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[2010] ZASCA 10
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TCT Leisure (Pty) Ltd v Commissioner for the South African Revenue Services (59/09) [2010] ZASCA 10; [2010] 3 All SA 325 (SCA); 72 SATC 187 (12 March 2010)
Links to summary
THE
SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH
AFRICA
JUDGMENT
Case No: 59/09
In
the matter between:
TCT
LEISURE (PTY) LTD
Appellant
and
THE
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE
SERVICES
Respondent
Neutral citation:
TCT
Leisure v The Commissioner for the South
African
Revenue Services
(59/09)
[2010] ZASCA 10
(12
March
2010).
Coram:
HARMS DP, CLOETE
et
CACHALIA JJA
Heard: 19
February 2010
Delivered: 12
March 2010
Summary:
VAT Act 89 of 1991;
'equity security' exemption s 12; the goods 'supplied' comprised
preferent shares and other discrete rights; because
the rights were
not included in the shares, the 'equity security' exemption in
s 12(a) was not applicable; the turnover from
the sale of the
rights was therefore subject to VAT.
______________________________________________________________
ORDER
______________________________________________________________
On appeal from: Special Tax Court (Durban) (Hurt J
presiding):
The appeal is dismissed with costs including the costs
of two counsel.
______________________________________________________________
JUDGMENT
______________________________________________________________
CLOETE JA (HARMS DP
et
CACHALIA JA concurring):
[1] The Holiday Club is an organisation which has for
some time sold holiday accommodation commonly known as 'time-share'
to members
of the public. The organisation was restructured in 1995.
Before that date, VAT was paid on the product it supplied and
thereafter,
it was not. The cardinal question in this appeal is
whether VAT was payable in respect of the product sold after the
restructuring.
[2] The various components of the organisation making up
The Holiday Club from time to time, have varied. In 1993 Leisure
Property
Trust ('the trust') was formed. The trust acquired rights to
accommodation introduced to it by TCT Leisure (Pty) Ltd (to which,
without
begging the question, I shall refer as 'the taxpayer') and in
return for which the trust issued 'points rights' to the taxpayer.
These points rights conferred a contractual right of occupation
enforceable against the trust exercisable subject to defined
conditions.
The taxpayer sold the points rights to members of the
public. It was common cause before this court that these transactions
constituted
a 'taxable supply' on which VAT was payable; and VAT was
in fact paid. The relevant provisions of the Value-Added Tax Act 89
of 1991
read:
'7(1) Subject to the exemptions,
exceptions, deductions and adjustments provided for in this Act,
there shall be levied and paid for
the benefit of the National
Revenue Fund a tax, to be known as the valued-added tax â
(a) on the supply by any vendor
of goods or services supplied by him on or after the commencement
date in the course or furtherance
of any enterprise carried on by
him;
. . .
calculated at the rate of 14 per
cent on the value of the supply concerned . . . .'
1
[3] When The Holiday Club was restructured in 1995 a new
company, Leisure Holiday Club Ltd ('LHC'), was formed. The trust
became its
sole ordinary shareholder. The taxpayer transferred
properties and rights of use in properties comprising holiday
accommodation,
which it owned, to LHC for a consideration of R27,5m
consisting of the issue to the taxpayer of 62 500 preference
shares in
LHC with a nominal value of one cent each ('the shares')
and 62 500 'debentures'
2
with a face value of R439,99 each. These properties and rights of use
in properties were then acquired by the trust from LHC; and
the
taxpayer began selling the shares (and possibly the 'debentures')
which it had acquired in LHC, to members of the public. It
is in
respect of the turnover from these sales, for the financial years
ending February 1998 to February 2002, that the Commissioner
issued
the revised assessments levying VAT which are at issue in this
appeal.
[4] The Commissioner raised the assessments on the basis
that the taxpayer dealt in 'timeshare interests' which were included
in the
definition of 'fixed property' in the VAT Act and,
accordingly, that those interests were 'goods' and their supply fell
within the
purview of s 7(1) of the Act.
3
The basis of the assessments was unanimously upheld by the Special
Tax Court, Durban (Hurt J presiding). Leave to appeal to this
court
was subsequently granted in terms of s 34 of the VAT Act read with s
86A(2)(b)(i) and s 86(5) of the Income Tax Act 58 of 1962.
[5] Because of the view I take it is unnecessary to
consider the correctness of the basis of the order made by the
Special Tax Court
because even if the basis was incorrect, as
contended by the taxpayer (and I express no view in this regard), the
onus was on the
taxpayer, in terms of s 37 of the VAT Act,
4
to prove that the turnover from the sales was nevertheless exempt.
This the taxpayer sought to do by arguing that what was supplied
to
the members of the public were 'financial services' in the form of
'equity securities', as defined in s 2, which were exempt from
VAT in
terms of s 12(a) of the Act. Those provisions read inter alia:
'12. The supply of any of the
following goods or services shall be exempt from the tax imposed
under s 7(1)(a):
(a) The supply of any financial
services . . . .'
'2(1) For the purpose of this
Act, the following activities shall be deemed to be financial
services:
. . .
(d) the issue, allotment or
transfer of ownership of an equity security . . .
. . .
(2) For the purposes of subsec
(1) â
. . .
"equity security"
means any interest in or right to a share in the capital of a
juristic person . . . .'
[6] In the words of counsel who drew the heads of
argument on behalf of the taxpayer:
'The essential question is
whether the basis of the scheme was changed [in 1995] to one in which
"shares" rather than "points"
were sold.'
Put differently, in order to succeed, the taxpayer would
have had to show that the occupation rights formed part of the bundle
of
incorporeal rights comprising the shares in LHC which the taxpayer
sold to members of the public. The source of such rights could
only
be found in the memorandum or articles of association of LHC
5
or in any valid resolution passed in accordance with the memorandum
and articles setting out the rights attaching to the shares to
be
issued pursuant to the resolution.
6
[7] At the time LHC was incorporated, the terms
governing the shares were set out in clause 3 of its original
articles of association.
That clause gave the right to shareholders
to use the property of the company in the following terms:
'3(a) The preference shareholder
shall:
1. Be entitled to use any
property acquired by the company for leisure or holiday purposes in
accordance with a schedule of use to
be prepared by the directors of
the company, which schedule shall ensure that each shareholder has
equal access to the use and enjoyment
of the property, determined pro
rata to the number of shares held . . . .'
However by special resolution passed on 15 September
1995, which was before any shares at issue in this appeal were issued
and therefore
before the taxpayer sold such shares to members of the
public, clause 3 was amended to exclude the paragraph just quoted.
[8] The articles of LHC did not provide that the
shareholder would be entitled to an allocation of points rights pro
rata to its shareholding
â indeed, there is no link between the two
in the articles (or memorandum) of LHC. Certificates issued to
members of the public
read as follows:
'Share Certificate
This is to certify that the
undermentioned is the registered owner of fully paid Preferent Shares
of one cent each in the abovementioned
Company subject to the
Memorandum and Articles of Association of the Company.
Points Rights Certificate
Subject to the payment of
Membership and Reservation Fees, this certificate also entitles the
holder to the equivalent user rights
in Points in The Holiday Club.'
[9] Clause 1 of the standard sale agreement between the
taxpayer and members of the public read:
'The Trading Company [the
taxpayer] hereby sells to the Investor who hereby purchases in
perpetuity upon the terms and conditions
of this Agreement a share
interest in the Company [LHC], referred to as Points Rights in the
Scheme, which entitles him/her to be
credited each year with the
number of Points as determined in Schedule 2 hereto.'
Certain of the concepts are defined as follows:
'Points Rights
â means a right for the Member to be credited each year with the
number of Points specified in the Points Rights/Share Certificate;
Points/Shares
â means the instrument by means of which the Member of
Points/Shares becomes entitled to exercise the right to the Use and
Occupation
of Accommodation;
Scheme
â means a property time-sharing scheme known as "The Holiday
Club" pertaining to the Accommodation conducted in terms
of the
rules thereto;
Accommodation
â means the property, immovable or otherwise, intended for use by
any Member in any Resort, including the movables, and in respect
of
which the Accommodation is owned, leased, rented or otherwise
available from time to time by the Trust and are accordingly included
in the Scheme.'
From what I have previously said it is quite clear that
it was not the 'share interest in the Company' (ie LHC) referred to
in clause
1 of the standard sale agreement which entitled the member
of the public 'to be credited each year with points rights' which, in
turn, entitled the member to accommodation rights in terms of the
scheme. The points rights conferred such entitlement. What was
sold
were shares and points rights. As Mr Fernandes, the company secretary
of the taxpayer (called to testify on its behalf), correctly
said in
cross-examination:
'CROSS-EXAMINER: I'd just like
to put it to you for any further comment you wish to make that after
1995, if you sold shares, what
you sold were 1 cent preference shares
and points.
MR FERNANDES: And?
CROSS-EXAMINER: And points, the
same points that you'd been selling before you continued to sell but
you tagged on to it a 1 cent
preference share.
MR FERNANDES: Correct. The
points for accommodation and the shares for ownership.'
The fact that the taxpayer as a matter of commercial
practice only sold points together with shares (a fact much
emphasized in the
heads of argument and by counsel who represented
the taxpayer when the matter was argued in this court) does not
result in a merger
of the rights attaching to each, nor does it
entitle the shareholder qua shareholder to exercise the right of a
points holder or
a points holder to exercise the rights of a
shareholder.
[10] Counsel representing the taxpayer when the appeal
was argued before this court relied on the decision of the New
Zealand Court
of Appeal in
Commissioner of
Inland Revenue v Gulf Harbour Development Ltd
.
7
In that matter one member of a group of companies sold to the public
redeemable preference shares in another member that operated
a golf
club and related facilities. The rights attached to each share, which
passed to the purchaser, included membership of the
club. The issue
was whether such sales were to be treated as a supply of financial
services for the purposes of the Goods and Services
Tax Act 1985. The
high court had held that the supplier of a share in a company
operating a country club was an equity security and
that the
transaction was, therefore, an exempt supply of financial services
for GST purposes. The Commissioner's primary submission
on appeal was
that what was supplied in substance was membership of the golf club
and that this supply should attract GST; that the
equity security
element was ancillary to, or incidental to, the supply of membership
of the club; and alternatively, that there were
two supplies in the
transaction namely the supply of an equity security and the supply of
membership of the golf club. The Commissioner's
appeal was dismissed
and the Court of Appeal held inter alia that how the offer was
marketed and why people purchased the shares
was irrelevant, in that
everyone who buys a share in a company buys it to acquire the rights
attaching to that share; that the share
is in all cases a 'vehicle'
for acquisition of the rights attached to it; and the fact that in
this case the rights attached to the
shares were rights to membership
in the country club did not alter what the purchasers were acquiring.
The high court's view that
there was no evidence to support the
supply of more than the shares was confirmed and the Court of Appeal
held that the right to
membership passed not as a discrete element,
but as an incident of share ownership.
[11] In the present matter I have held that the right to
occupy was supplied not as an incident of share ownership, but as a
discrete
element (in the form of points rights). The case is for that
reason of no assistance to the taxpayer.
[12] It was in dispute whether, at the same time that
shares and, as I have found, points rights were sold to members of
the public,
the 'debentures' acquired by the taxpayer in LHC were
also sold. It is not necessary to resolve the dispute nor is it
necessary to
establish a value for the shares. The VAT Act makes
express provision for a composite supply of goods which are subject
to VAT and
those that are not in s 10(22) which reads as follows:
'Where a taxable supply is not
the only matter to which a consideration relates, the supply shall be
deemed to be for such part of
the consideration as is properly
attributable to it.'
But the Taxpayer conceded that if the rights to
accommodation supplied to members of the public did not form part of
the rights attaching
to the shares, the full consideration paid by
members of the public was subject to VAT.
[13] The appeal is dismissed with costs including the
costs of two counsel.
_______________
T D CLOETE
JUDGE OF APPEAL
APPEARANCES:
APPELLANTS: K J Kemp SC (with him I Pillay)
Instructed by Cox Yeats, Durban;
McIntyre & Van der Post, Bloemfontein
RESPONDENTS: O L Rogers SC (with him Ms A A Gabriel)
Instructed by The State Attorney, Cape Town;
The State Attorney, Bloemfontein
1
Section 7(1) has been reproduced in its present
form. The amendments to it from time to time since its commencement
are irrelevant
to the present appeal.
2
It is not necessary for purposes of the appeal to
decide whether this description is accurate.
3
In s 1 of the VAT Act, 'goods' are defined as
meaning inter alia 'fixed property'; and 'fixed property' is defined
as meaning inter
alia 'in relation to a property time-sharing
scheme, any time-sharing interest as defined in section 1 of the
Property Time-sharing
Control Act, 1983 (Act 75 of 1983), and any
real right in any such . . . time-sharing interest.'
4
Section 37 provides:
'The burden of proof
that any supply . . . is exempt from or not liable to any tax
chargeable under this Act . . . shall be upon
the person claiming
such exemption . . . and upon the hearing of any appeal from any
decision of the Commissioner, the decision
shall not be reversed or
altered unless it is shown by the appellant that the decision is
wrong.'
5
Commissioners of Inland Revenue v Crossman & others:
Commissioners of Inland Revenue v Mann & others
[1936] 1 All
ER 762
(HL) at 787;
Wessels & 'n ander v D A Wessels &
Seuns (Edms) Bpk & andere
1987 (3) SA 530
(T) at 561G-H;
Letseng Diamonds Ltd v JCI Ltd & others; Trinity Asset
Management (Pty) Ltd & others v Investec Bank Ltd & others
2007 (5) SA 564
(W) para 17.
6
Blackman et al
Commentary on the Companies Act
ad s 91 p
5â174-1; Morse et al
Palmer's Company Law
para 6.104.
7
[2003] UKPC 32
;
(2004) 21 NZTC 18
, 915.