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The court decided that, although the two Acts had long since been repealed, the regulations had continued in existence in their successors, currently the Legal Practice Act, 2014.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

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.

The taxpayer operated in the fast-moving consumer goods industry to which wholesale and retail Sectoral Determination 9 (SD9) prescribed wage increases to union members.  SD9 establishes conditions of employment and minimum wages for employees in the wholesale and retail sector.  The staff consisted of management and non-management employees.  Within the non-management category were permanent full-time monthly paid employees and permanent part-time weekly paid employees.  About 30% of the non-management employees belonged to a union.

SD9 is published in January each year, applicable from 1 February for 12 months.  The negotiated wage increases were paid from 1 May, on which date the taxpayer paid lump sums to all non-management employees, union and non-union, backdated to 1 February.  The evidence was that the taxpayer treated all employees equally to avoid labour relations chaos and had done so for many years.  The taxpayer had concluded a three-year collective agreement with the union and applied this wage agreement across the board.

CSARS disallowed the taxpayer’s ETI claims for February, March and April 2014 and 2015 on the grounds that the amount paid was less than the SD9 minimum.   Section 4 of the Act provides that an employer is not eligible for the incentive if the wage paid to the employee is less than “the amount payable by virtue of a wage regulating measure applicable to that employee”.  SARS went further and disallowed claims in respect of employees who had taken unpaid leave, despite the fact that the taxpayer had claimed the ETI only for the period during which the employee had been at work and paid.  SARS based this decision on an interpretation of section 2(2), which provides that the ETI is available to “a qualifying employee in respect of a month”.  According to SARS, this meant that the employee had to have worked and been paid for the whole month.

The taxpayer contended that the collective agreement was a “wage regulating measure” as contemplated in section 4.  It followed that the taxpayer was permitted to apply the agreement across the whole bargaining unit regardless of union membership in terms of its past practice for reasons of commercial necessity.  Furthermore, the calculation of pro-rated monthly earnings where there had been unpaid leave was an appropriate manner of calculating ETI where employees had taken unpaid leave for part of a month.

CSARS opposed the appeal on the grounds that: the ETI entitlement is granted on a month-to-month basis, not retrospectively months later; the amounts paid to non-union members, being the wages determined under the collective bargaining agreement, were less than SD9, the  minimum wage under the wage regulating measure; the collective bargaining agreement made no reference to non-union members; and therefore the tax was in breach of section 4.  Furthermore, the ETI Act did not provide for retrospective application of the minimum wage; and employees who took unpaid leave were not entitled to a full month’s pay and therefore did not qualify for the ETI.

The court noted that the ETI Act is an incentive to encourage job creation for employees under 30 years of age, to encourage employment creation.  The government recognised the need to share the costs of expanding the labour market with the private sector and wished to support employment growth, especially in relation to young work seekers.  In addressing the submissions of the taxpayer and SARS, the court adopted the well known principles of interpretation summarised in Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13, where the Supreme Court of Appeal found that in interpreting any legislation one should seek to give a sensible and business-like interpretation to the statute or have appropriate regard for its purpose”.

To accept the contentions of CSARS would amount to not applying this tenet of interpretation.  The taxpayer’s remuneration policy did not result in unacceptable retrospective application of ETI; its policy was well established and based on an understandable recognition of the need to avoid chaos in the workplace; and to apply an interpretation that meant that the remuneration of an employee who took just one day’s unpaid leave in a month would lose the benefit of ETI was without merit.

One is tempted to speculate whether CSARS was genuinely intent on applying these, as the court with respect correctly described them, meritless interpretations of the Act; or whether it was seeking judicial interpretation of uncertain aspects of the Act.  It is hoped, perhaps somewhat optimistically, that the latter was the case.

The circumstances hark back to the unlamented secondary tax on companies (STC) and in particular a loophole provided by section 44(9) of the Income Tax Act, 1962 (Act) that needed to be closed.

Pienaar Brothers (Pty) Ltd (not the taxpayer) was an operating company.  It needed to introduce a BEE element of ownership into the company.  To this end, acting on legal advice, section 44 of the Act was used.  The taxpayer was acquired in March 2007.  A condition of an amalgamation transaction as applied to the current matter was that the company, the “amalgamated company”, disposed of its assets to the newly acquired company, the “resultant company” in exchange for shares in the resultant company.  The amalgamated company then disposed of those shares, being its only asset, to its shareholders and its existence was terminated.

On 16 March 2007 the taxpayer, then bearing the name Sererebule Trading 15 (Pty) Ltd, concluded the amalgamation transaction, effective from 1 March 2007, in terms of which it acquired the assets of Pienaar Brothers (Pty) Ltd partly in exchange for shares in the taxpayer.  The value of the assets was of course treated as the subscription price for the shares, and credited, to the extent of their par value to the share capital of the taxpayer and the rest, amounting to R29.5 million, to its share premium account.   The reason for the transaction was to introduce a BEE component into shareholding.

On 3 May 2007 the taxpayer distributed the R29.5 million to its shareholders from its share premium account.  At that date, paragraph (f) of the former, and equally unlamented, definition of “dividend” in section 1 of the Act excluded from the definition any amount distributed from the share premium account of a company.  Section 44(9) confirmed that this exemption applied to distributions in terms of an amalgamation transaction.

On 7 May 2007 the BEE shareholders acquired 25.1% of the share capital of the taxpayer, now shorn of its substantial share premium account, for what was presumably a small, affordable amount, thus achieving the BEE objective of the transaction.

The problem that led to the present matter arose when SARS imposed STC on the taxpayer’s R29.5 million distribution to its shareholders.  In other words, SARS denied the exemption provided for in paragraph (f) of the definition of “dividend”.  The taxpayer objected on the grounds that on 3 May 2007 paragraph (f) still applied, as the amending legislation following the annual Budget proposals on 20 February 2007 had not yet been promulgated.

In his Budget speech on 20 February 2007 the Minister announced that certain retrospective amendments would be introduced to deal with certain anti-avoidance arrangements relating to STC.

On the following day SARS issued a press release announcing that the STC exemption for amalgamation transactions contained in Section 44(9) of the Act was to be withdrawn with immediate effect and replaced with section 44(9A), which closed the loophole with effect from that day, 21 February 2007.

The amending legislation was promulgated on 8 August 2007, deleting section 44(9) and in effect ensuring that distributions such as the one carried out by the taxpayer on 3 May 2007 would be subject to STC, with effect from 21 February 2007.  The taxpayer contended that it had never received any formal notice of this retrospective legislation, and it was unconstitutional for legislation to affect transactions already concluded under previous legislation.

The court proceeded with a long and interesting analysis of retrospective and retroactive legislation, which is beyond the scope of this article.  Perhaps the discussion may be very briefly summarised by saying that the court found that the retrospective legislation did not arbitrarily deprive the taxpayer of its property.  Parliament had used a well-accepted mechanism for amending legislation to protect the government’s ability and need for taxes in order to run the country.  Taxpayers had been warned, by the Minister on 20 February, and by SARS on 21 February, and by vigorous discussions between interested parties and SARS and National Treasury, which led to amendments to the original proposals, that the amending legislation was on the way and would be back dated to 21 February 2007.  Consequently, the backdating to 21 February could not be considered to be unconstitutional.

As the court, with respect correctly, pointed out, this is a familiar mechanism.  As far back as December 1988, for example, just as taxpayers were going off for their end of year break, the then Minister of Finance, Barend du Plessis, warned taxpayers that in the amending legislation following the 1989 Budget he was going to introduce two anti-avoidance measures, to take effect from the day of this announcement.  The resultant additions to the Act were section 8E, at that time called preference share schemes, and section 103(5), the interest/dividend swap schemes.  Taxpayers were thus put on notice that between then and the promulgation date of the 1989 amending legislation that they entered into preference share schemes and dividend/interest swaps at their peril.  In 1989 we did not yet have our current constitution, but it is submitted that retrospective legislation with advance warning is both constitutional and an understandable weapon in the hands of the fiscus.

Finally, most recently in their draft response dated 14 June 2017 to comments raised at the hearings of the Parliamentary Standing Committee on Finance, National Treasury (NT) and SARS referred to Pienaar Brothers in their response to complaints that the Budget announcement, published on 22 February 2017, that the rate of dividends tax was to be increased from 15% to 20% with effect from that date, was retroactive and made without a mandate from the legislature.  NT and SARS pointed out that the court in Pienaar Brothers had found that retrospective legislation was acceptable.  Dividends tax is imposed when a dividend is paid in the case of listed companies, and on the earlier of when it is paid or due and payable in the case of unlisted companies.  The response continued:

“South African law distinguishes between retroactive legislation and retrospective legislation. Retroactive legislation means legislation that changes the law with effect from a date in the past, in respect of events or transactions irrespective of whether they occurred before that date, typically where legislation provides that from a past date, the new law shall be deemed to have been in operation. On the other hand, retrospective legislation means legislation that affects an event that occurred prior to the date on which the legislation was promulgated but on or after the date on which the proposed change in the law was first announced.

Applying the above to the given circumstances, the proposed increase of the DT rate from 15 per cent to 20 per cent with effect from 22 February 2017 is not retroactive as it does not seek to tax dividends that were paid before 22 February 2017.  The proposal was effective from the date of the announcement, not from a date in the past.  However, the proposed increase can be viewed as retrospective as it has been implemented before the legislation has been promulgated.  Other proposals in the Draft Rates Bill, such as changes to personal income taxes, can be characterised in the same manner. In fact, most rates and threshold changes take place after the announcement on Budget Day, and begin to be implemented before the tax laws are enacted (normally around December, about ten months after the announcement).  Given the market sensitivity of tax announcement, this practice is the norm in order to ensure that taxpayers do not rush to restructure their tax affairs to lower or avoid paying the full amount of the expected tax.

All over the world, it is not uncommon for taxation measures to be enacted with retrospective operation and for those measures to commence from the date of the budget announcement, rather than the date of a transaction or enactment of legislation.  Generally, there is acceptance that amendments to tax legislation may apply retrospectively, where the Government has made an announcement of its intention to introduce legislation with sufficient detail of the proposal and subsequent legislation providing for commencement with effect from the date of announcement.  It is international practice for countries to accept that retrospective amendments may be appropriate where a retrospective provision (i) corrects an unintended consequence of a provision, (ii) addresses tax avoidance and (iii) might otherwise lead to a significant behavioural change that would create undesirable consequences.”

The dividends tax issue is now water under the bridge, but Pienaar Brothers has confirmed the acceptability of retrospective legislation in appropriate circumstances.

This case was an application by Respublica for a declaratory order as to the meaning of “commercial accommodation”, arising from a dispute between Respublica and SARS.  It was not an appeal against an assessment and hence had not been through the tax court. 

Respublica owned immovable property divided into furnished units comprising kitchenette, bathroom and bedroom/living area.  It let the building to the Tshwane University of Technology for a five year period for the sole purpose of accommodating TUT’s students.  Respublica supplied domestic goods and services in the form of water, electricity, maintenance, management of the building, a common TV room and laundry services.  TUT paid rental of R1 376 480 per month plus R275 per unit for utilities.  TUT was entitled to accommodate other people during holiday periods, when the student occupants were required to vacate their units and return home.

SARS contended that the agreement did not comprise commercial accommodation, defined in section 1 of the Act to the extent here relevant as “lodging, board and lodging, together with domestic goods and services, in any…flat…which is regularly and systematically supplied…but excluding a dwelling in terms of an agreement for the letting and hiring thereof”.  The term “domestic goods and services” is defined to include cleaning and maintenance, electricity, television set, furniture and fittings and laundry.

This definition was crucial to the matter because section 10(10) of the Act provides that: “where domestic goods and services are supplied at an all-inclusive charge in any enterprise supplying accommodation for an unbroken period of exceeding 28 days, the consideration in money is deemed to be 60% of the all-inclusive charge”.  So Respublica was contending for an order that it was conducting a commercial accommodation enterprise, meaning that it was liable for VAT on only 60% of the all-inclusive charge.

Before addressing the merits, SARS first argued that the court lacked the jurisdiction to hear the matter, which should have been dealt with under the Tax Administration Act.  However, the court approved of Respublica’s contention that the matter involved a question of law and also that there was no assessment in respect of which it could raise an objection.  The provisions of the TAA relating to litigation are predicated upon response to an objection leading to an appeal, and in the present matter there had been no objection or appeal.

Noting that the dispute revolved around interpretation of relevant sections of the VAT Act, the court referred to the seminal statement in Endumeni and proceeded to follow its principles in addressing SARS’ arguments on the merits.  These arguments were that:

• the dictionary meaning of “lodging” should be interpreted to refer to a natural person. As the lessee, TUT could thus not be a lodger;
• there was no nexus between Respublica and the students upon which it could be argued that they were lodgers in the leased premises;
• TUT should be regarded as a tenant and not as a lodger;
• since the dictionary meaning of lodging is “temporary accommodation”, and the contract was for five years, the contract could not be one of lodging; and
• the utilities were paid separately from the rental and could not be considered part of an all-inclusive charge as envisaged in section 10 (10).

• there is no clause in the Act that stipulates that a lodger be a natural person;
• the students were an integral part of the lease agreement and obliged to abide by its terms. The premises were let to TUT for the sole purpose of accommodating the students;
• the students went home during the holidays, making their stay a temporary one;
• Respublica did provide domestic goods and services;
• SARS’ interpretation of “commercial accommodation” was too restrictive and Respublica’s application was not about the meaning of “lodging” but about the phrase “commercial accommodation”.

In 2001 Steinhoff Southern Cape (Pty) Ltd acquired property in Knysna on which forestry, timber growing and plywood manufacturing was conducted.  However, Steinhoff’s ultimate European holding company blocked the purchase because of its then policy not to invest in fixed property in South Africa.  So Steinhoff had to find somebody to own the land.  The solution was to transfer the plantation and land to Kluh while Steinhoff acquired the machinery and equipment and the sawmill.

Two years later, there was a change of heart, driven by increasing timber prices and scarcity of plantation resources.  As a result, Kluh disposed of the plantation contracts, the forestry operations and the plantation immovable property to Steinhoff as a going concern.

SARS taxed Kluh on the proceeds of disposal of the plantation, based on section 26(1) read with paragraph 14(1) of the First Schedule to the Income Tax Act, 1962.  Kluh appealed unsuccessfully to the Cape tax court but was successful on appeal to the High Court, which led SARS to appeal to the SCA.  Section 26(1) provides that the taxable income of a person carrying on farming operations must be determined in accordance with the provisions of the First Schedule.  Paragraph 14(1) provides that any amount received by or accrued to any farmer (my emphasis) in respect of the disposal of a plantation forms part of gross income.  The primary issue was thus whether Kluh was carrying on farming operations.

The evidence was that Kluh from the beginning had wanted nothing to do with any farming operations.  It had “neither the appetite for the risks associated with farming nor the requisite skills, equipment and personnel to undertake farming operations”.  The sole reason for its existence was to acquire bare ownership of the land and plantation.  The parties had agreed from the start that Steinhoff had the right to conduct the farming operations and had on termination of the agreement to return the plantation to Kluh in the state in which it had been at inception of the agreement.

As the SCA found, SARS in its argument put the cart before the horse.  First, that the purpose of paragraph 14(1) was to extend tax liability by treating the proceeds of disposal of a plantation as gross income.  Second, that the mere sale of a plantation constitutes farming operations, irrespective of the extent of the actual conduct of the taxpayer in the farming operations.  Third, that Steinhoff had conducted the farming operations on behalf of Kluh.

The court found that before one could consider whether the First Schedule applied, the taxpayer had to be carrying on farming operations as contemplated in section 26(1).  Only then was one at large to consider the First Schedule.  In response to the first of SARS’ three submissions, the court noted that paragraph 14 is a deeming provision.  It is axiomatic that when something is deemed to be something else it is in fact not that something else.  It followed that, in the absence of paragraph 14, a plantation would be a capital asset, and only if a farmer disposed of it would the proceeds be deemed to be gross income.  Second, SARS’ argument was misleading in its assertion that the Act recognises the disposal of a plantation as the carrying on of farming operations.  The first hurdle was section 26(1) before any aspect of the First Schedule could apply.  As to the third submission of SARS, according to the facts Kluh did not have the right to the yield of the plantation; it did not have the use of the land and the plantation, and it derived no income from them.  These it had granted to Steinhoff.

In the result, the appeal failed and was dismissed with costs.

This judgment provides a useful lesson in the correct approach to the interpretation of legislation, in this case the Income Tax Act.  The word “farmer” in paragraph 14(1) means that SARS has to show that the taxpayer has met the requirements of section 26(1) before the First Schedule applies.  It is not the case that, if a taxpayer carries out an activity contemplated in the First Schedule, it automatically means that section 26(1) applies to the taxpayer.

Peter Surtees

The taxpayer, Kluh Investments, was a special purpose subsidiary of a Swiss company. By agreement with its holding company and Steinhoff Southern Cape (Pty) Ltd it was used as a vehicle to hold land in South Africa with a timber plantation on it. The reason for the transaction was that Steinhoff wanted access to the plantation but did not want to hold land in South Africa. Two years later, Steinhoff changed its mind and the taxpayer disposed of the land and plantation to Steinhoff.

In 2001 Steinhoff purchased the machinery and equipment (including a sawmill) and the taxpayer acquired the land, the timber plantation and certain other assets. Both transactions were treated as going concern acquisitions, thus qualifying for zero rating in terms of section 11(1)(e) of the Value-Added Tax Act, 1991.

Steinhoff and the taxpayer had an oral agreement, based on trust, that Steinhoff would be entitled to conduct the plantation business on the taxpayer’s land for Steinhoff’s benefit. The term of the agreement was indefinite. Steinhoff had access to the land and was entitled to harvest the timber for its own account. Steinhoff used its own equipment, employed employees to work on the plantation and contracted with service providers for the plantation operations. Steinhoff incurred all the operational expenditure and received all the income, and these were reflected in its financial statements. It was not answerable to the taxpayer for its operations. The parties agreed that on termination of the agreement Steinhoff would ensure that the volume and quality of the plantation would be as it had been at inception of the agreement.

The taxpayer had no equipment, employees or expertise in plantation operations. It was common cause that the taxpayer considered the acquisition of the land and plantation as a strategically advantageous long-term investment.

Two years later, increasing timber prices and a scarcity of timber led Steinhoff to change its policy and become amenable to owning immovable property in South Africa.

An independent valuer determined the purchase price and the parties agreed that the taxpayer would sell what they referred to as “the plantation business” to Steinhoff for R144,7 million as a going concern and thus zero-rated for VAT purposes. This description was later amended to refer to the sale of immovable property, standing timber, the plantation sale assets, machinery and equipment and plantation contracts. In addition, the parties agreed that VAT at the standard rate might be payable on the transaction, in which case the taxpayer would issue invoices to Steinhoff. Finally it was agreed that the taxpayer would pay Steinhoff a R12 million “bonus management fee” for the exemplary manner in which it had looked after the taxpayer’s investment.

In its 2004 tax return the taxpayer reflected the disposal proceeds as capital in nature and declared a capital gain of R45,6 million, being the difference between the disposal proceeds of R144,7 million and the valuation of the plantation of R99,1 million of the plantation at 1 October 2001, the date on which CGT came into operation, and claimed the R12 million “bonus management fee” as a deduction.

SARS rejected the treatment of the plantation disposal proceeds as capital in nature, contending that section 26(1) read with paragraph 14 of the First Schedule deemed the proceeds to be part of the appellant’s gross income.

Section 26 provides that the taxable income of any person carrying on farming operations must be determined in accordance with the Act but subject to the provisions of the First Schedule. Because paragraph 14 of the First Schedule applies to the proceeds of plantation disposals, it followed, according to SARS, that a person who receives such proceeds is farming and that the proceeds are gross income and taxable as provided for in the First Schedule.

In the alternative, SARS argued that even though Steinhoff had conducted the plantation operations independently of the taxpayer, it had done so on the taxpayer’s land, the appellant retained a direct interest in the operations and Steinhoff was obliged on termination of the oral agreement to return the plantation in the same condition as it had been at commencement. It followed, according to SARS, that there was a sufficiently close connection between the disposal proceeds and the plantation operations during the subsistence of the oral arrangement to render section 26(1) and paragraph 14 of the First Schedule applicable to the taxpayer.

The High Court found that the alternative basis conflated two distinct issues:

“Section 26(1) does not apply merely because there has accrued to the taxpayer income which has ‘derived from’ farming operations; the section applies to a person carrying on farming operations to the extent that his income is derived from such operations. Two questions must therefore be answered: (i) Was the person whom SARS wishes to tax a person carrying on farming operations during the year of assessment in question? (ii) If so, did the particular item of income in dispute derive from those farming operations?”

The court reviewed the relevant case law and concluded that a number of tax court decisions have, like the tax court in the present matter, similarly conflated the two questions. In rejecting SARS’ first argument the court found that “the purpose of para 14 is not to define what constitutes the carrying on of farming operations, but to characterise a particular type of accrual as gross income rather than capital.”

“[T]here must be conduct by the taxpayer apart from disposing of a plantation previously acquired by the taxpayer in order to constitute the carrying on by him of farming operations”. Put differently, section 26 is the entry point; firstly, the taxpayer must be shown to be carrying on farming operations. Only then would the proceeds from disposal of a plantation, in terms of paragraph 14, be gross income.

On the facts, the taxpayer was not conducting farming operations and section 26(1) did not apply. Therefore the nature of the plantation disposal proceeds fell to be determined in accordance with the normal provisions of the Act, namely that they were capital in nature.

Facts

In November 2003 A Investments Ltd (A), using the taxpayer as its agent, had disposed of its 47,3% shareholding in B (Pty) Ltd, trading as BCD. In June 2006 A informed the taxpayer that it had discovered that the taxpayer had withheld material information from A when it sold its shares in BCD. This information, which was about minority shareholder protection, would have had a bearing on whether or not A sold its entire shareholding in BCD.

In August 2007 the taxpayer sold his shares in BCD for about R842 million, and in October A claimed damages from the taxpayer for its failure to represent A properly. The claim was based on the value of the shares and claims A would have enjoyed had it not sold its shares and claims in BCD. After negotiations, the parties agreed on an amount of R695 million, which the taxpayer duly paid to A.

The taxpayer then sought to link the 2003 sale by A to the taxpayer’s 2007 sale, so that it could deduct the settlement amount from the proceeds. The taxpayer’s aim was to satisfy the court that, whereas the proceeds of his disposal was R842 million, it was subject to his obligation to pay the settlement amount to A. In making this submission the taxpayer relied on paragraph 35(3) of the Eighth Schedule to the Income Tax Act, 1962, which provides that the proceeds from the disposal of an asset must be reduced by any reduction of an accrued amount forming part of the proceeds as the result of, inter alia, “the cancellation, termination or variation of an agreement or due to the prescription or waiver of a claim or release from an obligation or any other event” (emphasis added). Put differently, when the taxpayer sold his shares in 2007 he was aware that he would have to pay a settlement amount to A, and his argument was that the sale of his shares was therefore linked to his obligation to pay A the settlement amount. According to him, the obligation was “any other event” contemplated in paragraph 35(3).

Court decision

The court rejected this contention, stating that the fact that he had decided to pay the damages claim out of the proceeds did not affect the fact that he had disposed of his shares and received R842 million for the disposal.

Eiusdem generis rule

As to the taxpayer’s reliance on the phrase “any other event”, in support of which his counsel contended that the phrase was so wide that it included the settlement amount, the court found that one could not read the words in isolation. The court agreed with SARS’ submission that the phrase had to be interpreted according to the eiusdem generis or noscitur a sociis rule, in terms of which a word derives its meaning from that of its associates. In paragraph 35(3) these were cancellation, termination, variation, prescription, waiver, and release. The phrase therefore contemplated an event of a similar nature to its predecessors. Where general words follow particular and specific words, the meanings of the general words must be confined to things of the same kind as the specified ones. In addition, it was settled law that the word “any” did not extend the meaning beyond the confines of the word’s neighbours. In short, the two transactions were separate and distinct.

Penalties

Regarding the imposition of a 75% penalty for understatement by SARS, this meant that, in terms of the understatement penalty matrix in the TAA, SARS concluded that there were no reasonable grounds for the taxpayer’s treatment of the settlement amount. The taxpayer’s unchallenged evidence was that he believed that his interpretation was correct in terms of the Eighth Schedule. He had taken professional advice as well. On that basis the court found that there were reasonable grounds for the position the taxpayer had adopted. Further, in consulting the experts, he had taken reasonable care, so that his conduct was not caught by the next category in the matrix, which provides for a 50% penalty if the taxpayer has failed to take reasonable care in compiling his return. This left only the category of substantial understatement, carrying a 10% penalty, and it was clear that the taxpayer’s return had included a substantial understatement. Therefore a 10% penalty was appropriate, not the 75% imposed by SARS.

Finally, given the process by which the taxpayer had arrived at his decision, the court directed that the interest imposed by SARS should be waived.

In CSARS v Tradex (Pty) Ltd and Others Case No 12949/2013 the taxpayers were years in arrears with their tax returns and their financial records were in a mess, partly because of the administrative weakness of the main shareholder but mainly because she had been let down by successive financial managers. There was evidence of extensive efforts on the part of herself, her staff, two audit firms and an experienced tax consultant to bring order to nearly a decade of neglect of records and tax returns. Despite these efforts and much correspondence and numerous meetings with SARS, as well as several interim tax payments and undertakings to dispose of assets to raise funds with which to pay the outstanding taxes, SARS sought and obtained a provisional preservation order in August 2013. In the present matter SARS was seeking confirmation of that order. The court noted that at all times the taxpayers’ representatives had kept SARS apprised of progress.

In analysing section 163 of TAA, the court began by noting that a preservation order may be made if it is “required to secure the collection of tax”. The section does not say what circumstances would point to an order being required. The test was not one of necessity but that the order would provide a “substantial advantage in the collection of tax”, including guarding against the risk of dissipation. SARS was required to show that there was a material risk that assets that would otherwise be available to satisfy a tax liability would, without a preservation order, no longer be available.

Delinquency in a taxpayer’s conduct of its tax affairs might be part of the material from which one could infer the existence of a risk of dissipation, but there was no automatic connection between the two. The basis of SARS’ application was just this – the delinquency of the taxpayers in dealing with their tax affairs. SARS contended that delinquency could be inferred from the fact that, instead of using cash flow to pay its tax liabilities, Tradex had ploughed it back into the business. The court’s response was the obvious one that this conduct amounted to the opposite of dissipation. SARS had provided no evidence of dissipation by the taxpayers.

The court gained the impression that SARS had launched the application not so much because a preservation order was necessary but in order to bring matters to a head by placing legal pressure on the taxpayers after years of negotiation and effort. Whilst SARS’ evident frustration was understandable, this was not what the preservation provision was intended for. SARS had at its disposal other mechanisms to deal with delinquent taxpayers, such as the information-gathering provisions, the power to issue estimated and jeopardy assessments, the tax-recovery provisions, the administrative non-compliance penalties and the criminal offences created in the TAA.

A preservation order would, in the case of Tradex, an active trading entity, result in its closing down, and this would be unjust. The taxpayers had offered to register caveats against their immovable properties and, in the case of a property they were intending to sell, to procure that the proceeds be paid into their attorney’s trust account pending final assessments of taxes due.

Before concluding by refusing to confirm the provisional preservation order, the court made several observations about the application of the preservation provision.

Firstly, although SARS may apply for an order ex parte, to do so would be contrary to the principles of fairness and constitutional values in the absence of circumstances justifying a departure from ordinary procedures.

Secondly, even where an order is warranted, it doesn’t follow that all SARS’ requested terms should be included. For example, it isn’t always necessary to appoint a curator bonis, even though section 163 provides for an appointment. In the current matter there was evidence that the curator had contributed nothing and was a hindrance rather than a help.

Third, and this is perhaps the most telling comment, SARS should not frame preservation orders on a one-size-fits-all basis. The court noted that the current order was on the same terms as a similar application it had heard recently and accorded with several in the Gauteng area in recent months. Each order applied for should be tailored to the circumstances of the case.

Fourth, section 163 is a preservation procedure, not an execution mechanism. The section finds its primary application where the amount of tax has not yet been ascertained. Once the tax has been determined, several other sections of TAA assist SARS in collecting the tax. A preservation order should not, as was the case in the present matter, include a power on the part of the curator to realise assets in order to settle the taxpayer’s tax liability.

The TAA is still in its infancy and this judgment is the latest indication of how the courts are going to interpret and apply its sometimes draconian provisions.

Chronology:

DS Rens (the testator) owned the remaining extent of Portion 2 of the farm Hammanskraal No 112.

July 2008:         the Minister consents to sub-division into:

(1)           Rem Ext of Portion 2 (which I will refer to as Portion 112); and

(2)           Portion 76 of Rem Ext of Portion 2 (which I will refer to as Portion 76).

Feb 2009:         the Surveyor General approves the sub-division.

March 2009:      deed of sale of Portion 76 to D de Klerk on behalf of a company to be formed:

(3)           subject to a suspensive condition that township rights would be granted within 18 months; and

(4)           DSR would acquire 20% of the share capital of the company which would hold the property (Hammanskraal Residential Properties (Pty) Ltd).

Sept 2009:        Edelstein instructs a valuer to value the properties; not Portion 76 but of another Portion.  And see 17.2.

11 March 2010:  DSR executes his will:

(5)           Daughter Rene Zerf to get R250 000;

(6)           Daughter Natalie de Klerk to get a farm valued at R18 million (is D de Klerk Natalie’s husband?  Not clear from the judgment);

(7)           Son TA Rens (TAR) to get Rem Ext Portion 2.  (As will appear later, the issue in the case was whether this referred to the entire farm or only Portion 112).  He records his intention during his lifetime to transfer the property to TAR and insofar as he achieves this it must be seen as an advance on TAR’s inheritance.

1 June 2010:     deed of sale (the “second deed”) signed but nothing came of it.  D de Klerk signs on behalf of DSR (how?)

25 June 2010:    DSR dies.  Executors appointed: TAR, Edelstein & D de Klerk.

26 Sept 2010:    suspensive condition not met; contract null and void.

2 Dec 2010:      the deed of sale drafted and finalised.

25 Nov 2011:     registration of title and servitudes in favour of Eskom.

25 Nov 2011:     subdivision registered and certificate of registered title registered.

6 Jul 2012:        first and final liquidation and distribution in the estate filed and D De Klerk resigns.  Had he not resigned, Edelstein would have been compelled to take action against him.  The judgment does not explain the reason for this statement.

6 Jul 2012         Edelstein gets an opinion from Fine SC.  He does not tell Fine about the second contract or that the subdivision had not been finalised at time of the will.

Arguments

TAR contended that Portions 112 and 76 (ie the whole of Rem Ext of Portion 2) were bequeathed to him, whereas Edelstein contended that Portion 76 should fall in the family trust (presumably the residual heir)

The court identified what it called a factual matrix summarising the inferences that the protagonists urged upon the court, based on the facts and circumstances.  Based on these:

Edelstein contended that, at the date of execution of the will, Portion 76 was already sold.  The time for fulfilment of the suspensive condition had not yet lapsed and the deed of sale was in force.  He contended that the testator would have seen it this way, especially since he would receive a 20% shareholding;

Edelstein contended further that in September 2009 DSR had instructed him to transfer Portion 112 (ie excluding Portion 76) to TAR as an advance on his inheritance.  The transfer was delayed by the Eskom servitude registration.  The inference he placed before the court was that the legacy (see 6(3)) was to cover the eventuality that the donation had not been concluded by DSR’s death ie the donation related to the same property as in the will;

TAR contended that DSR would not have wanted him to inherit only R4 million (Portion 112) as opposed to R9 million (both Portions).  However, Rene and Natalie disputed this and pointed to the disparity of their inheritances.

TAR contended further that DSR was an astute businessman who would have well understood the tenuous nature of the suspensive condition.

Given the competing interpretations of the will, Edelstein contended for rectification on the grounds that the provision in the will was ambiguous and that the factual matrix pointed to his interpretation.

The finding

As to rectification, the court stated that rectification is an equitable remedy, the purpose being to give effect to the true intention of the testator in the case of a will.  The onus is on the applicant for rectification to establish, on the balance of probabilities, firstly that the alleged discrepancy between expression and intention was a mistake; and secondly what the testator really meant to provide.  In the present matter there was no ambiguity, and therefore no room for rectification.

Edelstein contended that the will must be interpreted according to Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] (4) SA 593 (SCA).  The court rejected this contention on the grounds of the difference between a contract and a will.  A contract offers the parties the opportunity to explain clauses.  A testator is beyond reach, and so the correct approach in the case of a will where, as here, the testator’s words are clear from the plain grammatical wording is to have regard to the material facts and circumstances known to the testator when he drafted the will.  The court cannot interpret the language of the will to give effect to what the testator may have intended but has not expressed at all.  The court must put itself in the position of the testator – the armchair rule.  Had DSR not wanted TAR to inherit Portion 76 if the sale fell through, he could have stated as much.

The “second deed” (see 7), had “popped up” as a desperate attempt by D de Klerk to keep the original deed of sale alive and thus Portion 76 out of the picture.  The court noted that D De Klerk had drafted and signed the “deed” on behalf of DSR and he, of course, was the person who stood to benefit from it.

Edelstein stated on affidavit that DSR had instructed him to exclude Portion 76 in the will but that he had omitted to do so.  TAR denied this and provided evidence in support of his contention.

In the event the court found for TAR and indicated some displeasure with Edelstein’s conduct.