Defy Ltd v Commissioner for the South African Revenue Services (192/09) [2010] ZASCA 11; 2010 (5) SA 416 (SCA) ; [2010] 3 All SA 275 (SCA) (12 March 2010)

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[2010] ZASCA 11
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Defy Ltd v Commissioner for the South African Revenue Services (192/09) [2010] ZASCA 11; 2010 (5) SA 416 (SCA); [2010] 3 All SA 275 (SCA); 72 SATC 99 (12 March 2010)

THE SUPREME COURT
OF APPEAL
REPUBLIC OF SOUTH
AFRICA
JUDGMENT
Case No: 192/09
DEFY
LIMITED
Appellant
and
THE COMMISSIONER FOR
THE SOUTH AFRICAN
REVENUE
SERVICE Respondent
Neutral
citation:
Defy
v SARS
(192/09)
[2010] ZASCA 11
(12 MARCH 2010)
Coram:
NAVSA,
NUGENT, HEHER, BOSIELO and LEACH JJA
Heard:
19
FEBRUARY 2010
Delivered:
12
MARCH 2010
Summary:
Secondary
tax on companies – exemption of dividend falling under
s 64B(5)(c)(ii) – whether moneys distributed constituted
‘profit of a capital nature’.
ORDER
On appeal from: Tax Court (Murphy
J and
Messrs
Crafford-Lazarus and Matlala)
sitting as court of first instance.
The appeal is dismissed with
costs that include the costs of two counsel.
JUDGMENT
NUGENT JA (NAVSA, HEHER, BOSIELO
and LEACH JJA
concurring)
[1] This appeal concerns the
liability of the appellant (Defy) for the payment of secondary tax on
companies (STC). The Commissioner
assessed Defy for STC in the sum of
R28 811 074 for the dividend cycle 16 May 2004 to 27
January 2005. Defy objected to
the assessment but the Commissioner
disallowed the objection. An appeal to the tax court (Murphy J and
Messrs Crafford-Lazarus and
Matlala) failed and thus the present
appeal.
[2] STC is a tax on dividends
declared by resident companies. It is imposed by s 64B (forming
part of Part VII) of the Income
Tax Act 58 of 1962. It is as well to
set out the material provisions of that section and to outline their
general effect before turning
to their application to the facts of
this case.
[3] Part VII was introduced into
the Act in 1993
1
and has since been amended from time to time. At the time that is
material to this appeal s 64B took the following form (omitting
provisions that are not now relevant):
‘
(2) There shall
be levied and paid for the benefit of the National Revenue Fund a
tax, to be known as the secondary tax on companies,
which is
calculated at the rate of 12,5 per cent of the net amount, as
determined in terms of subsection (3), of any dividend declared
on or
after 14 March 1996 by any company which is a resident.
(3) Subject to
subsection (3A), the net amount of any dividend referred to in
subsection (2) shall be the amount by which such dividend
declared by
a company exceeds the sum of any dividends which have accrued to that
company during the dividend cycle in relation to
such firstmentioned
dividend: Provided that –
(a) …
(b) in the
determination of the net amount of any dividend distributed in the
course or in anticipation of the liquidation or winding
up or
deregistration of a company, there shall be allowed as a deduction
any dividend contemplated in subsection (5)(c) which has
during the
current or any previous dividend cycle accrued to the company.
(3A)
2
In
determining the sum of the dividends which have accrued to a company
as contemplated in subsection (3), no regard must be had
to –
any dividend
contemplated in subsection (5)(b), (c) or (f).
–
(d) …
(4) …
(5) There shall be
exempt from the secondary tax on companies –
(a) – (b) …
(c) so much of any
dividend distributed in the course or in anticipation of the
liquidation or winding up or deregistration of a
company, as is shown
by the company to be a –
(i) …
(ii) distribution of
profits of a capital nature (other than capital profits attributable
to the disposal of any asset on or after
1 October 2001 which capital
profits must, in the case of an asset acquired before that date, be
limited to the amount of profit
determined as if that asset had been
acquired on 1 October 2001 for a cost equal to the market value of
that asset on that date determined
in the manner contemplated in
paragraph 29 of the Eighth Schedule): …
(iii) …
–
(e) …
any dividend
declared by a company which accrues to a shareholder (as defined in
Part III) of that company if –
(i) - (iv) …
(v) the company
declaring the dividend elects the exemption under this paragraph to
apply …’
[4] The word ‘dividend’ is
generally used to describe a distribution of profits to shareholders
but it has an extended meaning
for purposes of the Act. The
definition in the Act is lengthy and complex. It is sufficient for
present purposes to say that it means,
subject to its various
qualifications, ‘any amount distributed by a company to its
shareholders’. One of the qualifications is
that it does not
include (subject to provisos that are not material) money that is
given by a company to its shareholders ‘to the
extent that [it]
represents a reduction of the ... share premium account of a
company’.
3
[5] It is important to bear in
mind that STC is a withholding tax. The tax is levied upon a declared
dividend and the burden of the
tax will naturally be borne by the
recipient of the dividend. The company merely withholds the tax at
its source and pays it to the
Commissioner.
[6] Once a dividend has been
taxed, and the remaining amount of the dividend has been paid to a
company shareholder, the recipient
company may wish to pass the
benefit of the dividend to its own shareholders. It will do so by
declaring a dividend of its own in
the amount of the moneys that it
received. If that dividend were itself to be taxed then the
beneficiary of the original dividend
(the recipient of the second
dividend) would be burdened by double taxation.
[7] To avoid that occurring, STC
is levied on only the ‘net amount’ of a dividend that is
declared. Under subsection (3) (leaving
aside for the moment the
qualification in subsection (3A)) the ‘net amount’ of a declared
dividend is the amount of the dividend
(the outgoing dividend) less
the sum of all dividends that have accrued to the company (the
incoming dividends) during the same dividend
cycle.
[8] Thus if a company pays R100
to its holding company in settlement of a declared dividend (after
withholding STC), and the holding
company distributes that income to
its own shareholders by declaring a dividend of R100, the ‘net
amount’ of the holding company’s
dividend will be nil. The
ultimate beneficiary of the original dividend will bear the burden
only of the tax that was withheld at
its source.
[9] Subsection (5) exempts
certain dividends from STC. The effect of the various exemptions will
differ according to their purpose.
I confine myself in this judgment
to the exemption under subsection (5)(c)(ii).
[10] A dividend qualifies for
exemption under subsection 5(c)(ii) if it is distributed ‘
in
the course or in anticipation of the liquidation or winding up or
deregistration of a company’ and if it is shown by the company
to
be a ‘distribution of profits of a capital nature’ (subject to a
qualification that is not directly material
4
).
[11] I deal later in this
judgment with what is meant by ‘profits of a capital nature’. For
the moment I deal with the effect
that is brought about by exempting
a profit of that kind. (For convenience I will abbreviate the phrase
‘profit of a capital nature’
to ‘capital profit’.)
[12] If a shareholder (assuming
it to be a company) were to receive a dividend that has been exempted
from STC, and it were to pass
the benefit of that dividend to its own
shareholder, then on the ordinary application of the mechanism of
subsection (3), that shareholder
would enjoy the benefit of the
dividend free from tax. The qualification in subsection (3) prevents
that occurring by bringing subsection
(3A) into play. That subsection
provides that ‘no regard must be had’ to a dividend that was
exempt under subsection (5)(c) when
‘determining the sum of the
[incoming] dividends which have accrued to a company’ for the
purpose of calculating the ‘net amount’
of its dividend.
[13] Thus if a capital profit of
R100 is distributed by a company in anticipation of its winding up it
will be exempt from tax. But
if the recipient company were to
distribute that receipt (and no more) to its own shareholder by
declaring a dividend of R100, the
‘net amount’ of its dividend
will be R100 (the dividend, less incoming dividends, but leaving out
of account the exempt incoming
dividend) and will attract tax. The
effect is to allow a subsidiary to distribute its capital profits to
its holding company in anticipation
of its winding up, but to levy
the tax on a further distribution of the money by the holding
company.
[14] However, a holding company
that has received such a capital profit from its subsidiary might
itself be wound up. Naturally,
any moneys that are earned by it as a
capital profit in anticipation of its winding up may be distributed
to its shareholder free
of tax (because it is exempt under subsection
5(c)(ii)). But the proviso to subsection (3)(b) enables it also to
pass on to its shareholder
the benefit of the capital profit that was
made by the subsidiary. It does so by allowing the holding company to
deduct the dividend
received from the subsidiary from the ‘net
amount’ of the dividend that the holding company declares.
[15] Thus, if the subsidiary has
earned and distributed to its holding company a capital profit of
R100 (free of tax), and the holding
company has itself earned a
separate capital profit of R200 in anticipation of its winding up,
and it distributes all those moneys
(and no more) to its shareholder,
the net amount of its R300 dividend will be nil,
5
and the dividend will be received by the shareholder free of tax. If
that shareholder were to distribute those moneys further by
declaring
its own dividend then that dividend will attract the tax.
[16] I think the examples
demonstrate that, when a series of companies in a hierarchy are to be
wound up, the exemption and its related
provisions operate to enable
the ultimate shareholder in the series to receive, free of tax, the
capital profits made by all of them
in anticipation of their winding
up. But any further distribution of the moneys is treated as a
taxable dividend and will be taxed
upon that distribution occurring.
[17] In this case we are
concerned with a subsidiary and a holding company that have both made
distributions in anticipation of their
winding up, which is the
example in paragraph 15 above.
[18] It will be apparent from
that example that if the capital profit of R100 that was earned by
the subsidiary and distributed to
the holding company is, upon
receipt by the holding company, equally a capital profit earned by
the holding company (assuming that
is capable of occurring), then
upon distribution of that R100 by the holding company (without more)
the ‘net amount’ of its dividend
will be minus R100.
6
The shareholder will thus receive the dividend not only free of tax,
but together with what I might call a ‘tax credit’.
[19] If that is the only
distribution that the shareholder receives then the existence of the
‘tax credit’ will not be significant.
But if the holding company
were simultaneously to distribute a taxable amount of R100 then the
shareholder will receive both portions
of the dividend free of tax.
In effect, the tax that is payable on the taxable portion will be set
off against what I have called
the ‘tax credit’.
[20] It would be curious indeed
if a shareholder who receives R100 that is taxable were to be
relieved of that tax on account of simultaneously
receiving R100 that
is not taxable. Needless to say, that will occur only if the capital
profit that it receives from the subsidiary
were equally to be a
capital profit earned by the holding company. The Commissioner says
that is not possible. Defy says that it
is possible, and that it has
occurred in this case. The tax court agreed with Defy (but
nonetheless found for the Commissioner, which
is another curiosity in
this case).
[21] That is what this case is
about. Defy received from its subsidiary a distribution, in
anticipation of the winding up of its subsidiary,
amounting to
R343 811 457 (excluding an amount that it received in
repayment of a loan). Included in that amount was R206 080 509
that was earned by the subsidiary as a capital profit. Defy
distributed that sum of R343 811 457 to its shareholders,
together
with other money that was taxable. It says that the R343 811
457 that it received from its subsidiary, after deduction of the
cost
of acquiring the subsidiary, was a capital profit that it earned (and
thus exempt from tax
7
).
If that is so then, naturally, the deduction from that amount, under
subsection (3)(b), of the capital profit that it received
from its
subsidiary yields a negative sum of R206 080 509, and that
produces what I have called a ‘tax credit’. That
‘tax credit’
sets off the tax that is payable on the taxable moneys that were
distributed, and that is why no tax is payable
on the dividend.
[22] If that sounds internally
contradictory it is nonetheless the case that is advanced by Defy.
But let me say immediately that
I do not suggest that Defy has acted
improperly in any way. It says that if the statute, upon its proper
construction, has that effect,
then the Commissioner can have no
proper cause for complaint, and that must be correct. The question in
this case is whether it has
properly construed the statute.
[23] The dispute arises from a
decision by the shareholders of Defy to dispose of its business to
Clidet No 553 (Pty) Ltd and then
to wind up the company. Defy was an
investment company. Its assets comprised all the shares in a number
of subsidiaries and it can
be accepted that those shares were capital
assets. One of the subsidiaries was Defy Appliances (Pty) Ltd, which
was the main operating
company in the group. (I will refer to that
company as Appliances.) The identity of the other subsidiaries is not
material.
[24] The objective of winding up
Defy might ordinarily have been achieved by causing Defy to sell to
Clidet the shares in all the
subsidiaries and to distribute the
proceeds of the sale to the shareholders, and then winding up the
remaining shell. Indeed, that
was the approach that was adopted in
relation to the subsidiaries other than Appliances.
8
But so far as Appliances was concerned the shareholders chose instead
that Appliances should sell the whole of its business to Clidet
as a
going concern, that Appliances should then distribute the proceeds to
Defy (after paying liabilities), leaving Appliances as
a shell. Upon
receipt of the proceeds Defy would in turn distribute them to its
shareholders and Defy would be wound up (presumably
after dissolving
Appliances).
[25] To achieve those objectives
an indivisible agreement of sale was concluded between the relevant
parties. In terms of that agreement
Defy sold to Clidet all its
shares in the subsidiaries other than Appliances for R550 298 138,
and Appliances sold to Clidet
the whole of its business as a going
concern. After settling its liabilities Appliances then paid to Defy
the balance of the proceeds
of the sale of its business amounting to
R426 152 780 thereby denuding itself of all its assets.
[26] Of that amount R82 341 323
was paid in settlement of Defy’s loan account, R68 811 457
was paid in reduction
of Appliance’s share premium account, and the
balance was a distribution to Defy of profits made by Appliances –
revenue profits
of R68 919 490 and capital profits of
R206 080 510.
[27] It is not in dispute that
the distribution by Appliances, which was made in anticipation of its
winding up, did not attract STC.
Of the moneys that were paid by
Appliances to Defy R82 341 was the repayment of a loan (which is
not a dividend), R68 811 457
was paid in reduction of its
share premium account (which is not a dividend), the revenue profit
of R68 919 490 was exempt
from STC under subsection 5(f)
(why that was so is not material), and the capital profit of
R206 080 510 was exempt
from STC under subsection 5(c)(ii).
[28] Defy then distributed to its
shareholders the sum of R498 000 000 as a dividend. The
Commissioner takes the view that
R230 488 595 of that
dividend was subject to STC and he assessed Defy for tax on that
amount in the sum of R28 811 074.
[29] The Commissioner accepts
that the sale by Defy of its shares in the subsidiaries yielded an
exempt capital profit of R61 430 895.
He also accepts that
the amount of R206 080 510 that was exempt from STC when
distributed by Appliances is deductible from
the dividend under
subsection (3)(b). Thus his calculation of the ‘net amount’ of
the dividend can be tabulated as follows:
Distribution R498 000 000
Capital profit on sale of shares
exempt under subsection
(5)(c)(ii) (
61 430 895)
Taxable Dividend R436 569 105
Incoming exempt dividend
deductable
under subsection
(3)(b) (
206 080 510)
Net Amount of
Dividend R230 488 595
[30] Defy naturally agrees with
the Commissioner that its profit on the sale of the subsidiaries is
exempt under subsection (5)(c)(ii)
though initially it calculated the
profit to be R59 824 897. The difference between Defy and
the Commissioner on that score
is not significant. Defy accepts the
figure calculated by Commissioner. In what follows I will nonetheless
use Defy’s figure of
R59 824 897 to avoid introducing
confusion. Defy and the Commissioner are also at one that the exempt
dividend received
from Appliances (R206 080 510) is
deductible under subsection (3)(b). But Defy says that R305 311 541
9
of its dividend was a distribution of a capital profit that it earned
and is therefore exempt from tax under subsection (5)(c)(ii).
Thus it
tabulates the calculation of the ‘net amount’ of its dividend as
follows (I have simplified the language that it used):
Distribution R498 000 000
Capital profit on sale of shares
exempt under subsection
(5)(c)(ii) (59 824 897)
Capital profit on investment in
Appliances
exempt under Subsection
(5)(c)(ii)
(305 311 541)
Taxable Dividend R132 863 562
Incoming exempt dividend
deductable
under subsection
(3)(b) (
206 080 510)
Net Amount (negative) (R73 216
948)
[31] The various tabulations that
have been presented by or on behalf of Defy from time to time reflect
the ‘net amount’ of its
dividend to be nil. No doubt that was
because only R132 863 562 of the deduction has practical
significance for the purpose
of calculating STC. But I have presented
the true outcome to illustrate the point that I made earlier, which
is that the effect of
both exempting its distribution of R206 080 590
and deducting the equivalent amount that was received from
Appliances,
results in what I have called a ‘tax credit’. Portion
of the ‘tax credit’ offsets the tax that would ordinary have been
payable
on the taxable portion of the dividend.
[32] In its grounds of appeal to
the tax court Defy tabulated the calculation of its alleged capital
profit as follows (once more
I have simplified the language):
Dividend received from
Appliances R275 000 000
Share Premium received from
Appliances
68 811 457
Total Distribution from
Appliances R343 811 457
Less: Original cost of [Defy’s]
investment
in Appliances
(28 451 459)
Total Capital Profit Realised by
Defy R315 359 998
It went on to attribute the
earning of that profit to the periods before and after 1 October 2001
(as envisaged by the qualification
in subsection v(5)(c)(ii))
and attributed R305 311 541 to the latter period. We need
not concern ourselves with that
part of its calculation. The real
dispute is whether it earned a capital profit of R315 359 998
in the first place.
[33] It will be seen that the
case advanced by Defy is relatively straightforward. Put simply, Defy
says that it paid R28 451 459
to acquire the shares of
Appliances, and has received R343 811 457 in return, thus
it has profited on its capital investment
in the amount of
R315 359 998.
[34] It might indeed be said, in
general terms, that Defy has profited on its investment, but that is
not what we are concerned with
in this case. Moneys are not exempt
from STC merely because an arithmetic profit was made by the company
in an equivalent amount.
The subsection identifies money that is
exempt from STC with reference to the character of the moneys
concerned. The moneys are exempt
from tax if they have been yielded
to the company as a capital profit, and it is as well to have clarity
on what that means.
[35] The word ‘profit’ is
capable of being used in various ways to describe a gain, or
advantage, or benefit of some kind,
10
which is how Defy uses it. But like all language that is used in a
statute, it must be construed in its particular context. Subsection
(5)(c)(ii) is concerned with companies that divest themselves of
their residual assets in preparation for the dissolution of the
company. They do that by converting the assets into cash (or other
distributable form), so far as that is necessary, and then
distributing
the cash to their shareholders. In that context I think
it is clear that the word ‘profit’ has meaning 5. assigned to it
by the
Shorter Oxford Dictionary – ‘the pecuniary gain in any
transaction’ – and that the transactions to which it relates are
the
disposal of assets. It goes without saying that the profit so
earned will be ‘of a capital nature’ if the asset that yielded
the profit was a capital asset.
11
In short, the subsection exempts from taxation the pecuniary gain
that is earned upon disposal by the company of a capital asset.
[36] While offering no
alternative meaning of the phrase counsel for Defy nonetheless
submitted that the disposal by the company of
an asset is not a
prerequisite for the earning of a capital profit. In support of that
construction much was made in the heads of
argument of the reference
to the ‘disposal of any asset’ in the parenthesised qualification
in subsection (5)(c)(ii) (the
qualification relating to the
disposal of assets after 1 October 2001) in contradistinction to the
absence of any such reference
in the preceding words. The argument,
as I understand it, was that the inference to be drawn from the
absence of a reference to assets
in those preceding words is that the
subsection contemplates that a ‘profit of a capital nature’ might
be earned without disposing
of assets. It is only if assets are
disposed of, so the argument went, that the qualification comes into
play.
[37] I do not think that
inference is warranted. The qualification describes the basis upon
which a capital profit is to be attributed
to the periods before and
after 1 October 2001. The basis that has been chosen for that
attribution could not have been described
without reference to the
assets that yielded the profit. And if a capital profit is, by
definition, yielded only by the disposal
of an asset, then a
reference to the disposal of assets in the language that precedes the
qualification would be superfluous.
[38] Far from supporting Defy,
the qualification seems to me to operate against it. For if a capital
profit as envisaged by the subsection
is capable of being earned
without disposing of an asset, then I think it is remarkable that the
drafter did not provide for how
the profit was to be attributed if it
was earned over a period before and after 1 October 2001, bearing in
mind the purpose of the
qualification.
[39] We were also referred to
Bailey v Commissioner
for Inland Revenue
,
12
New Mines Limited v
Commissioner for Inland Revenue
,
13
and
Income Tax Case No.
101,
14
which were said to support the proposition that a profit of a capital
nature might be earned other than by the disposal of an asset.
The
courts were concerned in those cases with the question whether the
moneys concerned were revenue
–
and not profits
–
of a capital nature, for purposes of normal income tax. In the
present context those words are not interchangeable, though they were
treated as such in some of the submissions that were made before us.
We are not concerned with whether the moneys that were received
by
Defy constitute revenue of a capital nature for purposes of normal
income tax. We are concerned with whether they were earned
as a
capital profit for purposes of STC.
[40] I have already said that
counsel for Defy offered no alternative meaning of the phrase. Nor
was he able to proffer an example
of a capital profit that is earned
other than by the disposal of a capital asset (leaving out of account
this case). In my view that
is because there is none. I think it is
clear that the term is used in the subsection to mean, as I expressed
it earlier, the pecuniary
gain from the disposal of a capital asset
(the proceeds after deduction of the cost of acquiring the capital
asset).
[41] In this case the money was
not a gain from the disposal by Defy of an asset. Defy retained the
shares that it held in Appliances.
The court below said that Defy
‘
realised the value in
the shares by selling the business as a going concern’ and that ‘as
such the profits from the realization
of that value were profits of a
capital nature’. It was, of course,
Appliances,
and not Defy, that sold the business, but that is by the way. So far
is it was suggested that Defy disposed of the ‘value’
of its
asset that is not correct. The ‘value’ of an asset is not
property that is capable of being bought and sold. It is an
attribute
that is inherent in the asset. Its value might rise or fall,
depending upon the market for the asset, and its value might
even be
nil if the asset has no market at all, but an asset and its value are
inseparable. It is true that the money compensated
for the fall in
value of the shares but that is another matter.
[42] No doubt it was because Defy
could not be said to have earned a profit, in the proper sense of the
word, that the moneys were
described variously by counsel for Defy,
and by the court below, as having the ‘effect’ of a capital
profit, or ‘amounting
to’ a capital profit. The court below said
that the approach taken by the Commissioner was ‘too formalistic’.
It said that
there was ‘in effect a disposal of the assets
underpinning the value of the shares’ and ‘there was in substance
a disposal
of the shares’. But none of that is good enough. The
subsection exempts moneys that are a capital profit. It does not
exempt, in
addition, moneys that are not a capital profit, but have
the effect of being one.
[43] Those attempts to liken the
moneys to a profit seem to me only to draw attention to an
insurmountable hurdle for Defy. I have
pointed out that the
subsection identifies money that is exempt from taxation with
reference to the character of the money, and that
is determined by
the nature of the transaction that yielded it. The subsection does
not have one meaning on one occasion and a different
meaning on
another occasion. Moneys cannot be exempt when received by one
company, and also exempt when received by another company,
unless the
nature of the transaction that yielded it on each occasion is the
same. The insurmountable difficulty for Defy is that
it received its
money in payment of a dividend, and Appliances did not. It follows
inexorably that the moneys received by each cannot
both be exempt.
[44] The moneys earned by
Appliances were exempt because they were the gain that was yielded
from the disposal of capital assets.
The moneys received by Defy were
not yielded in the same way. Defy received its moneys in extinction
of its claim to be paid a declared
dividend in an equivalent amount.
It might be said that the claim was an asset that was disposed of in
return for the money but Defy
made no gain on the exchange and the
claim was in any event not a capital asset.
[45] There is a matter that I
need deal with only briefly before I conclude. The court below found
that the money received by Defy
as a distribution of the revenue and
capital profits of Appliances, after deduction of the cost of the
investment, had the effect
of being a capital profit and was
therefore exempt. (It found that the money received in reduction of
the share premium was not.)
One might have thought that in those
circumstances it would have found against the Commissioner. But it
was concerned at the result
that its conclusions had led it to, which
was what it called ‘double favourable treatment’ of the
exemption. The grounds upon
which it found for the Commissioner
instead were expressed as follows (in para 41):
‘
The problem of
double favourable treatment was not adequately canvassed by counsel
for the Commissioner during argument, even though
we invited
submission on the question. To us the matter is of critical
importance. It strikes us that the provisions of section 64B
read
contextually and purposively as a whole disclose a policy consistent
with the Commissioner’s submission that double favourable
treatment
of the same amount is intended only to the limited extent of a
deduction as opposed to a second exemption, whenever the
holding
company that has received an exempt liquidation dividend in turn
chooses to go into liquidation.’
[46] I have some difficulty with
the idea that a construction of the parts of a statute can produce
one result but a construction
of the sum of its parts can produce
another. It needs to be born in mind that a statute is not a
statement of policy by the legislature
that leaves the detail to be
filled in by a court. It is policy that has been translated into law.
If it has not been adequately
translated I do not think that it is
for courts to rewrite the statute. That would seem to me to strike at
the heart of the rule
of law.
[47] It seems to me that the
error of the court below was to treat the subsection as if it
exempted moneys that were yielded to a
company as a capital profit
(the moneys yielded to Appliances) as well as moneys that had an
equivalent effect (the moneys received
from Appliances), whereas the
subsection does not exempt both. It was by overlooking the
distinction – formalistic though the distinction
might be thought
to be – that the court was driven to the result at which it rightly
baulked.
[48] I agree with the submission
by counsel for Defy that the reasons given by the court below for its
order do not withstand scrutiny.
But an appeal lies against the order
made by a court rather than its reasons for doing so. For the reasons
I have given I do not
think that any of the moneys that are now in
issue were yielded to Defy as a capital profit and they were thus not
exempt from STC.
That they had the effect of earning it a profit is
immaterial. The subsection exempts capital profits and not also
moneys that are
not capital profits but look much the same. In those
circumstances the order of the court below was correct, albeit for
the wrong
reasons.
[49] Counsel for Defy reminded us
that the tax court (and by extension this court) is confined by Rule
12 to the issues defined in
the statement of the assessment read with
the grounds of appeal. He submitted that the grounds upon which I
have reached my conclusion,
which were the subject of debate in
argument before us, were not the grounds upon which the Commissioner
disallowed the objection.
I find that submission to be astonishing.
His own heads of argument were directed substantially to the matters
that I have dealt
with in this judgment, as were those that were
filed on behalf of the respondent. So was Defy’s notice of appeal
to the tax court,
and the judgment of that court.
[50] As for the ground upon which
the Commissioner disallowed the objection, he said that a dividend
is, by its nature, not a capital
profit. It needs to be borne that
the case might have been dealt with in either of two ways. If apples
are exempt from tax, but pears
are not, and a
pear
is presented for exemption, one might examine the characteristics of
an apple to see whether those characteristics are possessed
by a
pear, which is the approach that I have adopted. The Commissioner
approached the matter more directly. He said that if what
has been
presented is a pear, then it is certainly not an apple, whatever
characteristics an apple might have. But the two approaches
come to
the same thing.
[51] The appeal is dismissed with
costs that include the costs of two counsel.
___________________
R W NUGENT
JUDGE OF APPEAL
APPEARANCES
:
For appellant: A R Bhana SC
J Boltar
Instructed by:
Webber Wentzel, Johannesburg
McIntyre & Van der Post,
Bloemfontein
For respondent: P Ginsburg SC
T Machara
G Goldman
Instructed by:
The State Attorney, Pretoria
The State Attorney, Bloemfontein
1
By s 34(1) of Act 113 of 1993.
2
Inserted by s 40(1)(b) of Act 32 of 2004 with effect from 24
January 2004.
3
Subsection (f) of the definition of a ‘dividend’.
4
The qualification is designed to take account of capital gains tax,
which was introduced by the Eighth Schedule to the Act with
effect
from 1 October 2001.
5
The R200 capital profit of the holding company is exempt from tax.
The remaining R100 is a taxable dividend, from which the R100
dividend declared by the subsidiary is to be deducted under
subsection (3)(b).
6
The outgoing dividend will be a capital profit of the holding
company that is exempt from tax under subsection (5)(c)(ii), and
from the declared dividend of nil the incoming dividend of R100
falls to be deducted under subsection (3)(b) leaving a negative
balance of R100.
7
Subject to an adjustment that was required to be made in accordance
with the qualification to subsection (5)(c)(ii).
8
Except for certain dormant subsidiaries.
9
I deal later with how that amount has been calculated.
10
Shorter Oxford Dictionary
: 1. The advantage or benefit (of a
person, community, or thing); use, interest; the gain, good,
well-being. 2. The advantage or
benefit of or resulting from
something ; 3 … 4. That which is derived from or produced by some
source of revenue; proceeds, returns.
5. The pecuniary gain in any
transaction; the excess of returns over the outlay of capital.’
11
‘[An] asset acquired with a view to holding it either in a
non-productive state or to derive income from the productive use

thereof, and in fact so held.’ Per Corbett JA in
Elandsheuwel
Farming (Edms) Bpk v SBI
1978 (1) SA 101
(A) at 118D.
12
1933 AD 204.
13
1938 AD 455.
14
3 SATC 324.