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[2017] ZASCA 190
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Volkswagen South Africa (Pty) Ltd v Commissioner for the South African Revenue Service (1123/2016) [2017] ZASCA 190; [2018] 1 All SA 716 (SCA); 80 SATC 179 (20 December 2017)
Links to summary
THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 1123/2016
In
the matter between:
VOLKSWAGEN
SOUTH AFRICA (PTY) LTD APPELLANT
and
THE
COMMISSIONER FOR THE
RESPONDENT
SOUTH
AFRICAN REVENUE SERVICE
Neutral
citation:
Volkswagen
South Africa (Pty) Ltd v Commissioner for SARS
(1123/2016)
[2017] ZASCA 190
(20 December 2017)
Coram:
Leach,
Petse and Saldulker JJA and Plasket and Meyer AJJA
Heard:
9
November 2017
Delivered:
20
December 2017
Summary:
Income
tax – rebate paid to motor manufacturers to encourage
rationalisation of models – rebate dependent upon capital
investment made by manufacturers in order to rationalise –
rebate of a capital nature and not taxable.
ORDER
On
appeal from:
The
Tax Court, sitting at the Eastern Cape Local Division, Port Elizabeth
(Schoeman J and two assessors, sitting as court of first
instance):
1
The appeal is allowed, with costs.
2
The order of the court a quo is set aside and replaced with the
following:
‘
The
appellant’s income tax for the 2008, 2009 and 2010 tax years is
to be assessed on the basis that its PAA certificates
valued at
R83 651 677 for the 2008 tax year, R76 895 388 for the
2009 tax year and R48 338 557 for the
2010 tax year are
receipts of a capital nature.’
JUDGMENT
Leach
JA (Petse, Saldulker JJA and Plasket, Meyer AJJA concurring)
[1]
The issue which arises in this appeal is whether the accrual of
rebates calculated with reference to capital expenditure, and
to
which the appellant became entitled under a government scheme to
support the local motor industry, should be regarded as accruals
of a
revenue or capital nature. The Tax Court concluded that they were
revenue in nature and therefore fell to be included in the
appellant’s gross income. The appeal directly to this Court is
with leave of the court a quo granted under s 135(1) as read
with
s
133(2)
(b)
of
the
Tax Administration Act 28 of 2011
.
[2]
Section 1 of the Income Tax Act 58 of 1962 defines the ‘gross
income’ of a person as being ‘. . . the total
amount, in
cash or otherwise, received by or accrued to or in favour of such
[person] . . .
excluding
receipts or accruals of a capital nature . . .
’
(my emphasis). As appears from this, receipts or accruals are either
of a capital or of non-capital nature, the latter being
commonly
referred to as income or revenue. Indeed this Court stated some 73
years ago that there is no ‘half-way house’
between
capital and revenue – see
Pyott
Ltd v Commissioner for Inland Revenue
1945 AD 128
(13 SATC 121)
at 135 – and although this has been
the source of trenchant criticism,
[1]
it remains the position to this day. As a result, if an amount which
accrues to a taxpayer is not of a capital nature, it must
be taken as
being income or revenue and liable to tax, as opposed to those of a
capital nature which are not so liable.
[3]
There is no dispute between the parties as to the facts to which
regard should be had in determining their dispute. The appellant
is
one of the largest motor vehicle manufacturers in this country. It
derives its income from the sale of motor vehicles, not only
those
which it manufactures, many for export, but also from motor vehicles
imported from abroad for sale in this country. Commencing
as long ago
as 1995, the government initiated a motor industry development
program (MIDP) aimed at an internationally competitive
and growing
automotive industry. By June 2000 much had been achieved since the
MIDP had been introduced. Additional jobs had been
created in the
process and it was felt that the potential for greater growth and an
increase in yet further employment opportunities
was a reality.
[4]
In order to achieve this and to remain internationally competitive,
South Africa had to lower costs in its production of motor
vehicles
whilst maintaining quality capable of competing with the products of
manufacturers in other parts of the world. One of
the ways of
achieving this was thought to be to reduce the number of models being
produced, as global trends had shown that common
platform engineering
and the resultant benefits in improved economies of scale, led to
cost savings.
[5]
Consequently, as a result of the undoubted advantages it had shown to
the economy of the country, the government was prepared
to extend the
MIDP with one of its objectives being the rationalisation of models
being produced in the automotive industry. However,
it is one thing
to merely agree to rationalise the number of models being produced;
it is quite another to implement such a process.
Rationalisation of
models would require plant upgrades and technology enhancements to
put this country’s manufacturers on
a par with the world’s
best. This would involve substantial capital expenditure, inter alia,
to provide dedicated buildings,
to expand production lines, to
install robots used in the production and assembly processes, and to
update machinery and tooling.
[6]
As an incentive for the automotive manufacturers to embark on such an
expensive capital programme, the Board on Tariffs and
Trade, in its
report no 4045 of 19 May 2000, made the following recommendation:
‘
To
further encourage the global trend towards streamlining production of
light motor vehicle assembly plants into a limited number
of models,
the Board recommends the introduction of a Productive Asset Allowance
(PAA) to those manufacturers that have invested
a certain minimum
value in dedicated productive assets for the assembly of light
vehicles and manufacture of automotive components
to streamline their
manufacturing base to manufacture a limited product range for the
domestic and export markets, thereby improving
their international
competitiveness. The PAA recommended is in the form of a duty rebate
certificate to a maximum of 20 per cent
of the total investment in
qualifying productive assets, spread equally over five years and may
only be used to rebate duties on
imported motor vehicles.’
[7]
Pursuant to this, the Department of Trade and Industry announced the
introduction of a PAA with effect from July 2000. The form
in which
the benefit was provided to participating manufacturers was by way of
the issue of PAA certificates as envisaged in a
rebate item contained
in a schedule to the Customs and Excise Act 91 of 1964, providing for
a rebate on customs duty on certain
categories of completely built-up
imported light motor vehicles. The amount of the certificate was to
be calculated as a percentage
of the value of the ‘productive
assets’ approved by the Director-General: Trade and Industry
for purposes of this rebate
provision. The ‘productive assets’
referred to were described in the rebate item as including:
‘[b]uildings erected
for the sole purpose of manufacturing
specified motor vehicles or automotive components, and new or unused
plant, machinery, tooling,
jigs, dies and moulds, in-plant logistics,
testing, design and production IT equipment and supporting software.’
[8]
Although the PAA scheme was initially administered by the Board of
Tariffs and Trade on behalf of the National Department of
Trade and
Industry, its administration was later taken over by the
International Trade Administration Commission of South Africa
(ITAC).
Guidelines as envisaged by the tariff were issued first by the
Department of Trade and Industry and, later, by ITAC. The
2008
Guidelines in place at the time of the assessments for the tax years
in issue in the present case, were issued by the latter.
Inter alia
they provide for the processes to be adopted in order to make
applications of claims for such benefits, and the verification
of
claims. Of particular relevance is para 9.1 thereof which reads:
‘
Only
an applicant that demonstrates an investment in qualifying assets on
an approved project may claim for the PAA. The documented
capital
expenditure, as certified by the appointed accredited consulting
engineer, will form the basis of the PAA certificate.
ITAC will
consider the report of the engineer who will verify the first claim
of the applicant and who shall further conduct an
inspection on
site.’
[9]
The ‘qualifying assets’ referred to in the last paragraph
(whose qualified value was stated to be their value as
capitalised
according to generally accepted accounting practice), included new
buildings erected or used buildings purchased for
the sole purpose of
housing approved productive assets, as well as new and unused plant,
machinery and tooling used for the sole
purpose of manufacturing the
rationalised range of light motor vehicles. Such assets are thus,
essentially, those reflected as
‘productive assets’ in
the relevant rebate item already mentioned above.
[10]
In order for a PAA certificate to be issued, any claim for such
benefits had to be audited by external financial auditors using
prescribed audit standards in order to verify the investment in
productive assets. Once that was done, an engineer appointed by
ITAC
was delegated to conduct a physical on-sight asset verification
exercise which could lead to adjustments in their amount claimed.
Only once all of this had been done and the amount of the claim
claimed confirmed and agreed, would a PAA certificate be issued
to a
manufacturer. The amounts received in this way would be 20% of the
capital investment so audited and verified.
[11]
These PAA certificates could then be used by the manufacturer to
offset the duty which it became liable to pay on importing
fully made
up vehicles for sale in this country. In this way, manufacturers were
encouraged to invest in procuring qualifying productive
assets to
rationalise their model production. Put somewhat differently, as a
result of their participation in the PAA scheme and
the
rationalisation of the motor vehicles they were producing, they were
reimbursed to an amount of 20% of their capital expenditure
incurred
in the rationalisation process by, effectively, paying less import
duty than would have been the case had they not participated
in the
scheme. This was an investment incentive, not a trading incentive.
[12]
To sum up, the PAA was introduced as an incentive for the automotive
manufacturing industry to make new capital investments
in
manufacturing capacity in order to produce a rationalised range of
light motor vehicles. Only those manufacturers who committed
to the
process of rationalisation and made the necessary investments in
fixed capital to achieve rationalisation would be entitled
to
benefits under the scheme. Without doing so, they would not receive
PAA certificates, each of which reflected as their benefit
an amount
calculated in regard to the capital investment they had made in
pursuance of the scheme. The PAA certificates, in turn,
could be used
to reduce the amount of import duty a manufacturer became obliged to
pay on importing certain fully built-up vehicles
from abroad for
resale.
[13]
It is often said that there is nothing new under the sun. Certainly
rebates of this nature are nothing new. More than 200 years
ago, Sir
John Cradock, the Governor of the Cape Colony, acting on the advice
of the Cape Agricultural Commission which in January
1808 had
recommended that the indigenous fat-tailed Cape sheep be replaced by
the Spanish merino, sought to encourage the merino
breed by
admitting, duty free, all merino wool brought from the interior to
the Cape and discontinuing the taxes levied on wool
sheep in the
country districts. This rebate, it was hoped, would encourage farmers
in the Cape’s interior to switch to the
merino breed which it
was felt had great economic benefits for the country, inter alia from
exporting wool.
[2]
The
similarities between that scheme, designed to encourage farmers to
‘rationalise’ their production by breeding merino
sheep,
with the PAA scheme in the instant case, are striking.
[14]
Be that as it may, the appellant duly applied in the prescribed
manner supported by the necessary business plan to participate
in the
PAA scheme. In order to do so, it invested heavily in qualifying
assets in three different capital projects, namely, the
Golf A4
project, the Polo (PQ24) project and the Golf A5 project. These
investments ultimately led to it receiving PAA certificates
which
were audited as required and approved by ITAC. The appellant also
received PAA certificates relating to investments made
by two of its
suppliers, Shatterprufe (Pty) Ltd and PFG Springs (Pty) Ltd. These
receipts were pursuant to applications and claims
they had made on
their investment in qualifying assets supported by documents
furnished by the appellant identifying the platform
and project for
which it had engaged them to manufacture components. It is not
suggested that these certificates should be excluded
or that the
appellant was not entitled to their benefits.
[15]
In its income tax returns for the years of assessment 2008-2010, the
appellant reflected the PAA certificates it had received
as being
accruals of a capital nature. The amounts involved were substantial:
R83 651 677 for 2008, R76 895 388
for 2009 and
R48 338 557 for 2010. The Commissioner refused to accept
that these amounts were of a capital nature, and
assessed the
appellant to tax on the basis that they were income. The appellant’s
objection to such assessment was overruled,
which led to an appeal in
the Tax Court whose judgment is the subject of the appeal to this
Court.
[16]
As mentioned at the outset of this judgment, the fundamental question
is whether the PAA certificates are receipts or accruals
of a capital
nature. There is no simple litmus test which can be applied to
determine what is capital or revenue – see eg
Commissioner
for Inland Revenue v Guardian Assurance Co South Africa Ltd
1991
(3) SA 1
(A) at 19E-F – although over the years, various
guidelines have been laid down to assist in determining the nature of
a particular
receipt or accrual. These include whether the accrual
was forthcoming from the realisation of a capital asset or whether it
was
received in the course of carrying on business or in pursuance of
a scheme of profit making – see eg the seminal judgment
of
Corbett JA in
Elandsheuwel Farming (Edms) Bpk v Sekretaris van
Binnelandse Inkomste
1978 (1) SA 101
(A) at 118A-F. Thus in
Commissioner for Inland Revenue v Pick ‘n Pay Employees
Share Purchase Trust
1992 (4) SA 39
(A) at 56H-57C Smalberger JA
said:
‘
There
are a variety of tests for determining whether or not a
particular receipt is one of a revenue or capital nature. They
are laid down as guidelines only - there being no single infallible
test of invariable application. In this respect I agree with
the
following remarks of Friedman J in
ITC
1450
(1989) 51 SATC 70
(N):
“
But
when all is said and done, whatever guideline one chooses to follow,
one should not be led to a result in one's classification
of
a receipt as income or capital which is, as I have had occasion
previously to remark, contrary to sound commercial and
good sense.”
The
appropriate test in a matter such as the present is a
well-established one. The receipts accruing to the Trust will be
revenue
if they constitute “a gain made by an operation of
business in carrying out a scheme for profit-making”, in the
words
of the eminent Scottish Judge . . . The corollary is that
they will be non-revenue if they do not derive from “an
operation
of business in carrying out a scheme for profit-making”.’
[17]
The necessity of using good sense to decide whether an accrual is
capital or revenue in nature, was echoed by this Court in
W
J Fourie Beleggings BK v Commissioner, South African Revenue Services
2009 (5) SA 238
(SCA) para 7 where it was remarked that although
common sense has been described as a blunt intellectual instrument
‘it remains
the most useful tool to use in deciding the issue’.
In the light of this and the other principles already mentioned, I
turn
to decide whether in the present case the rebates received by
the appellant should be regarded as capital or revenue.
[18]
Para 3.2.3 of the South African Revenue Services Interpretation Note
59 of 10 December 2010, reads:
‘
A
government grant will be of a revenue nature in the hands of a person
carrying on trading operations if it is a trading receipt.
A grant is
a trading receipt if its receipt is a normal incident of a person’s
trading operations. The nature of the grant
received and the
relationship which exists between the grant received and the
recipient’s activities needs to be examined.
A
government grant will be a trading receipt when it is paid in order
to assist in meeting a person’s trading obligations
or in order
to assist in carrying on trading operations. A grant of this nature
results in trading receipts being supplemented
and accordingly is
itself a trading receipt.
By
contrast, any amount received or accrued for the purpose of –
·
establishing
an income-earning structure, or
·
as
compensation for the surrender of such a structure,
is
of a capital nature.’
[19]
As appears from this, the revenue authority regards the purpose of a
government grant of cardinal importance. That indeed is
supported by
the case law. Thus in ITC 402
(1937) 10 SATC 111
the taxpayer, who
carried on business as a produce merchant and exporter, received a
subsidy under the Export Subsidies Act 49
of 1931. The Commissioner
sought to levy tax against the subsidy. The taxpayer contended that
the amount of the subsidy was to
be viewed as a gift or an ex gratia
payment. The Special Income Court held that the subsidy arose out of
the appellant’s
trade as a produce merchant, that it was only
payable to the appellant because he was an exporter, and therefore
any receipts he
received on account of the subsidy should be regarded
as a trade receipt.
[20]
A similar approach was adopted by this Court in
Moolman
v Commissioner for Inland Revenue
1954 (2) SA 560
(A). The dispute in that matter flowed from a wartime
arrangement between the governments of this country and the United
Kingdom,
under which the latter agreed to purchase surplus wool from
South Africa with the two governments sharing any profits from its
resale. After the end of the war, the wool was sold at a substantial
profit and, under a domestic statute, contributing wool producers
became entitled to a share in such profit. Pursuant to this, the
taxpayer, a wool producer, had received a lump sum which he claimed
as capital and therefore not taxable. This Court stated that while
the taxpayer’s entitlement to the sum was derived from
the Act
in question ‘the question still remains why Parliament decided
that he should receive that sum’.
[3]
It then went on to hold that as the sum was awarded to the appellant
under the statute simply because he had sold wool in the Union
to the
government of the United Kingdom during the relevant period, the sum
he received was an addition to the purchase price which
he had
obtained when he first sold his wool and, on that basis, was not of a
capital nature. Again this decision turned on why
the grant had been
paid to the taxpayer.
[21]
In ITC 1435
(1987) 50 SATC 117
, the taxpayer, a co-operative society
of dairy farmers, had purchased a machine for analysing milk at a sum
of R26 222. The
following tax year, it received a grant-in-aid
of R18 000 in respect of the purchase price of this machine from
the Milk Recording
Central Co-operatives Ltd. The Commissioner agreed
that this was a receipt of a capital nature not subject to tax. The
Eastern
Cape Special Court agreed. In doing so, its President,
Mullins J, said:
[4]
‘
It
is clear that in the present case, the amount of the grant-in-aid
bears no relation to the amounts claimed by way of wear and
tear, nor
is it suggested that it was intended in any way to compensate
appellant for the past or future reduction in the value
of such
machinery by reason of wear and tear. It was specifically a grant to
assist appellant with the capital expenditure involved
in the
purchase of the machine and was therefore the grant of a capital
nature.’
[22]
Relying on these cases, the learned authors of
Silke
express the view:
[5]
‘
Subsidies
or similar payments made by the government in terms of an Act of
Parliament to local merchants or producers for the production
or
export of certain commodities are, it is submitted, on income account
if they are paid to supplement the trading receipts derived
from the
sale of such commodities.
.
. . .
If
a subsidy takes the form of a contribution towards the producer’s
cost of production of a certain commodity, it is submitted
that it is
of an income nature. On the other hand,
if
the subsidy is paid as a contribution towards the cost of fixed
capital assets – for example, the government may contribute
towards the cost of a new factory or plant and machinery – it
is submitted that it partakes of the nature of capital and
is not
taxable
.’
(My emphasis).
[23]
In the light of these authorities, counsel for the appellants,
adopting a phrase derived from
Commissioner
for Inland Revenue v Black
1957 (3) SA 536
(A) at 543B-C, contended that the court in each case
had looked to the ‘real and basic cause of the accrual’
to determine
whether it was capital or revenue in nature. That being
so, he submitted that the inquiry should resolve itself into
answering
two questions: first, what was the real and basic cause of
the accrual (or put somewhat differently, why or in respect of what
conduct or activity was the grant made) and, secondly, whether that
cause is, as a matter of fact, more closely associated with
the
equipment of the taxpayer’s income producing machinery
(in which event it should be regarded as capital) or with
its
income-earning operations (in which event it should be regarded as
revenue).
[24]
This indeed seems to me to be an appropriate approach in a case of
this nature. It also appears to be in line with certain
English
authorities. The decisions of the Court of Appeal and the House of
Lords in the matter of
Seaham
Harbour Dock Company v Crook (HM Inspector of Taxes)
are
both instructive
.
The taxpayer in that matter owned certain sea docks which it wished
to extend. It did so by using a government grant which was
motivated
on the ground that the extension would provide work at a time when
employment was scarce. The grant concerned was calculated
by
reference being had to the notional interest on the approved
expenditure over a period of two years. In the Court of
Appeal,
[6]
Lord Hanworth said
the following:
[7]
‘
What
was the trade at that time which was being carried on by the Seaham
Harbour Dock Company in respect of this dock extension?
How does the
sum then being expended, how does the contribution made to that
expenditure, fall within the trade of the dock company?
It is very
difficult to find any ground or any basis for holding that it was
part of their trade. It is quite true that the instalments
of the
grant have been credited to revenue in the accounts of the company,
but as has been said many times in this Court and in
the House of
Lords, one has to look at the substance of the matter, and the
accounts kept by the company neither inure in their
favour nor
against them if the true effect and substance of the matter grants
them relief or imposes a liability.
We
are therefore compelled to look at the substance of the matter; and
it seems to me Mr Cooper, who appeared for the company,
was
right when he made his claim: “(I) That the grant was made by a
Government body and was capital. It was not specifically
made for the
purpose of meeting interest but was expressly made in respect of
expenditure and for the purpose of helping the company
through with
its cost of construction. (II) That the term ‘equivalent to
half the interest’ was only a method of calculation
for
arriving at the amount of grant to be paid.
.
. . .
[I]t
appears that this sum was a sum paid out and out by the Unemployment
Grants Committee for the purpose of adding to and completing
the
capital sum of which there was an insufficient subscription before it
was received. And the mere mode of payment or method
of accounting
does not alter the character of the sums received; they were paid in
order to advance a capital expenditure to be
made by the Seaham
Harbour Dock Company, . . .’
Similarly,
Lord Justice Slesser said:
[8]
‘
[B]ecause
it becomes no more than this: a grant for an extension of a dock
which is in itself in respect of a capital expenditure.
This company
does not trade in dock construction; it trades in docking. They are
not dock engineers engaged in building docks;
they are engaged in the
utilisation of docks and they need this extension to cope with their
trade.’
[25]
In the judgment of the House of Lords
[9]
,
an appeal from the decision of the Court of Appeal was dismissed on
the basis that the grant was not a trade receipt. Rather it
had been
made by a government department with ‘the idea that by its use
men might be kept in employment and it was paid to
and received by
the dock company . . . simply to enable them to [construct docks]
with the idea that by so doing so people might
be employed’.
[10]
In the parlance of this country, the House of Lords held that the
grant had been paid to enable the taxpayer to invest in fixed
capital, and was therefore a receipt of a capital nature.
[26]
The decisions in
Seaham Harbour Dock Company
illustrate the
importance of the purpose for which a government grant is paid. This,
too, is stressed in para 3.2.5 of Interpretation
Note 59, which
provides as follows:
‘
A
government grant which is designated as being made towards the cost
of specified capital expenditure is capital in nature because
it is
made in order to assist or compensate a person in meeting costs of a
capital nature.’
[27]
Essentially one can have no quarrel with this statement. The
difficulty I have, however, is why it appears not to have been
applied to the appellant in the present case. In disallowing the
appellant’s objection to the PAA certificates not having
been
regarded as capital accruals, the respondent stated that ‘there
is no indication from the PAA Guidelines that the amount
was received
for the purpose of establishing an income-earning structure . . .’
It went on to state that in calculating the
PAA’s certificates,
the Department of Trade and Industry ‘took into account the
amount invested in qualifying plant
and machinery, however this was
done for the purpose of calculating the allowance’ which did
not imply that the appellant
had been compensated ‘for the
capital outlay in respect of the plant and machinery’.
[28]
My reaction to this is similar to that of Davis AJA in
Pyott
Ltd v Commissioner for Inland Revenue
and I, too, see ‘insuperable difficulties in holding anything
of the kind’.
[11]
As
appears from what I have said earlier in this judgment, it is clear
that PAA certificates were in fact issued in order to compensate
manufacturers for at least a portion of their capital outlay incurred
in respect of the plant and machinery required for rationalisation.
It was in this way that they were encouraged to go along with
the rationalisation scheme. To suggest the converse is simply
astounding. Indeed, the court a quo found that ‘the grant was
made due to capital expenditure.’ That being so, why
should it
not have been viewed as an accrual of a capital nature as envisaged
in para 3.2.3 of the Interpretation Note?
[29]
The court a quo answered that question as follows:
‘
[I]f
the PAA certificate was not utilised, within a stipulated period, as
payment for custom duties on imported motor vehicles,
the PAA
certificate would lapse. The certificate was not tradeable. The
certificate was conditional and did not accrue until there
were
imports. If there were no imports within the necessary time frame,
the condition had not been fulfilled and the certificate
could not be
used. The certificates only had value upon import of motor vehicles
and not when the capital expenditure was incurred.
The grant was to
assist the appellant with the revenue expenditure, customs duty
payable on imports.’
In
the light of this, the court a quo held that as PAA certificates
could only be redeemed by payment of customs duties, the diminished
payment of customs duty was clearly related to the gross income of
the appellant so that the PAA certificates were not of a capital
nature.
[30]
With due respect, I find myself unable to agree with this conclusion.
Firstly, the PAA certificates did not only accrue once
imports were
made. Once a certificate had been issued, it had immediate value
which accrued to the benefit of the taxpayer. The
fact that it would
lapse if not used within a stipulated period does not mean that the
benefit had not accrued, nor can it change
the nature of the accrual.
As they were issued to compensate a manufacturer for a percentage of
its capital expenditure, they were
clearly capital in nature and the
fact that they might lapse cannot change that position.
[31]
Moreover that the PAA certificates were not ‘tradeable’
speaks to me of them being capital in nature rather than
revenue. And
as I have stressed, they had accrued by reason of the taxpayer having
invested in income producing assets. The respondent’s
pleaded
contention that the investment which had been made was merely part of
a formula to calculate the benefits under the PAA
scheme, ignores
that fact. The making of a capital investment was at the centre of
the scheme and, without a manufacturer making
such an investment, a
PAA certificate could not be paid. Had the government paid in cash
rather than by way of the PAA certificates,
it clearly would have
been a grant paid in respect of that capital investment. As it
instead allowed a rebate in respect of import
duties, this does not
alter the fact that the benefit derived therefrom amounted to a
benefit received by the appellant in respect
of capital expenditure.
Consequently, the diminished payment of customs duty was not ‘clearly
related to the gross income
of the appellant’ as found by the
court a quo but, rather, should be construed as a method of payment
of a grant in respect
of capital expenditure.
[32]
Accordingly, in my view, the respondent’s contention that the
PAA scheme was not directly intended to support capital
expenditure
but merely to allow the appellant to reduce the cost to it of
imported vehicles and thereby increases revenue, is groundless.
PAA
certificates were in no way received as part of a scheme of profit
making. They reimbursed the appellant in respect of a percentage
of
its capital expenditure. The conclusion of the court a quo that the
PAA certificates should be construed as income rather than
accruals
of a capital is clearly wrong. The appeal must succeed.
[33]
The following order will issue:
1
The appeal is allowed, with costs.
2
The order of the court a quo is set aside and replaced with the
following:
‘
The
appellant’s income tax for the 2008, 2009 and 2010 tax years is
to be assessed on the basis that its PAA certificates
valued at
R83 651 677 for the 2008 tax year, R76 895 388
for the 2009 tax year and R48 338 557 for
the 2010 tax year
are receipts of a capital nature.’
_______________
L
E Leach
Judge
of Appeal
Appearances:
For
the Appellant:
M W Janisch SC
Instructed
by:
Chris Baker & Associates, Port Elizabeth
Symington & De
Kok Attorneys, Bloemfontein
For
the Respondent:
R G Buchanan
SC (with him R Tsele)
Instructed
by:
The State Attorney, Port Elizabeth
The State Attorney,
Bloemfontein
[1]
See
eg A de Koker & R C Williams
Silke
on
South
African Income Tax
Vol 1 Chapter 3 para 3.1 at 3-2 [2015 Service 56].
[2]
Ben MacLennan
A
Proper Degree of Terror
(1986 Ravan Press) at 141.
[3]
At 568A.
[4]
At 119-120.
[5]
A de Koker & R C Williams
Silke on South African
Income Tax
Vol 1
Chapter 3 para 3.43 at 3-104 [2009 Service 40].
[6]
Seaham Harbour Dock Company v
Crook (HM Inspector of Taxes)
(1930)
38 Ll.L Rep 65 (CA).
[7]
At 67-68.
[8]
At 69.
[9]
Seaham
Harbour Dock Company v Crook (HM Inspector of Taxes)
(1931) 41 Ll. L Rep 95 (HL).
[10]
Per Lord Buckmaster at 96.
[11]
At 129.