as if I personally acted herein and this power of attorney will remain in force until the Estate has been finalised and all monies owing to my Agent have been paid in full.”  As an aside, Judge van Zyl stated that it appeared to him that this was an irrevocable power of attorney, which rendered it unenforceable on the authority referred to earlier.  However, the parties had not taken the point and he said no more about it.

Before the liquidation and distribution process had been concluded, the defendant repudiated the agreement before the plaintiff was able to fulfil his mandate.  The plaintiff claimed payment of about R1,3 million, based on 90% of the commission the plaintiff had expected, based on the statutory executor’s rate of 3,5% of the gross value of the assets in the estate.  The defendant’s case was to take exception to the plaintiff’s claim in that he had failed to disclose a cause of action, because in terms of the regulations he was prohibited from administering and liquidating deceased estates.

It was clear that the plaintiff was well aware of the prohibition against substitution, as it was expressly alleged in the particulars of claim that “the purpose of the agreement was not to substitute or surrogate the First Defendant with the Plaintiff to act as executor in her place, is [sic] was to render services to the First Defendant against the fee similar to and/or equivalent to the fee which the First Defendant will receive upon the successful liquidation and distribution of the estate.  The Defendant [sic] therefor [sic] did not abdicate from her responsibilities and duties regarding the administration of the estate but delegated these to the Plaintiff”. 

The agreement was clearly, on its plain language, a power of attorney granted by a principal to an agent.  The plaintiff’s case was that, even with his assistance, it was the defendant who was regarded as having acted.  It followed, according to the plaintiff, that he had no need to make any allegation as to his capacity under the regulations.  His claim was purely for contractual damages for loss of income.

The court found that the plaintiff could not evade the implications of the regulations in this way.  On a proper interpretation of the regulations, having regard to the approach set out in Natal Joint Municipal Pension Fund v Endumeni Municipality[3], one of the reasons for their promulgation must have been to protect the public and to ensure the orderly and lawful administration of deceased estates.  “Notably, the regulations do not say that no person, save as provided for in the regulations, shall be appointed as executor.[4]  They specifically say that no such person “shall liquidate or distribute” a deceased estate.  This (sensibly so, given the purpose of the regulations) refers to the acts involved in liquidating and distributing an estate, rather than to where the responsibility lies for those actions.”  And further:”The first defendant patently did not administer the estate “personally”, as is required by regulation 4(1).  To interpret the requirement of “personally” in the regulations as to include liquidation and distribution via an agent would undermine the essence of the regulations.”

The grant of a power of attorney without regard to the regulations would allow them to be side-stepped and enable an unqualified person to administer an estate.  If the plaintiff were allowed to sue on the power of attorney for an executor’s fee, it would mean that the plaintiff was effectively allowed to step into the shoes of the executor.

The court upheld the defendant’s exception and gave the plaintiff leave, within 10 days, to amend his particulars of claim so as to remove the excepted cause of complaint (and, presumably, replace it with a more anodyne one such as “for services rendered and advice provided in the course of your liquidation and distribution of the estate of the late xxx”).

It commonly occurs that the person appointed as executor of a deceased estate is not equipped to carry out the liquidation and distribution unaided.  This frequently applies where the surviving spouse is appointed, for example.  Invariably, the surviving spouse obtains professional help.  If the person so engaged falls within one of the categories of persons listed in Regulations 3 and 4, the sort of situation that arose in the present matter would not arise.  Should the executor elect as advisor a person who falls outside the Regulations, the executor and the advisor should conduct the process in a way that makes clear that the executor was involved in the entire process and took all the important decisions, even though they were based on the advisor’s guidance.  And it would be most unwise to link the advisor’s fee to the statutory executor’s remuneration rate.

[1]  [2020] Case no 16526/2020

[2] Meyerowitz on Administration of Estates and their Taxation, Juta 2010

[3] 2012 (4) SA 593 (ZASCA) para [18]

[4] The Administration of Estates Act deals with this in section 13(2): “No letters of executorship shall be granted or signed and sealed and no endorsement under section fifteen shall be made to or at the instance or in favour of any person who is by any law prohibited from liquidating or distributing the estate of any deceased person.”

This is the nub of the recent judgment of the Supreme Court of Appeal (SCA) in Purveyors South Africa Mine Services (Pty) Ltd v CSARS Case No 135/2021 (not yet reported) and delivered on 7 December 2021.

In January 2015, Purveyors entered into a dry lease agreement with a USA company, Freeport Minerals Corporation, for the lease of an aircraft to operate air charter services for Tenke Fungurume Mining SARL, a non-resident company owning and operating a mine in the Democratic Republic of Congo. At the date of the agreement, Freeport owned 100% of the equity of Purveyors and 80% of Tenke.  Purveyors entered into an air charter agreement with Air Katanga to manage, operate and maintain the aircraft on behalf of Purveyors.

The aircraft transported employees, sub-contractors, suppliers and business guests from Johannesburg to Lumumbashi and Katanga, generally three times a week.  When it was not in use, the aircraft was kept in a hangar leased to Purveyors OR Tambo International Airport.

In November 2016, Purveyors became a subsidiary of CMOC DRC Limited, a company incorporated and tax registered in Hong Kong.  A sister company of CMOC DRC assumed the initial dry lease agreement and concluded a new one with Purveyors.  The agreement between Purveyors and Tenke remained undisturbed.

In January 2017 Purveyors received an opinion from PwC stating that Purveyors ought to have paid value-added tax on the importation of the aircraft into South Africa.  On 30 January Purveyors then approached SARS with a view to regularising its VAT obligation. On the following day a SARS official responded in an e-mail that the aircraft was subject to penalty implications.  On 29 March 2017 the official wrote to Purveyors explaining the reasons for the penalties and informing the taxpayer of the need to appoint a clearing agent.  Purveyors replied immediately, indicating that it understood that VAT and customs duty were payable, as well as fines and penalties.  On 30 March the SARS official responded in order to clear any misunderstandings and indicated that there existed no waiver of potential penalties and that if the tax payable to SARS was late, penalties and interest would arise.  On 16 May 2017, in response to a further request from Purveyors, PwC confirmed its earlier opinion.

Purveyors took no further steps for nearly a year, until on 4 April 2018 it applied for voluntary disclosure relief under section 226 of the Tax Administration Act (TAA).  SARS countered with reference to section 227, which provides that an application falls to be rejected if it is not voluntary and contains facts of which SARS was aware prior to the application.

Purveyors appealed unsuccessfully to the tax court, which found that the application had not been voluntary as there was an element of compulsion on the part of Purveyors when it made the application.

On appeal to the SCA, following an unrewarding appeal to the High Court, the issue was whether the earlier exchanges or discussions between SARS and Purveyors had any material bearing on the application.  Purveyors contended that the prior information disclosed to SARS in the process of ascertaining its tax liability was irrelevant and should not preclude it from making a voluntary disclosure application.  The application should not be considered at the historical point but only when the application was made.  In other words, prior knowledge disclosed by the taxpayer is no bar to a valid voluntary disclosure obligation.

Purveyors relied on a comment in an article by SP van Zyl and TR Carney where the learned authors state in relation to the Purveyors case a quo: “…‘disclosure’ is neither restricted in its denotation nor does its context in the TAA limit its meaning to ‘new’ or ‘secret’  information explicitly. To argue this would be precarious in the least”.  SARS contended that the application did not disclose information or facts of which SARS was unaware, and was not voluntary as Purveyors had been prompted by SARSs with the warning that it would be liable for penalties and interest arising from its failure to pay the tax due.  The Customs officials had already gained knowledge of the default and had advised Purveyors as early as 1 February 2017 that the aircraft should be declared and VAT paid.

The court proceeded to interpret section 227 in terms of the definitive Endumeni judgment, that “consideration must be given to the language in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production”.  According to the Oxford English Dictionary on Historical Principles, “voluntary” means “performed, or done of one’s own free will, impulse or choice; not constrained, prompted or suggested by another”.  “Disclosure” means “to open up the knowledge of others, to reveal”.

These two words required, according to the court, that the application must measure up fully to the requirements of section 227.  No purpose would be served if the TAA enabled errant taxpayers to obtain informal advice from SARSs and then, when the advice did not suit them, apply for voluntary disclosure relief.

On 29 March 2017 Purveyors’ office manager sent an e-mail to the responsible SARS official, stating:

“We understand from your mail and our telephonic discussion that a VAT output is applicable and customs duties are applicable as well. However the VAT input is claimable back. Fines and penalties are applicable, however, based on the fact that the company might have been misinformed at the inception of the operation of the aircraft, you are willing to advance that as mitigating circumstances in order to waive the applicable fines and penalties.  Furthermore, if we follow the process outlined below we will be in compliance with all the laws and regulations and you (SARS) will award a document of compliance.”

The court found that this e-mail made three things clear: the application was prompted by compliance action by SARS, which was aware of the interaction between Purveyors and SARS officials; Purveyors appreciated that it was liable for fines and penalties which had to be paid before Purveyors became tax compliant; and the application was to avoid the payment of fines and penalties rather than a desire to come clean.  To grant relief in circumstances where SARS had prior knowledge of the default would be at odds with the purposes of the programme, which was to enhance voluntary compliance with the tax system by enabling errant taxpayers to disclose defaults of which SARS was unaware and to ensure the best use of SARS’ resources.

On a true analysis of the facts, Purveyors’ application did not pass the test.  It disclosed no information of which SARS was unaware.  The submission that the application should be treated as if no exchanges, approaches or contact were made prior to the application was without merit.

Purveyors attempted one further argument, namely that SARS had not given notice of an audit or investigation as contemplated in section 226.  Had SARS done so, Purveyors would have been precluded from applying under the programme.  Because there had been no such notice, Purveyors was at large to apply.  The court rejected this contention by pointing out that it was under section 227, not section 226, that SARS had correctly rejected the application.

It is difficult to take issue with this judgment.  The court, with respect, arrived at the only tenable interpretation of the voluntary disclosure programme in the TAA.

Ms B was the sole heir and executrix in the estate of her deceased father, who died intestate on 18 August 2015.  The asset in question consisted of 1673 Kruger Rands (Coins), and the question was whether they should be valued for estate duty purposes in terms of section 5(1)(a) of the Estate Duty Act, as SARS contended, or of section 5(1)(g), as asserted by Ms B.  Before the estate had been finalised, Ms B had sold the Coins in several tranches between 27 May and 25 November 2016.

Section 5(1)(a) would apply if the Coins had been sold in the course of the liquidation of the estate, while section 5(1)(g) would apply if they had accrued to Ms B on the death of her father and she had sold them in her capacity as owner consequential upon inheriting them.  At date of death of the father, the value of the Coins was about R26,6 million, while the total proceeds of the sales were about R31,2 million.

Section 5(1)(a) provides that, for purposes of its inclusion in the estate, the value of any property disposed of in the course of the liquidation of the estate is the price realised, namely R31,2 million in the view of SARS in the present matter.  Section 5(1)(g) prescribes that the value of any other property (that is, in effect, property not sold but awarded to the heir) is the value at the date of death of the deceased person.  This would be R26,6 million if Ms B had her way.

The crisp question was whether Ms B had disposed of the Coins in her capacity as the only heir, and not as executrix “in the course of the liquidation of the estate”; or whether she had sold them as executrix.  Alternatively, if she had sold them in her capacity as executrix, whether she had done so “during liquidation”.  The appellant cited three judgments in arguing for section 5(1)(g):

CSARS v Estate late HE Kelly[2], where the court stated: “The norm is that estate duty is based on the value of the estate assets as at the date of the deceased’s death”;

De Leef Family Trust and Others v CIR[3]. Here the court stated: “Besides, according to our modern system of administration of deceased estates, the heir or legatee of an unconditional bequest obtains a vested right (dies cedit) to be entitled to the bequest on the death of the testator (a morte testatoris)”; and

Harris v Assumed Administrator, Estate Late Macgregor[4], [1987]. Although this case was about an intestate estate, the statement relied on by the appellant in the present matter was that the estate vests on the date of death when the heirs have been determined.

The facts of Kelly, on which the appellant mainly relied, were that Mrs Kelly at the time of her death in 1981 was married out of community of property to Mr D Kelly, who was the executor of her estate.  The estate assets included ten units of Karoo land on which bona fide farming operations were carried on.  Mr Kelly owned an undivided half shares of five of these units.  Mrs Kelly bequeathed her own farms to her son J Kelly (including the five units she owned outright) and the five half shares to her son F Kelly, in both instances subject to a usufruct in favour of her husband.

In 1983, while the estate was still being wound up, Mr Kelly and J Kelly entered into a redistribution agreement in terms of which Mr Kelly became the sole owner of the five half shares bequeathed to J Kelly, subject to a bequest price.  For estate duty purposes the total value of all ten units was determined at R289 177,50, being the Land Bank value as was permitted at that time.

In 1984, Mr Kelly, in both his personal capacity and as usufructuary, and F Kelly as bare dominium holder, sold the ten units to one P for R1 750 000.

In 1985 the executor filed the liquidation and distribution account, in which the ten units were reflected at the R289 177,50 Land Bank value in terms of section 5(1)(g).

In 1997 SARS became aware of the 1984 sale and revised the estate duty calculation to reflect the selling price, on the grounds that the sale had taken place in the course of the liquidation and that section 5(1)(a) applied.  The estate objected and appealed on the grounds that the sale had taken place during and not in the course of the liquidation.  The matter ended up in the then Appeal Court, where the learned judge held: “I conclude that a sale ‘in the course of the liquidation of the estate’ in s 5(1)(a) of the Estate Duty Act means a sale between which and the liquidation process there is some relationship. Put another way, it means a sale effected in the exercise of the functions involved in the liquidation. In short, the sale must be one in implementation of the liquidation process. It must therefore be by the executor or on behalf of the executor, in the latter’s capacity as executor, not in the latter’s personal capacity as beneficiary.”  And further: “Quite apart from the consideration that in selling to P the respondent did not purport to act as executor but only in his personal capacity as usufructuary, and as his son, F Kelly’s, representative, the following further facts demonstrate that the sale was not in the course of the liquidation:

[1] All the units of land were sold together as one. The merx included the respondent’s undivided half share in five of the units. This property was not an estate asset, it was not part of the liquidation process to sell it.

[2] It was not necessary for any estate purpose to sell any of the immovable estate assets prior to finalisation of the account.

[3] The sale was consequent upon the decision by the respondent and F Kelly to sell, pursuant to the redistribution agreement, in advance of their receiving transfer from the estate.”

Fortified by this decision as precedent, Ms B contended for the same result.  Perhaps made aware of the Kelly decision by her agent, who had experience as an executor, Ms B in emails with her financial advisor treated the sales as being concluded in her personal capacity as sole heir.  Significantly, as it turned out, the estate did not have sufficient cash to meet the liquidation and estate duty costs.  Ms B had to provide these from the proceeds of the Coins.  She claimed to have done so following her undertaking to pay the liabilities of the estate, and admitted that part of the reason for the sale had been to pay the liabilities and cover the administration costs of the estate.

The court found that the management of the liabilities and administration of the estate is inherently the function of the executor and not the heir.  Ms B’s reliance on Kelly “falls at the first hurdle of the legal requirement, as the sales in question were fundamentally in the function of the executor and could not have been undertaken in the personal capacity of the beneficiary”.  Moreover, it had been necessary to sell some of the Coins for estate purposes, in contrast with the Kelly position.

In conclusion, the court found that:

“[69] In the absence of any legal or factual congruence between the appellant’s case and the authority, there is no basis on which the appellant can rely on Kelly.

[70] The case of Kelly confirms that SARS’ opinion that the sale was in course of the liquidation of the estate is correct, in that:

[70.1] The sale could only have been undertaken by an executor;

[70.2] The sale only involved estate assets which the heir had no ownership over; and;

[70.3] The sale was necessary to cover the debts of the estate.”

Executors and heirs therefore need to be wary of uncritically relying on Kelly unless the facts, and especially point [2] above from Kelly, are in their favour.

[1] [2020] Case no 24863

[2] [2004] JOL 12754 (SCA)

[3] [1993] 55 SATC 207 (A)

[4] 1987 (3) SA 563 (AD)

Two sisters had created the Arathusa Trust in 1999.  Its only assets were all the shares in Manyeleti (Pty) Ltd, a company that owned a farm which was part of a game reserve.  The beneficiaries of the trust, described as “potential beneficiaries”, appear to have comprised members of the family of the founding sisters.  All the potential beneficiaries had been afforded the right to visit the farm with their families for vacations on a rotational basis.  When a difference of opinion arose between De Kock, the son of one of the founding trustees, and the rest of the family over the development of the farm for commercial use, the trustees amended the trust deed and removed him as a beneficiary.  De Kock approached the High Court for reinstatement, and the matter was settled on the basis that the purported amendment was to be regarded as of no force and effect and invalid.  The settlement was made an order of court.

It appears that the parties then entered into a dispute about the terms of the settlement, which culminated in De Kock approaching the High Court again.  De Kock sought an order that what he described as his “vested rights” under the trust be reinstated and that the existing trustees be removed and replaced by “independent and impartial” trustees to be appointed by the Master of the High Court.  The trustees contended that De Kock, as a “potential beneficiary”, had no vested right in the trust property and accordingly had no rights to protect.  The court found that the trustees had unlawfully discriminated against De Kock, because the law did not allow them to withhold the benefit enjoyed by the other beneficiaries simply because the rest of the family “had issues with him”.  Accordingly, the court ordered De Kock’s reinstatement as a beneficiary, and further that the Master should appoint an additional independent trustee in consultation with the other family members and “other interested parties”, (without identifying these parties in the judgment).  The court made a punitive costs order against the trustees.

Before the SCA the trustees and the other family members sought to appeal against the High Court’s decision and sought a determination of three issues: (i) whether leave to appeal should be granted; (ii) whether De Kock, as a discretionary beneficiary, had acquired rights as against the trustees which were capable of protection; and (iii) if so, whether the court had been correct in granting the reinstatement order, directing the Master to appoint an additional trustee, and issuing a punitive costs order.

The trust deed clothed the trustees with the power in their discretion to allow any beneficiary free use and enjoyment of the property.  The trust deed provided that the right of any beneficiary under the trust would vest only on payment or transfer to the beneficiary.  This did not include loans to a beneficiary.

Both sided argued on the question whether or not the right of access to the farm afforded to a beneficiary was a vested right.  The trustees were at pains to point out that they had not yet selected beneficiaries.  No vesting of rights was consequent, so the argument went, on the occasional occupation by beneficiaries.  They made much of the fact that the company, not the trust, owned the farm and it was the company that had the exclusive right to allow access to the farm.  The court made short shrift of this contention, pointing out that, as the shareholders of the company in their office as trustees, the trustees were making the decisions.  This left for consideration the question whether De Kock, as a “potential” beneficiary, had a right to protect.

The court rejected as misplaced De Kock’s submission that he had acquired vested rights.  Read in the context of the purpose and the other provisions of the trust deed, the occasional right of use on a rotational basis did not amount to vesting.  It then addressed point (ii) above and referred to the SCA decision in Potgieter & another v Potgieter NO & others [2011] ZASCA 181; 2012 (1) SA 637 (SCA) where the court found that: “The import of acceptance by the beneficiary is that it creates a right for the beneficiary pursuant to the trust deed, while no such right existed before.  The reason why, after that acceptance, the trust deed cannot be varied without the beneficiary’s consent, is that the law seeks to protect the right created for the first time.  In this light, the question whether the right thus created is enforceable, conditional or contingent should make no difference. The only relevant consideration is whether the right is worthy of protection, and I have no doubt that it is. Hence, for example, our law affords the contingent beneficiary the right to protect his or her interest against mal-administration by the trustee…”

Based on this dictum, De Kock was entitled to protect his discretionary right against maladministration by the trustees.  The withdrawal from him of the privilege of having a vacation on the farm constituted differential treatment without a justifiable basis, prompted by his attitude towards development of the farm for commercial purposes.  A trustee had the fiduciary duty towards all the beneficiaries of a trust irrespective of the nature of their rights.  This was so, even if a beneficiary was obstructive and contrarian.

As to the instruction to the Master to appoint an additional independent trustee, the court had this to say: “It is clear that there was a dispute of fact pertaining to [De Kock’s] allegation that the trustees did not attend to the affairs of the trust to the point where a letter of demand was issued against the trust.  The court a quo merely stated that the appointment of another independent trustee might quell the acrimony between the parties and restore the role of the trustees to what it should be. The third [trustee] is a chartered accountant by profession and is therefore qualified to properly understand the responsibilities of trusteeship. In the absence of facts conclusively showing that the third [trustee] would not be able to play that role, there is simply no legal basis for an order directing the Master to appoint an additional trustee.  The need for the appointment of an additional trustee was simply not established in this matter.  In any event, .in terms of the trust deed decisions must be arrived at consensually.  That would mean that the family and all the potential beneficiaries have to reach agreement, which obviates any need for the appointment of a further trustee.”

When it came to the punitive costs order, in light of the court’s findings the trustees had had a measure of success.  Despite the attempts of De Kock to defend the “unsustainable” punitive costs order, the decision as to costs was that the punitive element was removed from the High Court’s order and the costs of the appeal were to be borne by the respective parties.

The total costs of these two actions must have been astronomical, and one cannot but think that there must have been less expensive ways to resolve a family dispute.

The draft note commences by describing a missionary as a member of a religious mission, which consists of a group of people sent by a religious body to perform religious and social work, educational or hospital work.  Missionaries often operate under the banner of a society, agency, association, fellowship or some denominational body.

Typically, a missionary is not employed by a specific organisation, but relies on contributions to meet living expenses and operating costs of the mission work.  Sometimes these contributions come directly to the missionary, and sometimes via a missionary organisation that controls and administers donations and deploys them to missionaries in the field according to needs and availability of resources.  And here is the reason for claims that missionaries are not taxable on contributions to them; not employed, and dependent on charitable giving.

The draft note predictably starts with paragraph (c) of the definition of “gross income” in section 1(1) of the Income Tax Act.  This paragraph provides that an amount falls within paragraph (c) if it is received or accrued in respect of services rendered or to be rendered by the recipient.  The paragraph makes no exception where the amount is a voluntary award, or where it emanates from outside the Republic.

“In respect of” connotes a causal relationship between the amount and the services of the missionary.  The question is not: what prompted the donor to make the donation or, in the case of a controlling missionary organisation, to award the amount to the missionary?  Rather the question is: why was the payment made to the recipient?  This question was succinctly answered by Howie P in Stevens v CSARS [2006] 69 SATC 1 SCA.  The amounts were received by the recipients because they were employees who had received a benefit directly linked to their employment, and the payments were therefore taxable.

Lest it be argued that the missionary is not employed, the case cited in the meaning of “voluntary awards”, CSARS v Kotze [2002] 64 SATC 447 C, supports the “in respect of“ argument as well as and perhaps better than Stevens v CSARS, because the taxpayer in CSARS v Kotze was not an employee of the entity, the SA Police Service, that paid him the amount.  The service Kotze rendered was to alert SAPS as to what he suspected was an IDB transaction about to happen.  As a result, the illicit diamond dealers were caught in the act.  To reward Kotze for his public spirited action, the Commissioner of SAPS for the Western Cape awarded him with an amount maintained for this purpose.  Kotze won in the tax court, where the court relied on a decision of the UK tax court that such a payment was in the nature of an accolade and not for services rendered.  The fact that the recipient was Bobby Moore, captain of the only England team ever to win the FIFA World Cup, perhaps at least subconsciously influenced the court.  This argument did not succeed in CSARS v Kotze, where the court found that “services need not be rendered by virtue of any contract, nor need the amount received or accrued be by reason of any contract or obligation: it can be a purely voluntary payment”.

Next, the draft note states that an amount may be a donation in the hands of the payer, but nonetheless fall within paragraph (c).  Section 56(1)(k)(i) of the Act contemplates this type of situation by exempting from donations tax “any property which is disposed of under a donation as a voluntary award…the value of which is required to be included in the gross income of the done in terms of paragraph (c) of the definition of ‘gross income’ in section 1”.

Finally, the draft note makes the point that income received or accrued in respect of services has its source where the services are rendered.  And this is the Republic, where the missionaries are providing their services, and not the country from which the donations come.

Although the document is in draft form, it is difficult to envisage a different conclusion in the final version.

Section 2B provides that: “If any person dies within three months after his marriage was dissolved by a divorce or an annulment by a competent court, and that person executed a will before the date of such dissolution, that will shall be implemented in the same manner as it would have been implemented if his previous spouse had died before the date of the dissolution concerned, unless it appears from the will that the testator intended to benefit his previous spouse notwithstanding the dissolution of his marriage”.

As the court observed, elderly people tend not to get divorced, and they are more likely to die relatively soon after each other than young and middle-aged couples, who in turn are more likely to get divorced. This would explain the obscurity of section 2B. In its 1991 report, the SA Law Commission had recommended the insertion of section 2B into the Act after extensive research into the position in a number of other countries. The rationale is the acknowledgment that in so inevitably stressful and sometimes traumatic an experience as divorce, redrafting your will is often the last thing on your mind. The Commission recommended, however, that three months was long enough time for persons newly divorced to take stock of their new situation and take remedial action. The result was the introduction of section 2B in 1992.

The appellant’s spouse, NW, died less than three months after their divorce had been finalised. She had signed a will shortly before the couple’s marriage, referring to JW as “my husband”. The court found that this premature description did not invalidate the will. In the will she bequeathed her estate to her husband. No children were born of the union and NW had no children of her own. Her executor applied section 2B, which had the effect of disinheriting JW and devolving NW’s estate upon her parents in terms of the Intestate Succession Act, 1987. JW appealed against this decision on broadly two grounds. In response to each of the grounds, as mentioned below, the court devoted considerable attention.

Section 25(1) of the Constitution provides that no one may be deprived of property except in terms of a law of general application, and no law may permit the arbitrary deprivation of property.  In 73 closely crafted paragraphs, too long to consider in this brief summary, the court found that section 2B does not deprive beneficiaries of their right to benefit under a will, partly because they had no right but only a spes. This part of the judgment deserves an article of its own.

Section 34 of the Constitution provides that everyone has the right to have a dispute which can be resolved by the application of law decided in a fair public hearing before a Court, or, where appropriate, another independent and impartial tribunal or forum. JW contended that section 2B offends against section 34 of the Constitution because in the first place it “seeks to exclude the Court’s ‘general oversight function’ (sic). Secondly, because it ousts the ‘general discretion’ which the Court has in terms of the Wills Act (such as that which it has to condone non-compliance with the formalities required for a will or the revocation of a will), thereby preventing it from accepting evidence which a former spouse may be able to put forward of a testator spouse’s intent, which might be recorded in another document, or which may have been expressed in terms of an oral agreement which is ‘publicly accepted as true’ (sic). Thirdly, the applicant contends that the provision is in conflict with section 34 as it ‘deletes’ (sic) the constitutional right which the applicant has to seek judicial redress in circumstances where he is able to provide ‘direct’ evidence of a testator spouse’s testamentary intentions, and instead directs that the Court must operate under a ‘false fiction’ that a former spouse has predeceased a testator spouse, which is contrary to public policy”. In a mere 33 paragraphs, which also deserve their own article, the court demolished JW’s second constitutional challenge.

In the result, the court found that section 2B “serves a legitimate and compelling social purpose and the deprivation which it affects when it applies is not arbitrary in terms of s 25(1), and there is sufficient reason for it. It is also not procedurally unfair. In addition, the terms of s 2B do not constitute a limitation of the applicant’s right of access to a Court, in breach of s 34. Consequently, the application falls to be dismissed”.

Readers would do well to take the time to read and digest this judgment as an example of judicial interpretation at its best.

She would buy a residential property and live in it while she refurbished it and put it back on the market a few months later. Having sold it at a gain, she would buy another property and repeat the process. This went on to the point where she had bought, refurbished and sold five properties in four years, in each case using the primary residence exclusion to avoid paying tax on her gains. In each instance both the purchase price and selling price were below R2 million.

Her new tax consultant was concerned when she saw the taxpayer’s property dealing history and warned her that SARS could decline to allow her the primary residence exclusion on the grounds that her conduct amounted to a trade. The taxpayer was adamant that so long as she ticked the primary residence box on her annual tax return, which she was entitled to do because she at any particular time owned only one property, in which she resided, it was axiomatic that the exclusion applied. Therefore whenever she sold a property it was her primary residence and she was entitled to the exclusion.

The tax consultant said she would decline to tick the primary residence box on the taxpayer’s tax return, because she was concerned that this was an offence under the Tax Administration Act (TAA). It was possibly fraud, certainly misrepresentation, and non-disclosure of material facts. She was concerned about being seen to collude with the taxpayer in committing a tax offence. Not only would she be exposed to sanctions by SARS, but her Recognised Controlling Body (RCB) would be likely to take a dim view of her action. She warned the taxpayer that, should SARS at any time challenge her claim for the primary residence exclusion, SARS could reopen previous assessments for as far back as the taxpayer been conducting this activity. The three year prescription period for assessments does not apply where there has been fraud, misrepresentation, or non-disclosure of material facts.

The taxpayer poured scorn on the tax consultant’s opinion, which she described as off the wall, misguided and ill-informed. In her view, SARS was the tax expert, not the tax consultant, and if SARS accepted her claim for the exclusion it was no business of the tax consultant to second guess SARS. Needless to say, the taxpayer and the tax consultant parted ways.

Who is correct in this situation? Has the tax consultant acted correctly in terms of the tax legislation?

Gross income is defined in section 1 of the Income Tax Act as the total amount, in cash or otherwise, received by or accrued to or in favour of a person, excluding receipts or accruals of a capital nature. When we consider whether a receipt or accrual is capital in nature, and then potentially subject to the provisions of the Eighth Schedule, it is necessary to consider case law, and in particular the question of the intention of the taxpayer. For example, in CSARS v Capstone 556 (Pty) Ltd [2016] 78 SATC 231 ZASCA the Supreme Court of Appeal held that in order for a profit to be revenue in nature “the gain must be acquired by an operation of business in carrying out a scheme for profit-making”. In so finding, the court drew on a long line of decisions. A good example relevant to the taxpayer is Natal Estates Ltd v SIR [1975] 37 SATC 193, where the court found that in determining whether any particular case is one of realising a capital asset or carrying on a business of selling land for profit, the totality of the facts of the case must be considered in their relation to the ordinary commercial concept of carrying on a business or embarking upon a scheme for profit. Considerations will include, inter alia, the intention of the taxpayer both when acquiring and selling the land; the owner’s activities in relation to the land prior to decision to sell, and the light that these considerations throw on the owner’s statements of intention.

In the present matter the taxpayer set about using the primary residence to her advantage and proceeded to acquire, refurbish and sell her primary residences five times in four years. She argued, correctly, that at any particular time she owned one residence and used it as her primary residence. However, paragraph 45 of the Eighth Schedule, after providing in subparagraph (1)(b) that the gain on disposal of a primary residence is excluded from CGT if the proceeds do not exceed R2 million, then provides in subparagraph (4)(b) that subparagraph (1)(b) does not apply to the disposal of a primary residence where the taxpayer “used that residence or a part thereof for the purposes of carrying on a trade”. It is submitted that the tax consultant was correct to conclude that the taxpayer was conducting a trade in acquiring, refurbishing and selling residential properties. It did not avail the taxpayer that at each material time whichever property she then owned was her primary residence. Subparagraph (1)(b) prohibited the exclusion. And the tax consultant was wise to decline the appointment. SARS could report the tax consultant to her RCB under section 241(2) of the TAA, which provides that a senior SARS official may lodge a complaint with an RCB “if a registered tax practitioner has, in the opinion of the official-

• Without exercising due diligence prepared or assisted in the preparation, approval or submission of any return, affidavit or other document relating to matters affecting the application of a tax Act;
• Unreasonably delayed the finalisation of any matter before SARS;
• Given an opinion contrary to clear law, recklessly or through gross incompetence, with regard to any matter relating to a tax Act;
• Been grossly negligent with regard to any work performed by a registered tax practitioner;
• Knowingly given false or misleading information in connection with matters affecting the application of a tax Act or participated in such activity; or
• Directly or indirectly attempted to influence a SARS official with regard to any matter relating to a tax Act by the use of threats, false accusations, duress or coercion, or by offering gratification as defined in the Prevention and Combating of Corrupt Activities Act 2004 (Act 12 of 2004)”

The tax consultant would be vulnerable under all but the last of these if she permitted the taxpayer to claim the primary residence exclusion, on the facts before her. She has therefore acted correctly in declining to act for the taxpayer.

The taxpayer operates a loyalty programme known as Clicks ClubCard. Membership is voluntary and in no way limits the freedom of customers to shop wherever they choose. When a customer presents a membership card when making a purchase, one loyalty point is earned and recorded in the records of Clicks for every R10 spent. At quarterly intervals, a customer who has accumulated at least 100 points is awarded a voucher for R10 for each 100 points. Vouchers may not be exchanged for cash, but may be redeemed against the cost of subsequent purchases.

During the 2009 year of assessment, the taxpayer claimed an allowance of about R44 million to be deducted from its gross income, calculated on the basis of the cost of sales to the taxpayer in honouring vouchers that the taxpayer expected customers to redeem in the following tax year. SARS disallowed the claim and rejected the taxpayer’s objection to the disallowance.

The taxpayer succeeded on appeal to the tax court, for the following reasons:

• it was artificial and factually incorrect to regard the taxpayer’s expenditure as arising from a different contract from the first purchase and sale contract that had occasioned the customer’s acquisition of the points;
• the first purchase and sale agreement triggered the both the earning of income by Clicks and an obligation on the taxpayer to incur future expenditure;
• the obligation to incur future expenditure was therefore incurred under the same contract from which the income was earned and the requirements of section 24C were met.

Section 24C provided in 2009 that for the allowance for future expenditure to apply:

1. SARS must be satisfied that an amount of expenditure “will be incurred” after the end of the year;
2. in a manner that the amount will be deductible in a subsequent year of assessment; or in respect of the acquisition of an asset in respect of which any deduction will be admissible under the Act;
3. the income of a taxpayer in any year of assessment includes or consists of “an amount received by or accrued to him in terms of any contract”, and SARS is satisfied that all or part of the amount will be used to finance future expenditure which the taxpayer will incur “in the performance of his obligations under such contract”.
4. The allowance must be added back to income in the following year of assessment.

The most recent decision on section 24C was CSARS v Big G Restaurants (Pty) Ltd [2018] 81 SATC 185 SCA, in which the court held that the income and the expenditure must arise from the same contract. It does not avail the taxpayer if two contracts are “inextricably linked”. The operative concept is “contract”, not “scheme” or “transaction”.

SARS contended that there were at least three contracts: the ClubCard contract, which was issued free of charge and gave rise to no income in the taxpayer’s hands; the first contract of purchase and sale, when the customer bought merchandise from the taxpayer and triggered the award of points under the ClubCard contract; and the second contract of purchase and sale, when the customer bought merchandise and was entitled to redeem the voucher. The points awarded arose from the ClubCard contract. So the probable future expenditure arose from the points awarded under the ClubCard contract.

The taxpayer contended that the only issue for determination was whether or not the first contract of purchase imposed an obligation on the taxpayer, as the tax court had found. There was, according to the taxpayer a “direct and immediate connection” between each qualifying contract of sale and the obligation on the taxpayer to issue rewards to the customer. The ClubCard contract itself did not create or impose on the taxpayer any exigible obligation to grant any rewards on the taxpayer. The conclusion of a qualifying purchase not only brought into existence an exigible obligation on the taxpayer to issue rewards, but also determined the content of that obligation, with reference to the value of the qualifying purchase. It followed that the “same contract” requirement was met.

The court stated that the ClubCard contract establishes the right of the customer to receive points and then vouchers redeemable against subsequent purchases. This was how the taxpayer described the position in its reply to the SARS enquiry. When it came to the objection, however, the taxpayer shifted its ground. It continued to say that the expenditure was incurred in performing its obligations under the loyalty programme, but started to equivocate regarding the relationship between this and the contracts that generated the rewards. It stated that “there is no separate contract of purchase and sale relating to the goods purchased – the customer’s presentation of the ClubCard when paying at the till-point being inextricably interwoven with and an integral part of each purchase and sale of goods transaction entered into by the ClubCard customer”.

The phrase “inextricably linked” was the kiss of death for the taxpayer. The court referred to the decision in Big G, where the SCA had rejected this concept in relation to section 24C. The income from the first sale contract would be used to finance the acquisition of stock for future sales, thus enabling the taxpayer to meet its obligations under the second sale. The contract that created the right to income was the first sale. The contract that obliged the taxpayer to honour the vouchers was not the first sale, nor the second sale, but the ClubCard contract, a different contract from either of the sale contracts.

The taxpayer’s argument had as its object the reduction of the contractual relationship with a customer to a single qualifying contract of sale, which is both income-earning and obligation-imposing, because the taxpayer is obliged to award points to the customer. This argument ignored the reality of the arrangement, in which three contracts are operative under the loyalty plan. Consequently, the taxpayer did not have access to the section 24C allowance.

After the unanimous decision of the court, delivered by Dlodlo JA, Wallis JA, the author of the definitive judgment on interpretation in Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13, dealt with the decision in Big G, to show, according to the learned judge, why the outcome of Big G’s current appeal to the Constitutional Court would not affect the present judgment, and why the clear link between “a contract” and “such contract” in section 24C was fatal for the taxpayers in both Big G and the present matter. In doing so he, not surprisingly, applied the principles he had summarised in Natal Joint Municipal Pension Fund, by considering the reason for the introduction of section 24C in 1980. This was to provide relief to taxpayers who in the ordinary course of their operations would be required to make provision for replacement of machinery and equipment in order to keep their operations up to date. The learned judge referred to situations where construction companies receive upfront payments from clients to enable them to obtain the necessary equipment and materials to commence a contract.

In the case of businesses such as Big G, sensible management would in any event dictate that the external appearance in internal décor be regularly refurbished, regardless of whether or not the undertaking was operating under a franchise agreement. To allow a provision for such future expenditure would be to permit the deduction of expenses before they had been incurred, which would offer taxpayers a means of manipulating the timing of tax payments. The SCA had found in Big G that the sale of meals and the expenditure incurred on refurbishment arose from two different contracts. And this was the same argument that applied in the present matter. When a customer buys goods from the taxpayer and leaves the shop, that is the end of the transaction. It is only later, when the customer returns to the shop and makes another purchase, that the loyalty points awarded in terms of the ClubCard contract, and based on the value of the first transaction, come into operation. And the taxpayer’s obligation under the second transaction arises only from the need to acquire the goods necessary to conclude the second sale contract. If one views the matter from the perspective that the loyalty programme is merely an undertaking to offer the customer a discount on the next purchase, that hardly qualifies as expenditure contemplated under section 24C.

The essence of the argument was whether there was a sufficiently close connection between the expense and the taxpayer’s production of income. A secondary question, that of prescription, would arise should the court find against the taxpayer.

The facts were not in dispute. The taxpayer had implemented the share incentive scheme in 2004, the object being to afford employees the opportunity to participate in the scheme in order to promote the growth and profitability of the group. The selected employees were key managerial staff; the contribution was for the purposes of the scheme; the employees did benefit; the contribution was not capital in nature; the scheme was legitimate and its agreements, implementation and transactions not simulated. On 30 November 2004 the Trust was established. The sole beneficiary was Spur Holdco as to capital, shares and income. The Trust then acquired the share capital of a shelf company, Newco. On 7 December 2004 the taxpayer concluded a contribution agreement with the Trust in terms of which it made the R48,5 million contribution to the Trust. The trustees were obliged to use the contribution to subscribe for preference shares in Newco, redeemable only after five years and carrying a coupon rate equivalent to 75% of SA prime. Newco in turn used the subscription price to purchase 8,2 million shares in Spur Holdco, the listed company of the group. The participating employees were offered ordinary shares in Newco at par in proportions determined by Spur Holdco. They were not entitled to deal in their shares for at least seven years after issue, and the shares of any employee who left within that period were forfeited and used for later allocation to other employees.

Newco made no distributions during the five year term of the preference shares, so the participating employees became entitled to the accumulated growth in the Trust’s holding in Spur Holdco. By the end of the five year period, the trust was entitled to accumulated dividends of R22,5 million. This was settled by transferring to the Trust the equivalent value of Spur Holdco shares. Newco then redeemed the preference shares and disposed of the balance of its Spur Holdco shares. Out of the proceeds Newco paid dividends of R28,2 million and R635 000 to the participating shareholders in 2009 and 2011 respectively.

On 13 December 2010 the scheme was terminated and the participating employees became discretionary dividend beneficiaries of the Trust. The taxpayer’s R48,5 million, not being repayable to the taxpayer, vested in Spur Holdco, as did the preference share dividends of R22,5 million. It appears from the narration, although not expressly stated, that the trustees distributed these two amounts to the vested beneficiary. Thus the scheme came to an end.

In disallowing the deduction, SARS contended that the participating employees had not benefitted from the R48,5 million distribution. The only beneficiary was the sole vested beneficiary, Spur Holdco. Only if the participating employees had benefitted directly from the contribution could the expense qualify as a deduction under section 11(a) and thus as an expense incurred in the production of income.

The tax partner at Spur Group’s auditors had given evidence to the tax court and explained the rationale behind the scheme as devised. Under cross-examination by counsel for SARS as to why this scheme had been used and not the simpler provision of loans to the participating employees, he explained that loans can be a disincentive if, as often happens, the increase in value of the shares fails to keep pace with the capital amount of the loan and accumulated interest. The employee bore the risk of the share price falling to the point where the loan liability exceeded the amount the employee could obtain from selling the shares. Making the employees, in effect, dividend beneficiaries removed this risk. It seems that what the tax partner was getting at, without expressing it in these terms, was that the whole scheme had to be looked at holistically. The use of the Trust and Newco and Spur Holdco, and the preference share issue, and the acquisition of Spur Holdco shares, were all parts of a scheme designed to provide incentives to participating employees, to the benefit of the taxpayer and the employees, while mitigating the risk of loss to the employees.

The chief financial officer of the Group was one of the participating employees. She explained that, as a service oriented business Spur expected its employees to work irregular hours, not the usual 8 to 5 regime. They needed to be rewarded for this inconvenience. Spur was a very dividend rich company and in order to derive profits it needed an enthusiastic, committed and competent workforce. She affirmed that her participation in the scheme contributed significantly to her desire to remain employed at Spur.

The court proceeded to traverse the familiar principles from case law relating to deduction of expenditure, beginning with the locus classicus, Port Elizabeth Electric Tramway Co Ltd v CIR [1936] 8 SATC 13 CPD. The question is twofold: (a) whether the act to which the expenditure is attached is performed in the production of income; and (b) whether the expenditure is linked to it closely enough. The learned judge, Watermeyer J as he then was, went further to point out that the expenditure itself need not be necessary in order to earn income; the purpose of the act entailing the expenditure must be looked to. If it is performed for the purpose of earning income, then the attendant expenditure is deductible.  The learned judge concluded: “all expenses attached to the performance of a business operation bona fide performed for the purpose of earning income are deductible whether such expenses are necessary for its performance or attached to it by chance or are bona fide incurred for the more efficient performance of such operation”.

In CIR v Genn & Co (Pty) Ltd v CIR [1955] 20 SATC 113 AD, the Appellate Division referred with approval to Port Elizabeth Tramway and introduced “the closeness of the connection between the expenditure and the income earning operations” as a means of applying the test.

More recently, in CIR v Pick ‘n Pay Employee Share Purchase Trust [1992 65 SATC 346 AD the court stated that in a tax case one is not concerned with what possibilities the taxpayer foresaw and with which he reconciled himself. “One is concerned with his object, his aim, his actual purpose”.

This succinct summary was quoted with approval in Warner Lambert SA (Pty) Ltd v CSARS [2003] 65 SATC 271 SCA, a case that the tax court used extensively.in the present matter. Warner Lambert was the South African subsidiary of the US pharmaceutical giant. In terms of the Sullivan Code principles developed during the apartheid era, local operations of US companies had to permit no discrimination in the workplace and had to incur significant expenditure on social responsibility (SR) projects. The case revolved around whether the SR expenditure was deductible. The court found that it was incurred for the purposes of trade and for no other, because without access to the products and formulas of the US parent its income would have dried up. The SR expenditure had not added to the subsidiary’s income earning structure, which was complete. The SR expenditure had been incurred in order to protect its earnings. The SCA regarded these payments as similar to insurance premiums.

The tax court found that, on the evidence, the dominant purpose of the scheme “was to protect and enhance the business of the taxpayer and its income by motivating its key staff to be efficient and productive and remain in the taxpayer’s employ”. The taxpayer had incurred the expenditure for the purpose of earning income. The majority of the High Court fully aligned itself with these remarks. It acknowledged that the bulk of the benefit inured to the Spur Group, but that did not detract from the actual purpose of the expenditure as affirmed in the evidence. “It, in fact, is quite clear that maintaining a contented and motivated workforce forms part of the costs of performing the income producing operations and is crucial to the Spur Group’s commercial success and profitability”.

Perhaps unconsciously, the court was echoing a 1978 decision of the Swaziland Court of Appeal in COT v Swaziland Ranches Ltd [1978] 40 SATC 232 SwCA, where the court had to interpret the meaning of “buildings used in connection with farming operations” as provided for in the Swazi tax legislation. The majority of the court found that the expenditure incurred in erecting a school solely for the use of the children of employees and two beerhalls for employees was incurred to achieve a happy and contented workforce. As a result, the buildings were used in connection with farming operations.

There is thus strong argument that, on the correct facts, expenditure incurred to motivate and achieve a satisfied workforce can meet the general deduction formula test. The judgment also validates the use of employee incentive schemes, provided they are properly established and operated.

It is necessary to add a note of caution. Salie-Hlophe J issued a strong minority judgment, finding for SARS, fundamentally on the basis that the R48,5 million had not been incurred as contemplated in section 11(a) but had merely flowed through the Group as a vehicle through which to create the dividends, which in turn were the incentive. Because of her view, the learned judge was obliged to consider the prescription question. She stated that she would have found that there had been misrepresentation of material facts in the tax returns in that Spur had answered “no” to certain questions. The judgment does not indicate which these questions were. The fact that the financial statements had accompanied the tax return did not avail the taxpayer. Therefore, she would have found that the three year prescription period provided for in section 99 of the Tax Administration Act did not apply.

Given the strong minority judgment, and the amounts involved, SARS might well launch a further appeal to the Supreme Court of Appeal.