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[2010] ZASCA 153
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Abraham Krok Trust v Commissioner for South African Revenue Service (58/2010) [2010] ZASCA 153; [2011] 2 All SA 591 (SCA); 73 SATC 105 (29 November 2010)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No: 58/2010
No precedential significance
In the matter between:
THE ABRAHAM KROK TRUST
...................................................
Appellant
and
THE COMMISSIONER FOR THE SOUTH
AFRICAN REVENUE SERVICE
................................................
Respondent
Neutral citation:
The
Abraham Krok Trust v SARS
(58/10)
[2010] ZASCA 153
(29 NOVEMBER
2010)
Coram:
NAVSA, NUGENT, MAYA
and CACHALIA JJA and BERTELSMANN AJA
Heard:
4 NOVEMBER 2010
Delivered: 29 NOVEMBER 2010
Summary:
Donations tax –
alleged donation by trustees – whether donation authorised by
trust deed and thus exempt from donations
tax.
_______________________________________________________________________
ORDER
_______________________________________________________________________
On appeal from: Tax Court,
Johannesburg (Mathopo J and Messrs Hefer and Mabhoza sitting as court
of first instance).
The appeal is upheld, and the
cross appeal is dismissed, in both cases with costs that include the
costs of two counsel. The order
of the tax court is set aside and
substituted by an order setting the assessment aside.
_______________________________________________________________________
JUDGMENT
_______________________________________________________________________
NUGENT JA (NAVSA, MAYA and
CACHALIA JJA and BERTELSMANN AJA concurring)
[1] In 1973, under a notarial
deed of donation, Ms Sarah Krok created ‘The Abraham Krok
Trust’, and made certain donations
to the trustees for the
benefit of six children. In 1981 the notarial deed was revoked and
substituted by a new trust deed. Under
that trust deed the assets
that were being held in the Abraham Krok Trust were ‘deemed to
have been divided into six trusts,
one for the benefit of each of the
children’. I will refer to those six trusts as the ‘1981
trusts’. Notwithstanding
that the six trusts existed
separately, the terms of each was to be governed by the terms of the
1981 deed, which also provided
that they would be administered
collectively under the name ‘The Abraham Krok Trust’.
[2] In 1994 Mr Abraham Krok
executed six trust deeds. The trust deeds established new trusts for
the benefit of each of the children
that I referred to earlier.
Simultaneously Mr Krok donated a nominal sum to each of the trusts. I
will refer to those trusts as
the ‘1994 trusts’.
[3] Thus at the time that is now
material each of the children was the beneficiary of two trusts –
each was a beneficiary
of one of the 1981 trusts, and each was a
beneficiary of one of the 1994 trusts.
[4] Each of the 1981 trusts
concluded an agreement of sale with its counterpart 1994 trust. In
terms of each such agreement the
1981 trust sold to its counterpart
certain stipulated assets. The purchase price payable in each case
was R61 635 174.
In each case the purchase price was to be
discharged by the 1994 trust assuming certain liabilities amounting
to R9 232 125
and the balance of R52 455 232 was
treated as a loan owing by the 1994 trust to the relevant 1981 trust.
[5] In 1997 the ‘Abraham
Krok Trust’ (the collective name under which the 1981 trusts
were administered ) made what
was referred to as an ‘award’
to the 1994 trusts – retrospective to the 1996 tax year –
in an amount of
R52 455 232 in each case. At the same time
the trustees of the respective trusts agreed that the amount of the
‘award’
would in each case be set off against the debt
that was at that time owing by the relevant 1994 trust to its
counterpart.
[6] For the 1996 tax year the
Commissioner assessed ‘the Abraham Krok Trust’ for
donations tax on the ‘awards’
that were made and for
interest on that tax. The tax for which it was assessed amounted in
all to R78 682 849 and the
interest amounted to
R93 862 092. Although assessed in that name it was agreed
that in reality each of the 1981 trusts
was assessed for its
proportionate share of that amount.
[7] The 1981 trusts (acting under
the name of the Abraham Krok Trust) objected to the assessments. The
Commissioner dismissed the
objections and the trusts appealed to the
tax court. The tax court (Mathopo J with Messrs Hefer and Mabhoza)
dismissed the appeal
and ordered that the matter be referred back to
the Commissioner to assess the trusts ‘on the basis that the
[donations were]
made on 21 June 2006’. The trusts appeal
against the dismissal of the appeal, with the leave of that court,
and the Commissioner
cross-appeals against the grant of the second
part of the order.
[8] Section 54 of the Income Tax
Act 58 of 1962 levies a tax called ‘donations tax’ on
‘the value of any property
disposed of (whether directly or
indirectly and whether in trust or not) under any donation by any
resident’. Section 55(1)
defines a ‘donation’ to
mean
‘
any
gratuitous disposal of property including any gratuitous waiver or
renunciation of a right’.
And ‘property’ means
‘
any
right in or to property movable or immovable, corporeal or
incorporeal, wheresoever situated’.
[9] Donations
tax is payable by the ‘donor’ but if the donor fails to
pay the tax within three months
1
then the
‘donee’ becomes jointly and severally liable with the
donor for payment of the tax.
2
Where the
donation has been made to any trustee to be administered for the
benefit of a beneficiary then the ‘donee’
is defined to
include the trustee. Donations tax paid or payable by a trustee in
his or her capacity as such is recoverable from
the assets of the
trust.
3
In
Welch’s
Estate v Commissioner, South African Revenue Service
4
this court
observed that the effect of that inclusion in the definition of a
‘donee’
‘
is
to deem the trustee rather than the beneficiary to have benefited
from the donation, even although the trustee obviously has
not, and
to render the trustee jointly and severally liable with the donor for
the donations tax payable if the donor has not paid
it within the
prescribed period of three months from the date upon which the
donation takes effect’.
[10] A
donation that is made by a trustee to the beneficiary of a trust
would ordinarily attract donations tax. But such a donation
is
exempted from the tax by s 56(1)(
l
),
5
which exempts
‘property which is disposed of under a donation if such
property is disposed of under and in pursuance of any
trust’.
In
Welch’s
Estate
Marais
J observed that ‘the obvious purpose of [the exemption] is to
avoid donations tax being levied twice upon what was
in essence one
donation by the donor’.
6
In the same
vein he said later:
7
‘
Section
56(1)(
l
)
seems to be intended to protect the donor and the trustee from the
levying yet again of donations tax upon the ultimate disposal
by the
trustee of the
corpus
to
the beneficiary who gives nothing in return for it. Its apparent
purpose is simply to avoid taxing twice what is in reality one
donation traceable to the initial act of the donor in settling assets
upon the trust’.
[11] Whatever the true nature of
the ‘awards’ that were made by the 1981 trusts to the
1994 trusts, I think it must
be accepted that if they were capable of
being applied to extinguish the debts that were owing by the 1994
trusts to the 1981 –
and the trustees say that they were
capable of doing so – then they must have been ‘disposals
of property’ by
the 1981 trusts as contemplated by the
definition of a ‘donation’. For purposes of this judgment
I will treat and refer
to them as such. I will also assume that the
disposals were made ‘gratuitously’ – although that
is disputed by
the trustees – and thus would ordinarily be
donations that attract donations tax under s 54.
[12] The present dispute between
the trustees and the Commissioner arose in the following way. At some
stage after the trusts were
assessed for donations tax the trustees
consulted counsel, who informed them that in his view the disposals
‘might’
(I emphasise that the advice went no further than
that) not have been authorised by the trust deeds – in which
case they
would have been invalid. (I should add that there is no
dispute that at all times the trustees genuinely believed that they
were
authorised to make the awards.) Upon receiving that advice the
trustees took the view that if the disposals had indeed been
unauthorised
that would add another string to their bow in their
dispute with the Commissioner. If the disposals had been unauthorised
and were
thus legally invalid – so their argument went –
then they were not taxable under s 54 because that section, they
submitted, applied only to legally valid donations. But the trustees
intended to argue in the alternative (amongst other things)
that if
the disposals were authorised, and thus taxable under s 54, they
were similarly exempt from tax under s 56(1)(
l
). So they
decided that for so long as there was uncertainty as to the validity
of the disposals they would not pin their colours
to either mast but
would await, if necessary, a definitive determination by a court on
the validity or otherwise of the disposals.
[13] The written objections to
the assessment that the trustees placed before the Commissioner
reflected, essentially, that view
of the matter that was taken by the
trustees, which later formed the basis for the submissions that were
made to this court. They
submitted in their objection that ‘on
a proper construction of the deed … the trustees had no power
to make [the awards]’
and thus the awards were ‘invalid
and of no force or effect, and could not constitute a donation as
contemplated by section
54, read with section 55 …’ (the
contention being that s 54 taxed only legally valid donations).
But if the awards
were authorised, they submitted in the alternative,
then they fell within the exemption. (Other objections were taken
that are
not now relevant.)
[14] The response of the
Commissioner on the first point was that it mattered not whether the
disposals were valid or invalid at
law – in either event the
disposals occurred in fact and s 54 required no more than that.
On the second point the Commissioner
was more definite. He contended
that the disposal was not authorised by the trust deed and was thus
not made ‘under and in
pursuance’ of the trust –
accordingly it fell outside the exemption. That was the only ground
that he advanced –
in the reasons for his assessment and in
this court – for why the exemption did not apply.
[15] Argument before us was
directed largely to the proper construction to be placed upon the
various sections. The respective arguments
raise interesting
questions of construction of the relevant sections but on the view
that I take of the matter those questions
need not be resolved.
[16] It will be apparent from the
respective positions that the parties have adopted that the validity
or otherwise of the disposals
is not necessarily decisive of the
trustees’ case. But that is not so for the case advanced by the
Commissioner. On the case
advanced for the Commissioner the disposals
are taxable only if the trustees were not authorised to make them,
for only then would
they fall outside the exemption (on the
construction of the exemption adopted by the Commissioner). If the
disposals were indeed
authorised then the Commissioner accepts that
they fall within the exemption. Thus it is critical for the
Commissioner’s
case that the trustees were not authorised to
make the disposals.
[17] At first counsel for the
trustees submitted that the disposals were not authorised by the
trust deed but he later abandoned
the submission. When the question
was probed with counsel for the Commissioner in the course of the
appeal he could advance no
reasons why the disposals were not
unauthorised. After the hearing of the appeal we directed certain
questions to the Commissioner
in clarification of his position. It
seems that by then he had found a second wind because his counsel
submitted in reply to those
questions that the trustees had indeed
not been authorised to make the disposals and he advanced reasons why
that was so.
[18] It is not usual for a court
to pronounce upon the validity of a bilateral transaction if all the
interested parties are not
before it – which they usually will
not be in tax proceedings. By itself that seems to me to suggest that
the legislature
did not intend s 54 to apply only to an
authorised donation (as submitted for the trustees) nor to exempt
from donations tax
only authorised donations (as submitted for the
Commissioner) and thus the validity or invalidity of the transaction
would be irrelevant.
But once more it is not necessary to pursue that
enquiry.
[19] In his
reply to our questions the Commissioner submitted that the court is
indeed entitled to determine the validity of the
disposals. He added
that in this case the court is not called upon to do so because –
so the argument went – the trustees
bear the burden of proving
that the disposals are exempt
8
and they have
not discharged that burden. The Commissioner’s reliance upon
the burden of proof is misplaced. The material
facts in this matter
are not in dispute. The question under consideration is a matter for
construction of the trust deed and on
that question the burden of
proof does not come into play.
[20] I will assume in favour of
the Commissioner that the exemption, properly construed, applies only
to a donation that the trustees
were authorised by the trust deed to
make – which was the submission that was made on his behalf. If
that construction of
the section were to be correct it would seem to
follow implicitly that the legislature intended the tax court to be
competent to
pronounce upon that question (if only for tax purposes).
Once more I have assumed in favour of the Commissioner that it is
indeed
competent for the tax court (and thus this court) to pronounce
on the issue – which is also what his counsel submitted. With
that in mind I turn to the construction of the trust deed.
[21] The parties seem at first to
have applied their minds to the effect of clause 21 of the deed but
that clause is not exhaustive
of the enquiry. Clause 12.1 confers
upon the trustees a discretion to dispose of capital of the trust in
the following terms:
‘
The
trustees shall have the right, if they in their sole and absolute
discretion deem it necessary, to apply and utilize any portion
of the
capital of the trusts towards the purposes set out in 11.1, for the
benefit of the child for whom the trust has been established
and
should they in their discretion deem fit, for the benefit of any of
the other children, should circumstances in their opinion
so
warrant’.
[22] The first part of clause
11.1 provides as follows:
‘
The
income of the trusts shall be applied by the trustees in such amounts
and in such manner, for the benefit of the children and
for their
maintenance, well being, education, upbringing and reasonable
pleasures, as the trustees may determine in their absolute
discretion’.
[23] The conjunction ‘and’
signifies that the purpose to which income may be applied is not
confined to the maintenance
etc. of the children and that is not
disputed by the Commissioner. Thus on the face of it clause 12.1,
read with clause 11.1, could
not be clearer: capital of the trust may
be applied for the benefit of the children in the manner that the
trustees may determine
in their absolute discretion.
[24] But the Commissioner points
out that clause 11.1 goes on to provide that until a child has
attained the age of 21 years no
income may be paid to any of the
children but may be paid for their benefit. And he points out that
clause 11.2 provides that ‘should
the trustees resolve in terms
of 11.1 to pay or apply any of the income of the trusts for the
benefit of any of the children’
then the income ‘shall
accrue to the beneficiary concerned’, but the trustees may
nonetheless, at their discretion,
administer the funds ‘as
agents for the beneficiary’, and may ‘[pay the income
over to the beneficiary] from
time to time … as the trustees
may determine’. He also draws attention to clause 11.3, which
permits the trustees
to make an allowance from time to time to the
guardian of the child.
[25] Thus it was submitted for
the Commissioner (I use the words of counsel in his written reply to
our questions) that ‘what
is envisaged by the application of
income “for the benefit of the children” in paragraph
11.1 is either the payment
of such income to a child who had attained
the age of 21 years or the awarding of such income to a child in
circumstances where
such awarded income accrued to and vested in such
child but was administered by the trustees in the name of such child,
the trustees
[of the trust] acting as agents for such child’.
The only exception to the application of the income in that way, so
it was
submitted, was to pay an allowance under clause 11.3.
[26] On that basis, it was
submitted for the Commissioner, so far as clause 12.1 permitted the
trustees to apply capital ‘towards
the purposes set out in
11.1’, they were permitted only to pay it to a child who had
reached the age of 21 years (the second
part of clause 11.1), or to
award capital to a child to be administered by the trustees as his or
her agent (clause 11.2), or to
pay an allowance to his or her
guardian (clause 11.3).
[27] In my view there is no merit
in that submission. The various clauses relied upon for the
submission do not relate to the purpose
for which it may be used –
which is ‘for the benefit of the children’ – but to
how the income is to be
dealt with if it is applied to that purpose.
Clearly the donor intended those portions to apply only to the
application of income
and not to the application of capital as well.
Had he intended them to apply to capital under clause 12.1 he would
not have confined
himself to a reference-back to clause 11.1 alone.
Indeed, had his intention been as contended for by the Commissioner,
that could
have been achieved by referring in clause 11 both to
income and capital and not having clause 12.1 at all.
[28] Counsel for the Commissioner
also submitted that the construction of clause 12.1 that I suggested
earlier is inconsistent with
clause 12.2. I do not think it is
necessary to elaborate on the submission. In my view it is founded
upon a contorted construction
of clause 12.2 that is not justified.
[29] In my view the language of
clause 12.1 is clear and I see no reason to strain it – it
permits the trustees in their discretion
to apply capital for the
benefit of the children. There is no dispute that the disposals in
this case indeed benefited the children
and thus the trustees were
authorised to make them. It follows that the premise upon which the
assessment was made was unsound
and thus the decision of the
Commissioner was wrong. The Commissioner advanced no other grounds
for opposing the appeal. The cross
appeal also falls away.
[30] The appeal is upheld, and
the cross appeal is dismissed, in both cases with costs that include
the costs of two counsel. The
order of the tax court is set aside and
substituted by an order setting the assessment aside.
_________________
R W NUGENT
JUDGE OF APPEAL
APPEARANCES:
For
appellant: P A Solomon SC
J
T Boltar
Instructed
by:
Werksmans
Incorporating Jan S de Villiers, Sandton
Matsepes
Inc, Bloemfontein
For
respondent: T S Emslie SC
N
Mayesi
Instructed
by:
The
State Attorney, Cape Town
The
State Attorney, Bloemfontein
1
Or
such longer period as the Commissioner may determine.
2
Section
59 read with s 60(1).
3
Proviso
to the definition of ‘donee’ in s 55(1).
4
2005
(4) SA 173
(SCA) para 24.
5
Incorrectly
referred to as s 56(1)(e) in
Welch’s Estate
.
6
Para
25.
7
Para
70.
8
Section
82 of the Act.