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[2014] ZASCA 29
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GB Mining and Exploration SA (Pty) Ltd v Commissioner For The South African Revenue Service (903/2012) [2014] ZASCA 29; 2015 (4) SA 605 (SCA); 76 SATC 347 (28 March 2014)
Links to summary
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
REPORTABLE
Case
No: 903/2012
In
the matter between:
GB
MINING AND EXPLORATION SA (PTY)
LTD
...........................................
APPELLANT
and
THE
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE
SERVICE
..........................................................................................
RESPONDENT
Neutral
citation
:
GB
Mining v Commissioner: SARS
(903/2012)
[2014] ZASCA 29
(28 March 2014)
Coram
:
Navsa, Shongwe, Theron and Wallis JJA and Swain AJA
Heard
:
6 March 2014
Delivered:
28 March
2014
Summary
:
Revised tax assessments issued by
respondent – appellant lodging objection – objection
disallowed – appeal to
Pretoria Tax Court dismissed – on
appeal held:
–
Payments
as part of an attempted financial rescue offer not deductible.
–
Disposal
of rights to a mineral tailings dump by appellant resulted in a
capital gain.
–
Travel
expenditure partially deductible.
–
Disposal
of an asset to a joint venture resulted in a capital gain.
–
Disposal
of an interest in a joint venture resulted in a capital gain.
–
Partial
remission of additional tax granted.
Assessments
based on tax returns and financial statements by appellant –
appellant failing to prove incorrect – effect
thereof –
assessments upheld.
Order
On
appeal from
the Tax Court, Pretoria, (Mokgoatlheng P sitting as
court of first instance):
1
The appeal is dismissed save in the respects set out in paragraphs 2
and 3 below.
2
The penalties raised by the respondent in respect of the OTR amount
and the travelling expenses are remitted in their entirety.
3
The order directing the appellant to pay the respondent’s costs
in the court a quo is set aside.
4
The respondent is ordered to pay 10 per cent of the appellant’s
costs in the appeal.
JUDGMENT
Swain
Aja
(
Navsa,
Shongwe, Theron and Wallis JJA
concurring):
[1]
The appellant GB Mining and Exploration SA
(Pty) Ltd (GB Mining) was the subject of revised assessments for the
tax years 2003 –
2006 issued by the respondent, the
Commissioner for the South African Revenue Service (the
Commissioner).
[2]
GB
Mining objected to the assessments. The Commissioner disallowed the
objection in respect of the 2003 tax year and partially disallowed
the objection in respect of the remaining tax years. GB Mining
appealed to the Pretoria Tax Court which dismissed the appeal save
in
respect of the issue of management fees, which does not form part of
the appeal to this court. The present appeal is with the
leave of the
President of the tax court.
[1]
[3]
In order to place the contested assessments
of the Commissioner in context, it is necessary to set out the
background concerning
the history and activities of GB Mining.
[4]
Mr Ken Barnard, a geologist, developed what
he considered to be a unique process for the extraction of platinum
from chrome mining
tailings. Together with Mr Ricky Gardner he
decided to exploit his concept, but in order to do so a source of
chrome tailings,
as well as finance to construct a plant to process
the tailings had to be found.
[5]
The project was designated as ‘RK1’
and a shelf company was acquired by Mr Gardner and Mr Barnard and
renamed GB Mining.
This is the taxpayer in the appeal.
[6]
Having formed the vehicle to develop the
project a source of chrome tailings was identified on the farm
Kroondal 34 (the Kroondal
dump). As regards finance, capital was to
be raised from the public via OTR Mining Ltd (OTR) a company which
was listed on the
Johannesburg Stock Exchange (JSE), of which Gardner
had previously been the managing director. The intention was that GB
Mining
would transfer its business to and become the principal
shareholder in OTR and thereby secure for itself the advantages of
access
to the JSE.
[7]
OTR was in dire financial straits and in
order to prevent its demise and its delisting GB Mining mounted a
rescue operation. In
terms of a formal rescue offer, subject to
approval by the JSE and Securities Regulation Panel (SRP), GB Mining
would provide loan
capital for payment of creditors and employees in
return for shares in proportion to the amount of the loan. The
listing of OTR’s
options shares on the JSE was terminated on 22
August 2003 which effectively brought an end to the rescue operation.
In the interim
GB Mining had expended funds in the amount of
R2 638 070 on the payment of salaries for staff and office
expenses. GB
Mining contended that these employees were employed by
it and that this expenditure was incurred in the production of income
and
qualified as a deduction in terms of s 11(
a
)
read with s 23(
g
)
of the Income Tax Act 58 of 1962 (the Act). The Commissioner,
however, determined that the amount had been advanced by GB Mining
to
OTR as a loan and its deduction was disallowed as being capital in
nature. This determination was upheld by the court a quo
and is
challenged by GB Mining in this appeal.
[8]
In order to secure the chrome tailings in
the Kroondal dump, GB Mining concluded a notarial prospecting
contract on 7 March 2001
with the farmers who owned the mineral
rights to the Kroondal dump. GB Mining was granted the right to
prospect for minerals in
the tailings, with the option to purchase
the mineral rights, within a period of six months. This option was
duly exercised within
the specified period and the mineral rights to
the dump were purchased. The purchase price was the sum of
R2 400 000,
together with 1 250 000 OTR shares
and 625 000 OTR options. At this stage the final rescue offer in
respect of OTR had
not yet failed and it was still envisaged that the
mineral rights to the Kroondal dump would be transferred to OTR in
terms of
the rescue offer.
[9]
Soon however, it became clear that the
Kroondal dump did not contain sufficient material for the project and
additional chrome tailings
would have to be obtained from chrome
mining companies operating in the area of the Kroondal dump, namely
Xstrata SA (Pty) Ltd
(Xstrata) and Bayer (Pty) Ltd (Bayer).
[10]
GB Mining required further capital while
the OTR rescue offer was being considered and approached Aquarius
Platinum (South Africa)
(Pty) Ltd (Aquarius) as a source of capital
and to be a suitable partner in exploiting the RK1 concept. According
to Mr Gardner’s
evidence, which in this case as in others was
not reconcilable with the documents, it was agreed that GB Mining and
Aquarius would
jointly exploit the Kroondal dump on a 50:50 basis and
would use the plant of Kroondal Platinum Mines Ltd, a wholly owned
subsidiary
of Aquarius, to process the material. He said Aquarius was
to contribute R14 million for its 50 per cent share, GB Mining would
receive a 25 per cent share in the consortium and ‘another 25
per cent for cash at the cost of the plant’ and GB Mining
would
be paid R3,5 million. That amount was paid and it is this payment of
R3,5 million which gives rise to the next area of dispute
between GB
Mining and the Commissioner. The Commissioner contends that in return
for payment of this amount Aquarius acquired 50
per cent of the
mineral rights in the Kroondal dump. GB Mining, however, contends
that it did not dispose of these rights to Aquarius,
as they remained
ceded to GB Mining, which in turn made them available to the joint
venture as its capital contribution. The Commissioner,
however,
determined that GB Mining disposed of an asset comprising a Kroondal
right/interest to Aquarius for R3,5 million. This
determination was
upheld by the court a quo and is also challenged by GB Mining in this
appeal.
[11]
GB Mining successfully raised further
capital from foreign investors and as a result, Gardner and Barnard
(UK) Limited (GBUK) was
registered as a company in the United
Kingdom, and then became GB Mining’s holding company.
Investors, Mr Samuel Sher and
others were allotted 32 per cent of the
shares with Mr Gardner and Mr Barnard holding the remaining 68 per
cent. Shortly thereafter
Mr Gardner and Mr Barnard resigned from GB
Mining to become shareholders of GBUK.
[12]
In order to secure the additional source of
chrome tailings, GB Mining concluded agreements with Xstrata and
Bayer in terms of which
GB Mining acquired the right ‘to remove
and beneficiate the feedstock’ being the material and
by-products supplied
by Xstrata and Bayer, including chrome tailings.
Both of these agreements provided that GB Mining would ‘cede
and assign
all its rights and obligations in terms of this agreement
to RK1’. The reference to RK1 is a reference to the RK1 joint
venture
referred to below.
[13]
During this period of intense activity Mr
Gardner and other representatives of GB Mining travelled overseas on
behalf of GB Mining
and expenses were incurred. GB Mining claimed
these expenses as deductions in terms of s 11(
a
)
of the Act on the ground they were incurred in the production of
income. The Commissioner disallowed 50 per cent of the expenses
holding that GB Mining incurred the travel expenditure partly for the
purpose of creating or acquiring an income producing structure,
or a
source of profit, and 50 per cent of the travel expenditure was
attributable to that purpose. The Commissioner contends that
50 per
cent of the travel expenditure in an amount of R412 339 was of a
‘capital nature’ in terms of s 11(
a
)
of the Act and was not deductible. The court a quo upheld the
Commissioner’s determination which is the subject of a further
challenge by GB Mining in this appeal.
[14]
On 20 October 2003 GB Mining, Aquarius and
Victoria Global Holdings Ltd (Victoria) concluded a Notarial
Consortium Agreement in
terms of which they would jointly produce
platinum group metal concentrate at a consortium plant to be erected
in the Xstrata mining
area. The concentrate would be sold to Impala
Refining Services Ltd and Rustenburg Platinum Mines Ltd. The
‘participating
interests’ of the parties would be
Aquarius 50 per cent and GB Mining and Victoria 25 per cent each. The
joint venture was
styled RK1JV.
[15]
Profits from the joint venture would be
shared in the same ratio as the respective shareholding. The
contribution to be made by
the parties was that Aquarius and Victoria
would make capital cost contributions of R16 million and the Rand
equivalent of £615 000
respectively. GB Mining would
contribute the difference between the Rand equivalent of the Victoria
contribution and
R8 million. In the event that the Victoria contribution was less than
R6 765 000 the difference between the Victoria
contribution
and R6 765 000 would be contributed by Victoria and GB
Mining in equal shares. It was recorded that GB Mining
had
‘contributed to the consortium certain mineral rights and
intellectual property’. The Commissioner determined that
GB
Mining had thereby disposed of an asset to RK1JV, the proceeds of
which were R8 million. The base cost was nil and the disposal
consequently resulted in a ‘capital gain’ of R8 million
for GB Mining. GB Mining contends there was no disposal of
an asset
as GB Mining acquired the Xstrata and Bayer minerals for and on
behalf of the RK1JV. The court a quo upheld the Commissioner’s
determination which is challenged by GB Mining in this appeal.
[16]
Mr Barnard died during October 2003 which
resulted in a change in the shareholding in GBUK with Mr Gardner
acquiring effective control
over GBUK through the shareholders’
agreement. Mr Gardner accordingly held 62 per cent of the shares and
Mr Sher and others
held the remaining 38 per cent. As at 28 February
2004 GBUK had acquired another subsidiary in South Africa, RK Mining
SA (RKMSA)
and a company RKR Mining UK Ltd (RKUK). Both groups held
shares in the same ratio in RKUK which held all the shares in RKMSA
which
was involved in the RK2 project. This was similar to the RK1
project but related to the processing of feedstock obtained from a
different area. Early in 2005 it was then decided to terminate their
joint shareholding in GBUK and RKUK so that each of these
companies
would become wholly owned by one of these two groups of shareholders.
Their entitlement to their previous profit share
in the RK1 and RK2
projects needed however to remain unchanged. In February 2005, Mr
Gardner accordingly acquired the majority
interest in GBUK, in
exchange for his majority interest in RKUK. After some inconclusive
efforts to transfer between the two groups
a proportionate stake in
each joint venture, it was agreed in November 2005 that GB Mining,
which held the interest in the RK1
project, would hold 38 per cent of
that stake on behalf of RKMSA and would pay over that proportion of
net income to RKMSA. There
was a reciprocal undertaking by RKMSA in
respect of a 62 per cent stake in the RK2 project.
[17]
The Commissioner determined that the 38 per
cent interest which GB Mining held in terms of this arrangement on
behalf of RKMSA,
was an asset which it disposed of during the 2005
tax year. The proceeds from the disposal were determined as being
R23 277 530
and the base cost of the asset was determined
as being R8 284 506. The figure for the base cost comprised
an amount of
R3 629 000 (being 38 per cent of R9 550 000
being the contribution made by GB Mining to the consortium) and
an
amount of R4 655 506 (being donations tax on the amount of
R23 277 530). The court a quo, however, decided
that
donations tax was not payable and this finding is not the subject of
the present appeal. The Commissioner accordingly contends
on appeal
that the capital gain of GB Mining should be increased from
R14 993 024 to R19 648 530 to account
for the
reduction in the base cost.
[18]
GB Mining contends that the transaction was
in the form of a multiparty agreement between two groups of
shareholders and their companies,
which entailed the exchange of
assets of equal value and therefore did not result in any capital
gain. Having held that no donations
tax was payable, the court a quo
then held that GB Mining had disposed of the 38 per cent joint
venture interest in RK1 for a consideration,
being the right to 62
per cent of the interest held by RKMSA in the joint venture interest
RK2 and that the value of the rights
given up by each party was
similar to the rights received. The Commissioner submits that these
findings are not in issue in this
appeal, as the effect of these
findings is that the proceeds from the disposal by GBSA of the 38 per
cent interest in RK1, is an
amount equal to the relevant value being
R23 277 530. The determination by the Commissioner is
challenged by GB Mining
in this appeal.
[19]
The Commissioner assessed GB Mining for
additional tax in terms of s 76(1) of the Act in
respect of the tax assessed
under each of the disputed items. The
Commissioner submits that the penalties assessed were appropriate. GB
Mining contends that
the grounds for imposing penalties were not
present and no penalties should have been imposed. The court a quo
upheld the Commissioner’s
determination of the penalties which
is challenged by GB Mining in this appeal.
[20]
The objections raised by GB Mining to the
determinations made by the Commissioner concerning the OTR payments,
the disposal of the
Kroondal dump and the disposal of an asset to the
RK1 joint venture, were based upon what GB Mining contended was
incorrect information
supplied to the Commissioner in GB Mining’s
tax returns. Was it permissible for it to do this by way of objection
and appeal
rather than by asking for a reduction in the assessments?
[21]
Section 79A of the Act deals with the
reduction of an assessment by the Commissioner:
‘
Reduced
assessments
(1) The Commissioner
may, notwithstanding the fact that no objection has been lodged or
appeal noted in terms of the provisions
of Part III of Chapter III of
this Act, reduce an assessment -
(a)
. . .
(b)
where it is proved to the satisfaction
of the Commissioner that in issuing that assessment any amount which
–
(i)
was taken into account by the Commissioner in determining the
taxpayer’s liability for tax, should not have been taken
into
account; or
(ii)
should have been taken into account in determining the taxpayer’s
liability for tax, was not taken into account by the
Commissioner:
Provided
that such assessment, wherein the amount was so taken into account or
not taken into account, as contemplated in subparagraph
(i) or (ii),
as the case may be, was issued by the Commissioner based on
information provided in the taxpayer’s return for
the current
or any previous year of assessment.’
[22]
A
taxpayer may seek a reduction in the Commissioner’s assessment
in terms of s 79A without objecting to the assessment in
terms of s
81.
[2]
The Commissioner’s
power to reduce the assessment exists ‘notwithstanding the fact
that no objection has been lodged
or appeal noted’. In
addition, the power of the Commissioner is not restricted to its
mero
motu
exercise, because the error in the assessment has to be ‘proved
to the satisfaction of the Commissioner’. To discharge
this
burden of proof the taxpayer must place information before the
Commissioner to substantiate the error relied upon. In doing
so it
may rely upon an error that it made in its return.
[23]
The Commissioner may therefore act in terms
of s 79A to reduce an assessment in the absence of an objection in
terms of s 81 of
the Act and may do so even where it flows from
incorrect information provided in the taxpayer’s return. Can
the taxpayer
who has been the cause of the incorrect assessment by
the Commissioner instead claim to be ‘aggrieved’ thereby
and
object to an assessment in terms of s 81?
[24]
The statement that the powers of the
Commissioner under s 79A can be exercised ‘notwithstanding the
fact that no objection
has been made’, suggests that an
alternative route for the taxpayer to follow is by way of objection
and, if necessary, appeal.
That was the conclusion of Hurt J in ITC
1785 67 SATC 98
, where he said;
‘
.
. . the fundamental object of tax legislation is to exact from each
citizen his due. What is “due” is, in each case
(questions of penalty aside), strictly prescribed by statute and the
amount of the taxpayer’s taxable income must, in the
process of
assessment, be accurately determined preparatory to the calculation
of the amount which he (or she) is required to hand
over to the
fiscus
. In
that light, it is clear that a taxpayer whose taxable income has been
determined on an erroneous basis, is always “aggrieved”
even if the source of error is entirely attributable to him.’
[25]
I
agree with Hurt J, notwithstanding the oddity of a taxpayer being
aggrieved by an assessment based on the erroneous information
it
provided in its return. Accordingly it was permissible for GB Mining
to follow the course that it did.
[3]
[26]
In the Tax Court’s judgment reliance
was placed on the provisions of s 82 of the Act which provided that
the burden of proof
rested upon any person claiming an exception,
non-liability, deduction, abatement, or set-off in terms of the Act.
Before us, GB
Mining contended in its heads of argument a point not
taken in the court below, that the provisions of s 82 of the Act were
unconstitutional
and invalid.
[27]
It
is clearly undesirable for courts to make orders declaring statutory
provisions invalid without providing the relevant organs
of state
with the opportunity to intervene in the proceedings.
[4]
Rule 10A of the Uniform Rules of Court provides:
‘
10A.
If any proceedings before the court, the validity of a law is
challenged, whether in whole or in part and whether on constitutional
grounds or otherwise, the party challenging the validity of the law
shall join the provincial or national executive authorities
responsible for the administration of the law in the proceedings and
shall in the case of a challenge to a rule made in terms of
the Rules
Board for Courts of Law Act, 1985 (Act No. 107 of 1985), cause a
notice to be served on the Rules Board for Courts of
Law, informing
the Rules Board for Courts of Law thereof.’
The
Minister of Finance had not been joined in these proceedings and had
a direct interest in the challenge raised by GB Mining.
Counsel for
GB Mining when faced with this obstacle abandoned the point.
[28]
The taxpayer accordingly bears the onus of
satisfying the Commissioner that the information furnished is
incorrect and that a reduction
in the assessment is justified. In
order to do this, additional evidence would have to be placed before
the Commissioner.
The nature of this evidence will depend upon the
facts of each case and particularly the nature of the erroneous
information supplied
to the Commissioner. So for example, the fiscus
might rightly ask how it can be expected to alter or reduce an
assessment when
information supplied by a taxpayer is not withdrawn
or substituted so as to enable the reduction or alteration contended
for. This
problem arises in the present case as shown below.
[29]
In terms of regulation A2 of the
Regulations issued under s 107 of the Act (Government Notice R105 –
in Government Gazette
Extraordinary No 1011 of 22 January 1965) any
return must ‘be accompanied by all such balance sheets, trading
accounts, profit
and loss accounts and other accounts of whatever
nature, as are necessary to support the information contained in the
return’.
The evidence to ‘support’ the information
in the return must accordingly ‘corroborate’ it (
Concise
Oxford English Dictionary
, 12 ed).
Balance sheets and accounts perform a vital and formal role in
corroborating the information in the return. The Commissioner
must be
able to rely upon the veracity and accuracy of this evidence which
forms the basis for the assessment. The Commissioner
is entirely
dependent upon the taxpayer to furnish this evidence. In the event of
incorrect information being included in the balance
sheets or
accounts, evidence would have to be furnished to explain the precise
nature and extent of the incorrect information and
how it was
included. All relevant supporting documentation to verify the correct
information would have to be submitted. An amended
balance sheet or
account may have to be submitted to the Commissioner, together with a
full explanatory note to clarify the amendment.
[30]
Each of the contested determinations made
by the Commissioner must be approached on the basis that GB Mining
bears the onus of proving
that the Commissioner was wrong. In
addition, where GB Mining contends that the determination was based
upon incorrect information
supplied to the Commissioner by GB Mining,
whether in the form of balance sheets and accounts or otherwise, GB
Mining must show
that it has provided credible and reliable evidence
to explain the error and substantiate what it maintains is the true
position.
In any event, even if the Commissioner had borne the onus
of establishing the correctness of the determinations made, as will
become
apparent, the outcome of this appeal would have been the same.
I shall in successive paragraphs deal in turn with each of the six
issues in this appeal.
The
OTR payments
[31]
The amount claimed was described in GB
Mining’s financial statements for the year ending 29 February
2004 as ‘OTR loan’.
The financial statements were signed
by GB Mining’s director Mr Van Zanten, as well as its auditors
KPMG Inc and accompanied
GB Mining’s tax return for that year.
Mr Van Zanten was GB Mining’s sole director and public officer
at the relevant
time. When giving evidence before the court a quo he
was asked ‘at that stage did you know that the loan actually
consisted
of the expenditure incurred in respect of salaries and
other office expenditure of GB itself?’ to which he replied
‘Yes’.
However, he later stated ‘the mechanism was
such that the expenditure that was incurred by GB on behalf of OTR
would be repaid
in terms of the shares’. In addition, in a
letter dated 12 June 2009 written by Mr Van Zanten on behalf of GB
Mining to the
Commissioner it is stated that ‘the rescue
operation, envisaged for OTR at the time, was to inject loan capital
and to transfer
business assets to the company . . .’. In a
memorandum dated 7 March 2002 written by Mr Gardner on behalf of GB
Mining addressed
to representatives of OTR and GB Mining the
following appears:
‘
1.
. . In the meantime GB is operating under a clause that has been
recommended by OTR’s legal advisors which amounts to
“curatorship management” and therefore GB can only make
management decisions on behalf of OTR
and
cannot offer full time employment until GB is granted full management
control by the JSE / shareholders. In the interim GB will
do its
utmost to protect the current staff of OTR.
The knock back for current OTR staff means in simple terms that the
delay in GB being able to offer immediate employment means
that the
bonus system that GB offers will only kick in later. As stated, these
delays were totally unforeseen and in no ways can
it reflect on any
members of the OTR board.
2.
In the meantime any costs incurred will be borne by the relevant
companies.’ [My emphasis.]
[32]
A press release by OTR dated 17 January
2003 announcing the agreement with GB Mining, referred to ‘the
conversion of R2 466 000
of debt owing by OTR to GB Mining
to be converted to equity’. When giving evidence Mr Gardner was
referred to this passage
in the announcement and he explained ‘that
is the salaries and the offices etcetera etcetera that we had been
paying for.
Because we were not allowed by the auditors, KPMG to
claim the money we had spent on the nomads, because they had nothing
to do,
apparently they had nothing to do with running GB Mining at
the time’. Counsel for GB Mining submitted that Mr Gardner was
referring here to ‘nomads’ and not employees generally,
but there is no explanation as to which employees would qualify
as
‘nomads’ and how such a large sum of money could be spent
on them.
[33]
Consequently, GB Mining did not provide
credible and reliable evidence to explain the alleged error in
describing the amount in
question as an ‘OTR loan’ in its
financial statements and why its auditors KPMG had done so. Indeed,
all the information
at hand points emphatically in the opposite
direction. The Commissioner’s view, endorsed by the Tax Court,
that this was
a loan that was written off when the OTR rescue failed,
is plainly correct.
[34]
Thus the amount of R2 638 070 did
not qualify as a deduction in terms of s 11
(a)
of the Act. The appeal against this determination by the Commissioner
must accordingly fail.
The
disposal of the Kroondal dump
[35]
The schedule to GB Mining’s tax
return for the 2003 tax year stated ‘calculation of capital
gain / (loss) GB Dump –
sold to Aquarius’. The note to
this entry stated ‘sold 50 per cent to Aquarius at R1 300 000’.
Mr Van
Zanten signed the tax return as the director of GB Mining and
declared that the particulars contained therein were ‘true and
correct in every respect’. He confirmed when giving evidence
that this related to a sale of the dump for R1,3 million.
[36]
Mr Van Zanten, in response to a query by
the Commissioner stated in a letter dated 10 June 2008, that Aquarius
was to acquire 50
per cent of the dump and mineral rights and the
amount of R1,3 million paid by Aquarius to GB Mining ‘was their
portion of
the purchase price’. He reiterated this in a letter
dated 23 June 2008 stating ‘In February 2002 GB Mining sold 50
per cent of the dump to Aquarius for R3,5 million. The deal was done
on the basis that Aquarius would pay the farmers the R2,2 million
owed to them by GBSA and pay the balance of R1,3 million directly to
GB Mining’.
[37]
Mr Van Zanten said that his initial idea
that there was a sale of 50 per cent ‘was the original plan as
. . . explained to
me by Mr Gardner’, but added that when SARS
became involved Mr Gardner clarified ‘that it had actually not
been sold’.
However, in a letter dated 21 February 2002 written
by Mr Gardner to Mr Murray of Aquarius he states ‘As agreed
with your
good self your 50/50 upfront cost for the procurement of
the GB dump is R3 500 000’. Mr Gardner stated that at
the time he wrote the letter he was under the impression there would
be a sale of 50 per cent of the dump to Aquarius.
[38]
Mr Gardner said that GB Mining had
originally tried to sell the Kroondal dump to OTR, but not to
Aquarius. He reiterated ‘I
was under the impression that
Aquarius Platinum were going to buy this dump in fact all the way up
[to] 3 June 2003’. Mr
Gardner confirmed there was a draft sale
agreement in terms of which the dump was sold to Aquarius, but sought
to explain its terms
on the basis that there was a misunderstanding
on his part of what Aquarius was prepared to do. An agreement was
reached with Aquarius
dated 3 June 2003. Clause 14.2 of the agreement
provides as follows:
‘
It
is recorded that prior to the signature date, the parties contributed
an aggregate amount of R7 000 000 to facilitate
the
implementation of the tailings project and the RK1 project, which
start-up contribution was
14.2.1 in the
instance of GB Mining contributed by way of time expenditure and
services rendered in establishing the RK1 project
and the tailings
project, to a value of R3 500 000.’
Mr
Gardner said that this clause was agreed upon as early as August
2001. Mr Murray of Aquarius asked how much he should invest,
what it
would cost and they agreed on a figure of R7 million. According to Mr
Gardner, because it was a 50/50 share Aquarius was
to pay R3,5
million for the project to continue, plus the past expenses GB Mining
had incurred, and the technology GB Mining possessed
to extract
platinum from the chrome tailings.
[39]
Counsel for GB Mining submitted that this
clause clearly sets out the reason for the payment of R3,5 million to
GB Mining. Counsel
for the Commissioner, however, pointed out that if
this description is correct, contrary to the determination of the
Commissioner,
the R3,5 million would fall within GB Mining’s
‘gross income’ and would give rise to an income tax
liability
for GB Mining, greater than the capital gains tax liability
contended for by the Commissioner. This amount was not included by GB
Mining in its gross income in its tax returns, which indicated that
GB Mining did not believe the amount to be consideration for
‘time
expenditure and services rendered’ by it.
[40]
If the provisions of clause 14.2 had been
agreed upon between Mr Gardner and Mr Murray as long ago as August
2001, it is inexplicable
why he would have written to Mr Murray on 21
February 2002 recording their agreement that the ‘50/50 upfront
cost for the
procurement of the GB dump is R3 500 000’.
It is also inexplicable why he would believe up until 3 June 2003
that
Aquarius was going to buy the dump. There is no evidence
tendered by GB Mining to explain how an amount of R3,5 million which
Mr
Gardner believed was the amount Aquarius was to pay to purchase
the dump, was then transformed into payment for ‘time
expenditure
and services rendered in establishing the RK1 project and
the tailings project’ to the same value.
[41]
It is significant that it was contended by
GB Mining for the first time before the court a quo, by amendment to
its grounds of appeal
dated 12 June 2009, that ‘there was no
sales transaction or disposal of the dump concerned, which could
trigger application
of the CGT provisions of the Eighth Schedule’.
[42]
An ‘asset’ as defined in para 1
of the Eighth Schedule to the Act includes property (corporeal and
incorporeal) and
‘a right or interest of whatever nature to or
in such property’. To have disposed of an ‘asset’,
GB Mining
need not have disposed of the Kroondal dump. If GB Mining
disposed of any Kroondal right or interest, it disposed of an asset.
[43]
No credible and reliable evidence was
tendered by GB Mining to explain the alleged error in its tax return
describing the transactions
as a sale of the dump to Aquarius. The
contradictions and inconsistencies in the evidence of Mr Gardner
considered together with
the conflict between his evidence and the
financial statements, the tax return and other documents, point
ineluctably to the conclusion
that the amount in question should not
be excluded in terms of the Eighth Schedule to the Act.
[44]
The Commissioner correctly determined that
GB Mining disposed of an asset comprising a Kroondal right or
interest to Aquarius for
‘proceeds’ of R3,5 million. The
base cost of the asset, being the amount paid by GB Mining in
acquiring the asset from
the farmers was R1 780 771. The
capital gain for GB Mining in its 2003 tax year was therefore
R1 719 229. The
appeal against this determination by the
Commissioner accordingly fails.
The
travel expenditure claim
[45]
GB Mining in a schedule annexed to its tax
return set out details of overseas travel and the costs associated
therewith, undertaken
by its representatives, which it claimed as a
deduction in terms of s 11(
a
)
of the Act.
[46]
A deduction was claimed by GB Mining on the
basis that the expenses were incurred in the production of income and
were consequently
not capital in nature.
[47]
In
New State
Areas Ltd v Commissioner for Inland Revenue
1946 AD 610
at 620-1 Watermeyer CJ stated:
‘
The
problem which arises when deductions are claimed is, therefore
usually whether the expenditure in question should properly be
regarded as part of the cost of performing the income earning
operations or as part of the cost of establishing or improving or
adding to the income earning plant or machinery.’
[48]
As to the formulation of a test to assist
in the determination of whether expenditure is of a capital or
revenue nature, Streicher
JA had the following to say in
Commissioner
SARS v BP South Africa (Pty) Ltd
2006
(5) SA 559
(SCA) at para 23:
‘
A
test that has been adopted to assist in the determination whether
expenditure is of a capital or revenue nature is to ask whether
the
expenditure is more akin to the income-producing operations of the
taxpayer or whether it is more akin to the income-earning
structure
of the taxpayer, or to ask, “Is it expenditure required to
carry on a business or is it required to establish a
business?”
Money spent in creating an income-producing concern is capital
expenditure; it is invested to yield future profit’.
[49]
If the purpose of the overseas travel was
partially to produce income for GB Mining and partially to improve
the income-earning
structure of GB Mining, an apportionment of the
expenses incurred can be made on the basis of ‘what would be
fair and reasonable
in all the circumstances of the case’. See
CIR v
Nemojim (Pty) Ltd
1983 (4) SA 935
(A) at 951 C-E.
[50]
The Commissioner contends that the
expenditure in question was used partially for the purpose of
improving the income-earning structure
of GB Mining and was therefore
of a capital nature and not deductible in terms of s 11(
a
)
of the Act. Because of the lack of clear evidence of GB Mining as to
the purpose of each of the trips the Commissioner apportioned
the
expenditure on a 50:50 basis. As a consequence 50 per cent of the
amount claimed was determined not to be deductible. It should
be
noted that GB Mining and the Commissioner had originally reached a
settlement in terms of which 50 per cent of the expenses
would be
disallowed. However, when the Commissioner imposed additional tax on
the claims that were disallowed, GB Mining adopted
the view that it
was no longer bound by the settlement and claimed all of the
expenditure incurred.
[51]
One would have expected Mr Gardner to
explain the purpose of each trip. Although he conceded that the
expenses of certain trips
were not deductible, when asked by his
counsel whether the remaining trips were undertaken ‘mainly in
order to raise capital,
working capital for GBSA’ he replied
‘that is correct’ and added ‘everything . . . is
about raising money’.
His answer does not address the issue of
whether the money was raised to enhance the income-producing
operations, or the income-earning
structure of GB Mining. His
concession was justified as the purpose of some of the trips was to
explore a stock exchange listing
in either the UK or Spain and others
were directed at exploring potential new business opportunities. It
is clear from the Schedule
provided by GB Mining that the 50:50
apportionment was justified.
[52]
The apportionment by the Commissioner of
the expenses claimed for overseas travel on a 50:50 basis, so that 50
per cent was deemed
to be of a capital nature and not deductible in
terms of s 11(
a
)
of the Act in the amount of R412 339, was fair and reasonable in
all the circumstances.
[53]
The appeal against this determination by
the Commissioner must accordingly fail.
The
disposal of an asset to the RK1 joint venture
[54]
The accounts of the RK1 consortium in the
form of the trial balance for the period 1 July 2004 – 30 June
2005 record a capital
contribution by GB Mining of R8 million. This
accords with the consortium agreement which, as pointed out above,
records that GB
Mining has contributed to the consortium ‘certain
mineral rights and intellectual property’.
[55]
Mr Gardner confirmed that Aquarius had
contributed R16 million and Victoria had contributed R8 million to
the joint venture. He
said that GB Mining was not obliged to make any
cash contribution and that its contribution was ‘in kind’
and added
‘I do not think you can put a price to that, I mean
it is a huge amount of money we spent developing RK1, but I saw a
value
on the consortium balance sheet. But the consortium balance
sheets have nothing to do with us, it is not anything, to do with
us’.
When he was asked whether he could explain why GB Mining’s
capital contribution was shown in the consortium accounts as R8
million, he replied ‘I have no idea. I just think it is to
match up the other 25 per cent shareholders’ funds, they
put in
R8 million and that is the best conclusion that I can come to. I do
not know why it’s put in there, no. It has got
nothing to do
with us as such. We are not responsible for their bookkeeping or the
way they present accounts, GB Mining is not,
sorry’.
[56]
The entry in the accounts of the joint
venture that GB Mining had contributed an amount of R8 million
required an explanation other
than Mr Gardner simply saying it was
wrong and he had no idea why it was reflected in this manner. This
contradiction required
evidence to explain the error, if there was
one, which may have been clarified by a representative of Aquarius.
There is again
a contradiction between documentary evidence and the
evidence of Mr Gardner.
[57]
This is particularly relevant in the
context of the provision in the consortium agreement that GB Mining
has contributed ‘certain
mineral rights and intellectual
property to the consortium’. In terms of the agreements
concluded by GB Mining with Xstrata
and Bayer it was recorded that
‘GB will as soon as practically possible after the effective
date cede and assign all its
rights and obligations in terms of this
agreement to RK1. . .’.
[58]
Despite these provisions, counsel for GB
Mining submitted in his heads of argument that ‘appellant did
not acquire any mineral
rights from Bayer / Xstrata but merely their
consent for the construction of the relevant pipeline and for the
“off-take”
of their chromite waste material, against
payment of royalties’.
[59]
It was also submitted that the crux of GB
Mining’s case was that these rights were acquired on behalf of
the consortium as
part of GB Mining’s initial cash contribution
and not for GB Mining’s own account.
[60]
GB Mining’s
ipse
dixit
in the form of the trial balance
which was never withdrawn and never properly explained is fatal to
its case. I agree with the
submission made by counsel for the
Commissioner, that the probabilities are that GB Mining disposed of
an asset, being the Xstrata
and Bayer rights to the other members of
the consortium for a consideration of R8 million. The appeal against
the Commissioner’s
determination must accordingly fail.
The
disposal of a 38 per cent joint venture interest
[61]
As pointed out above, the Commissioner
determined that the 38 per cent interest in 25 per cent of the RK1
joint venture which GB
Mining held on behalf of RKMSA was an asset
which it disposed of, attracting capital gains tax. GB Mining
contends that there was
an exchange of assets of equal value, which
did not result in any capital gain.
[62]
GB Mining and RKMSA agreed on 28 October
2005 that GB Mining would pay to RKMSA 38 per cent of the net income
received by GB Mining
from Aquarius in terms of the consortium
agreement. In terms of clause 3.1 it was provided that RKMSA ‘will
be deemed to
have acquired a 38 per cent share in the “participation
share”’ which was defined as the 25 per cent
participation
share which GB Mining held in RK1. Clause 3.2 of this
agreement provided that ‘in as much as the consortium agreement
provides
for a pre-emptive right in favour of the consortium
participants and the consortium participants were not prepared to
waive their
pre-emptive rights, GBMSA acknowledges that for all
purposes of the relationship between them, RKM will be regarded by
GBMSA as
a 38 per cent owner of the participation share’. Mr
Gardner said this was caused by Aquarius not allowing RKMSA into the
consortium.
[63]
In terms of clause 4.1 of the agreement it
was provided that RKMSA would be entitled to 38 per cent of the net
income derived by
GB Mining from the participation share (25 per
cent) in the consortium. The effective date of the agreement was 1
February 2005.
[64]
On 30 June 2006 Ivanhoe Nickel and Platinum
Ltd (Ivanhoe) purchased all the shares of RKUK. The only asset of
RKUK was 100 per cent
of the issued shares in RKMSA. In clause
7.2.10.1 of this agreement it is recorded ‘RKSA owns as its
sole asset, its 38 per
cent interest in the 25 per cent interest held
by GBSA in the RK1 consortium’. The purchase price as provided
for in clause
5.2 was the Sterling equivalent of R26 847 000.
At the same time Ivanhoe purchased all the shares in GBSA thereby
effectively
acquiring the remaining 62 per cent of the entire 25 per
cent stake in the RK1 joint venture. A reading of the agreements
shows
that the price was a global price in respect of both
transactions divided between them in the proportion of their
respective effective
interests in the joint venture.
[65]
As regards GB Mining’s contention
that there was an exchange of assets of equal value, namely that GB
Mining gave up its 38
per cent interest in the joint venture and in
turn RKMSA gave up its 62 per cent interest in the joint venture to
the group of
companies in which Mr Gardner held the majority shares,
the court a quo held that GB Mining had disposed of the 38 per cent
JV
interest for a consideration being the right to 62 per cent of the
interest held by RKMSA in the joint venture RK2. The court a
quo then
concluded ‘the inference of the interlinking of the
transactions between the parties was that the value of the rights
given up by each party was similar to the value of the rights
received, although no evidence was led on this point’. Counsel
for the Commissioner stated that this finding of the court a quo is
not in dispute in this appeal.
[66]
In terms of the agreement concluded between
GB Mining and RKMSA, RKMSA would be regarded as a 38 per cent owner
of the participation
share. GB Mining accordingly ceded these rights
to RKMSA. In terms of paragraph 11 of Part III of the Eighth Schedule
a ‘disposal’
includes the cession of an ‘asset’
and the definition of an ‘asset’ in Part I ‘includes
a right or
interest of whatever nature to or in such property’.
[67]
In terms of paragraph 38 of the Eighth
Schedule, where a person disposes of an asset for a consideration not
measurable in money,
the person must be treated as having disposed of
that asset for proceeds equal to the market value of the asset, as at
the date
of disposal. The finding of the court a quo that the value
of the rights that were exchanged were similar, or according to GB
Mining
of equal value, does not alter the fact that the 38 per cent
share ceded by GB Mining to RKMSA, was disposed of for ‘a
consideration
not measurable in money’.
[68]
The Commissioner determined that the value
of the 38 per cent JV interest thus disposed of was the amount of
R26 847 000
paid by Ivanhoe on the basis that this was an
arm’s length transaction. The present value of this amount as
at 1 February
2005, being the effective date when GB Mining sold the
38 per cent JV interest to RKMSA calculated at the SARS rate at the
time
of 10.5 per cent, produced an amount of R23 277 530
which constituted the ‘proceeds’ of the disposal. The
base cost of the asset in terms of paragraph 20(1)(
a
)
of the Eighth Schedule to the Act is the expenditure actually
incurred in respect of the cost of acquisition of the asset. This
is
38 per cent of R9 550 000 (being the contribution made to
the consortium) which produces an amount of R3 629 000.
As
will be recalled, the Commissioner originally determined that the
base cost of the asset included donations tax of 20 per cent
on the
amount of R23 277 530, producing an amount of R4 655 506.
The court a quo, however, decided that there
was no donations tax
payable and there is no appeal against this finding. The base cost
accordingly falls to be reduced from R8 284 506
to
R3 629 000 with a consequent increase in the capital gain
from R14 993 024 to R19 648 530 (the
latter being
the difference between the proceeds of R23 277 530 and the
amended base cost of R3 629 000) for
GB Mining in its 2005
tax year. The assessment was accordingly raised on a lower amount
than could be justified by the Commissioner.
That cannot be a cause
for complaint by the taxpayer.
[69]
The appeal against the Commissioner’s
determination must accordingly fail.
The
assessment of additional tax in terms of s 76 of the Act
[70]
The Commissioner submits that in relation
to each of the contested assessments there was an omission in terms
of s 76(1)(
b
)
of the Act, or an ‘incorrect statement’ in terms of s
76(1)(
c
),
in respect of the relevant tax return. These sections provide that
the additional tax payable is an amount equal to twice the
amount of
the tax chargeable. The Commissioner, however, has a discretion in
terms of s 76(2)(
a
)
to remit the additional tax ‘or any part thereof as he may deem
fit’. Should the Commissioner decide not to remit
the whole of
the tax imposed, this decision is subject to objection and appeal.
[71]
The Commissioner exercised his discretion
to remit the penalties imposed as follows:
(a) Travel
expenditure – originally 180 per cent reduced to 20 per cent
penalties assessed.
(b) OTR amount –
originally 160 per cent reduced to 40 per cent penalties assessed.
(c) Disposal of
asset to Aquarius with the resultant capital gain – originally
more than 150 per cent reduced to less than
50 per cent penalties
assessed.
(d) Disposal of an
asset to RK1JV with the resultant capital gain – originally
assessed at 160 per cent reduced to 40 per
cent penalties assessed.
(e) Disposal of 38
per cent JV interest with the resultant capital gain –
originally assessed at 180 per cent reduced to 20
per cent penalties
assessed.
[72]
The Commissioner submitted that relevant
facts in the assessment of the additional tax payable were:
(a) The
circumstances giving rise to the assessments did not come to the
attention of the Commissioner as a result of any voluntary
disclosure
by GB Mining.
(b) There were
inconsistencies in the information furnished to the Commissioner
which made it difficult to establish the true facts.
(c) The views of GB
Mining could not reasonably have been held.
[73]
Although there is some substance to these
submissions, in my view the Commissioner erred in imposing the
additional tax that he
did in respect of the travel expenditure and
the OTR amount.
[74]
There was no omission or incorrect
statement in respect of the travel expenditure. The details of the
trips were disclosed and GB
Mining then entered into negotiations
with the Commissioner. As pointed out GB Mining abandoned the
expenses claimed in respect
of certain of the trips and a settlement
was reached in terms of which 50 per cent of the expenses would be
disallowed. When the
Commissioner imposed additional tax on the
claims that were disallowed, GB Mining adopted the view that it was
no longer bound
by the settlement and claimed all of the expenditure
incurred. Counsel for the Commissioner submitted that GB Mining had
furnished
insufficient information and on this basis the additional
tax was justified. In my view, this does not amount to an omission or
furnishing incorrect information and the imposition of the additional
tax was not justified.
[75]
In the case of the OTR amount GB Mining
originally declared that the amount in question was a loan to OTR. It
was only at a later
stage that it sought to retract this and submit
that the amount involved was expenditure incurred by GB Mining in the
production
of income. No omission or incorrect statement was made in
the tax return. When this proposition was put to counsel for the
Commissioner,
he fairly conceded that the additional tax should not
have been raised.
[76]
As regards the remaining instances where
additional tax was imposed, I am satisfied that it was correctly
imposed at an appropriate
rate. In each instance it is clear that
there was an omission or incorrect statement concerning the relevant
facts.
[77]
The appeal against the additional tax
raised in respect of the travelling expenses and OTR amount
accordingly succeeds, but fails
in respect of the additional tax
raised in respect of the remaining categories.
[78]
The court a quo ordered GB Mining to pay
the Commissioner’s costs. It was only entitled to make this
order if the Commissioner
applied for it in terms of s 83(17) of the
Act. Counsel for the Commissioner conceded that no application had
been made by the
Commissioner and the costs order should be set
aside. He did, however, ask for the costs of the appeal including the
costs of two
counsel. However, when regard is had to the fact that
the appellant has in this appeal succeeded in having the additional
tax in
respect of the OTR amount and the travelling expenses entirely
remitted, which constitutes a total saving of R352 911.44, a
suitable order, having regard to the significance of this in the
context of the case as a whole, is that the Commissioner should
be
ordered to pay 10 per cent of GB Mining’s costs in this appeal.
[79]
The following order is made:
1 The appeal is
dismissed save in the respects set out in paragraphs 2 and 3 below.
2 The penalties
raised by the respondent in respect of the OTR amount and the
travelling expenses are remitted in their entirety.
3 The order
directing the appellant to pay the respondent’s costs in the
court a quo is set aside.
4
The respondent is ordered to pay 10 per cent of the appellant’s
costs in the appeal.
K
G B SWAIN
ACTING
JUDGE OF APPEAL
Appearances:
For
the Appellant: E M Du Toit SC
Instructed
by:
Manong Badenhorst
Abbot Van Tonder, Johannesburg
Phatsoane
Henney Attorneys, Bloemfontein
For the Respondent:
A Subel SC (with him J Boltar)
Instructed
by:
The
Commissioner for the South African Revenue Service, Pretoria
State
Attorney, Bloemfontein
[1]
Section
86(A)(2)(
b
)
(i)
of the Income Tax Act 58 of 1962. (This section has been repealed.
Section 133(2)
(b)(i)
of the
Tax Administration Act 28 of 2011
is now the applicable
provision).
[2]
Section
81 of the Act provides that:
‘
(1)
Objections to any assessment made under this Act shall be made in
the manner and under the terms and within the period prescribed
by
this Act and the rules promulgated in terms of section 107A by any
taxpayer who is aggrieved by any assessment in which that
taxpayer
has an interest.’
[3]
Section
93(1)(d)
of the
Tax Administration Act 28 of 2011
now provides that
SARS may make a reduced assessment if satisfied there is an error in
the assessment as a result of an undisputed
error by SARS or by the
taxpayer in a return.
[4]
See
Jooste
v Score Supermarket Trading (Pty) Ltd (Minister of Labour
intervening)
1999 (2) SA 1
(CC) and
Parbhoo
and others v Getz NO and another
1997 (4) SA 1095
(CC).