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[2010] ZASCA 131
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Ackermans Ltd v Commissioner for South African Revenue Service, Pep Store (SA) Ltd v Commissioner for South African Revenue Service (441/09) [2010] ZASCA 131; 2011 (1) SA 1 (SCA) ; [2011] 2 All SA 125 (SCA); 73 SATC 1 (1 October 2010)
Links to summary
THE SUPREME COURT OF APPEAL OF
SOUTH AFRICA
JUDGMENT
Case No: 441/09
In the matter between:
ACKERMANS
LIMITED
..................................................................
Appellant
and
THE
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE
SERVICE
........................................................................
Respondent
In
the matter between
PEP
STORES (SA) LIMITED
............................................................
Appellant
and
THE
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE
SERVICE
.
.........................................................................
Respondent
Neutral citation:
Ackermans v CSARS
(441/09)
[2010] ZASCA 131
(1 October 2010).
Coram:
NAVSA, CLOETE, CACHALIA, MHLANTLA and
BOSIELO JJA
Heard:
20 September 2010
Delivered:
1 October 2010
Summary:
Income Tax Act 58 of 1962; meaning of
'expenditure' in s 11(a).
______________________________________________________________
ORDER
______________________________________________________________
On appeal from:
South Gauteng Tax Court
(Johannesburg) (Willis J
presiding):
The appeals are dismissed, with costs, including the
costs of two counsel.
______________________________________________________________
JUDGMENT
______________________________________________________________
CLOETE JA (NAVSA, CACHALIA, MHLANTLA and BOSIELO JJA
concurring):
[1] There are two appeals before the court: one by
Ackermans Ltd and one by Pep Stores (SA) Ltd. On 1 March 2004
Ackermans sold
its retail business as a going concern to Pepkor Ltd.
At issue in the appeal is whether by virtue of the sale agreement
Ackermans
is entitled to a deduction, in terms of s 11(a) of The
Income Tax Act 58 of 1962, of the sum of R17 174 777 in
respect
of its 2004 year of assessment. Save for the specific nature
and amount of the contingent liabilities on which the disputed
deductions
sought by Pep Stores were based, the facts of the Pep
Stores appeal are identical to the Ackermans appeal. The outcome of
the Ackermans
appeal will accordingly determine the fate of the Pep
Stores appeal. The South Gauteng Tax Court sitting in Johannesburg
(presided
over by Willis J) found against the appellants and
confirmed the assessments of the Commissioner. The appellants'
application for
leave to appeal to this court in terms of s 86A of
the Act was subsequently granted.
[2] In terms of the sale agreement Ackermans sold the
'business' to Pepkor as a going concern. The 'business' was defined
as Ackermans'
retail clothing business, including the 'business
assets', the 'liabilities' and the 'contracts' as at the effective
date (1 March
2004). The 'liabilities' were defined as meaning 'all
the liabilities arising in connection with the business, in respect
of any
period prior to the effective date, known to [Ackermans] as at
the effective date'. The liabilities were in fact R329 440 402.
They included three amounts, to which I shall for convenience refer
as 'the three contingent liabilities', namely:
(a) R9 880 666, being a contingent liability
in respect of Ackermans' contractual obligation to fund
post-retirement medical
aid benefits for its employees;
(b) R6 394 111, being a contingent liability
in respect of Ackermans' obligations to employees under a long-term
bonus
scheme; and
(c) R900 000, being a contingent liability in
respect of repair obligations undertaken by Ackermans under property
leases.
It is these three contingent liabilities, which total
R17 174 777, around which this appeal revolves.
[3] The 'purchase price' was defined as 'the amount
equal to the sum of R800m and the rand amount of the liabilities' ─
ie
R800m plus R329 440 402, totalling R1 129 440 402.
The purchase price was to be discharged as follows:
(a) as consideration for inter-company and other loans
owed to Ackermans, by an assumption by Pepkor of an equivalent amount
of
the 'accounts payable' ie amounts due by Ackermans to trade
creditors as at and in respect of the period prior to 1 March 2004;
(b) as consideration for the remaining business assets
sold,
(i) the assumption by Pepkor of the remainder of the
liabilities and
(ii) the creation of an R800m loan account owed by
Pepkor to Ackermans.
[4] In terms of the sale agreement therefore, Pepkor
assumed all of Ackermans' liabilities, including the three contingent
liabilities.
The appellants' counsel submitted, and the submission is
not contentious, that had Ackermans retained its business and
continued
to trade, the three contingent liabilities would have been
deductable in its hands as and when they became unconditional
because:
(a) salary and employee benefits paid by a taxpayer are
incurred in the production of income and are of a revenue nature.
Post-retirement
medical aid subsidies and long-term bonuses are
designed to attract and retain high quality staff and to incentivize
them to render
good service, all for the benefit of the business; and
(b) similarly, rental and related property expenditure
(eg maintenance, repair and restoration) incurred by a taxpayer for
the use
of the premises from which it trades are revenue expenses
incurred in the production of income.
[5] Ackermans does not claim an
entitlement to deduct the three contingent liabilities. This would
not have been competent since
they were still conditional at the
effective date when Pepkor assumed them. Rather, a deduction is
claimed on the basis that under
the sale agreement Ackermans incurred
expenditure (in the sense envisaged in s 11(a) of the Act) in an
amount equal to the contingent
liabilities. The submission was that
Ackermans did so by foregoing a portion of the asset purchase price
(to which it would otherwise
have been entitled) equal to the value
of the contingent liabilities. The economic effect of the sale
agreement in respect of Ackermans'
liabilities, including the three
contingent liabilities, it was contended, was that Ackermans
received, for assets sold at R1 129 440 402,
only
R800m; and that the position is the same as if Ackermans had received
R1 129 440 402 from Pepkor and paid R329 440 402
back to Pepkor for the latter to assume the liabilities as at the
effective date. The appellants' counsel submitted, with reference
to
South African,
1
English
2
and Australian
3
authorities, that when lump sum
expenditure is incurred by a taxpayer to free itself from anticipated
or contingent revenue expenses,
such expenditure is generally itself
of a revenue nature, and that this applies to Ackermans' expenditure
in the present case.
It will not be necessary to consider the
correctness of this submission.
[6] It was contended on behalf of the Commissioner that
the deduction claimed:
(a) did not constitute 'expenditure' or 'expenditure
actually incurred';
(b) was not incurred in the production of income;
(c) was of a capital nature;
(d) was not incurred for the purposes of Ackermans'
trade as required by s 23(g) of the Act;
(e) was precluded from deduction by operation of s 23(e)
of the Act (which refers to 'income carried to any reserve fund or
capitalised
in any way'); and
(f) was precluded from deduction by operation of s 23(f)
of the Act (which refers to 'expenses incurred in respect of any
amounts
received or accrued which do not constitute income as defined
in section one').
It will be necessary to deal only with the first issue
raised by the Commissioner.
[7] The Commissioner submitted that Ackermans did not
have any obligation to make a payment to Pepkor in terms of the sale
agreement,
and that the manner in which the purchase price was
discharged did not involve any expenditure being incurred by
Ackermans. To
this the appellant replied that deductable 'losses', as
comprehended in the phrase in s 11(a) 'expenditure and losses
actually
incurred', can exist independently of a legal liability (eg
where trade stock is destroyed in a fire or money is stolen from the
business); and that being so, there is no reason why 'expenditure'
must necessarily have its source in a legal liability owed by
a
taxpayer to a third party. The economic consequences of a transaction
should thus be examined to ascertain whether it has resulted
in an
actual diminution of, or has had a prejudicial effect on, the
taxpayer's patrimony. Therefore (I quote from counsel's heads
of
argument):
'Whether the contract created an
actual liability on Ackermans' part to pay R329 440 402 to
Pepkor (a liability which
would be settled through set-off) is, we
submit, irrelevant. From the perspective of Ackermans' patrimony, the
commercial effect
is precisely the same as if such a liability had
been created.'
[8] I cannot accept this argument. To my mind,
'expenditure incurred' means the undertaking of an obligation to pay
or (which amounts
to the same thing) the actual incurring of a
liability. No liability was incurred by Ackermans to Pepkor in terms
of the sale agreement.
The manner in which the purchase price was
discharged by Pepkor did not result in the discharge of any
obligation owed by Ackermans
to Pepkor. Ackermans owed Pepkor nothing
in terms of the sale agreement and one looks in vain for a clause in
that agreement that
has this effect. It is for this very reason that
the appellant in its oral submissions abandoned any reliance on
set-off, which
would have been the inevitable effect if there had
been these reciprocal obligations. At the outset, in the initial
letter of objection
to the assessment by SARS, written by auditors
acting on behalf of the appellants, there was reliance on set-off in
the following
terms:
'13.8.1 The purchaser undertook
to buy Ackermans' business for R1 129 440 402. The
purchaser thus owed this amount
to Ackermans.
13.8.2 Ackermans undertook to
pay the purchaser R329 440 402 to take over its existing
and future liabilities. Ackermans
thus owed this amount to the
purchaser.
13.8.3 It is
the two aforementioned mutual but opposing debts which were set off
against each other, namely the R1 129 440 402
owed to
Ackermans by the purchaser, and the R329 440 402 owed to
the purchaser by Ackermans, which underscores clause
6.1.2.
4
13.8.4 In other words, in stead
of the purchaser physically paying Ackermans R1 129 440 402,
and Ackermans physically
paying the purchaser R329 440 402,
the parties allowed for set-off to operate, which meant that the
amount of R329 440 402
was set-off against R1 120 440 402,
resulting in a figure of R800 000 000 owed by the purchaser
to Ackermans.
There is nothing sinister about such a contractual
arrangement, it occurs in overabundance in commercial life.
13.9 The payment of R23 017 959
so incurred by Ackermans on 1 March 2004 as part of the set-off
arrangement was unconditional,
as it was actually paid to the
purchaser through set-off on the day (1 March 2004) that the
obligation arose to pay this amount.'
The argument is untenable. It is trite that set-off
comes into operation when two parties are mutually indebted to each
other, and
both debts are liquidated and fully due. That is not what
happened here and the argument based on set-off was correctly
abandoned.
[9] It was submitted on behalf of the respondent that
unless the three contingent liabilities were allowed as a deduction
in the
hands of Ackermans, an anomaly would arise as they would never
be deductible. The argument is without foundation. There would be
no
bar to Pepkor deducting the liabilities as and when they became
unconditional, as counsel representing the Commissioner rightly
conceded.
[10] It is clear that what occurred, as is usually the
case in transactions of this nature, is that the nett asset value of
the
business ─ the assets less the liabilities ─ was
calculated and that this valuation dictated the purchase price. In
the ordinary course of purchasing the business as a going concern on
this basis it would follow that the liabilities would be discharged
by the purchaser. The journal entries relied on by the appellants do
not equate to expenditure actually incurred. On the contrary,
the
mechanism employed in the agreement of sale resulting in the journal
entries was to facilitate the sale.
[11] The fact that Ackermans rid itself of liabilities
by accepting a lesser purchase price than it would have received had
it retained
the liabilities, does not mean in fact or in law that it
incurred expenditure to the extent that the purchase price was
reduced
by the liabilities. At the effective date no expenditure was
actually incurred by Ackermans.
[12] The appellants accordingly fail at the first
hurdle. The appeals are dismissed, with costs, including the costs of
two counsel.
_______________
T D CLOETE
JUDGE OF APPEAL
APPEARANCES:
APPELLANTS: O L Rogers SC (with him M W Janisch)
Instructed by Werksmans, Tyger Valley
McIntyre & Van der Post, Bloemfontein
RESPONDENTS: A Rafik Bhana SC (with him Ms J T Boltar)
Instructed by The Registrar, Tax Court, Pretoria
The Commissioner for The South African Revenue Service,
Pretoria
1
SIR
v John Cullum Construction Co (Pty) Ltd
1965
(4) SA 697
(A).
2
Hancock
v General Reversionary & Investment Co Ltd
[1919]
1 KB 25
;
Rowntree & Co Ltd v Curtis
[1925] 1 KB 328
(CA);
British
Insulated & Helsby Cables Ltd v Atherton
[1926]
AC 205
(HL);
Anglo-Persian Oil Co Ltd v
Dale
[1932] 1 KB 124
(CA);
Heather
v P-E Consulting Group Ltd
[1973] 1
All ER 8
(CA) and
Vodafone Cellular Ltd
v G Shaw (HM's Inspector of Taxes)
[1997]
EWCA Civ 1297.
3
Spotlight
Stores (Pty) Ltd v CoT
[2004] FCA 650
and (on appeal)
Pridecraft Pty Ltd v
CoT; CoT v Spotlight Stores Pty Ltd
[2004]
FCAFC 339.
4
Clause
6.1.2 of the sale agreement, paraphrased in para 3 above, provides:
'6.1 The Purchase Price shall be discharged as follows
by the Purchaser:
. . .
6.1.2 as consideration for the remaining Business
Assets:
6.1.2.1 the Purchaser will assume the remainder of the
Liabilities, and
6.1.2.2
the Purchaser will with effect from the Effective Date owe the
Seller R800 000 000,00 (eight hundred million
rand) as a
loan and which will be reflected as a loan account in the books of
the Seller.'