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[2018] ZASCA 155
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Milnerton Estates Limited v Commissioner for the South African Revenue Service (1159/2017) [2018] ZASCA 155; 2019 (2) SA 386 (SCA); 81 SATC 193 (20 November 2018)
Links to summary
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
no: 1159/2017
In
the matter between:
THE
MILNERTON ESTATES
LIMITED APPELLANT
and
THE
COMMISSIONER FOR THE SOUTH
AFRICAN
REVENUE
SERVICE RESPONDENT
Neutral
citation:
Milnerton Estates Ltd v
CSARS
(1159/2017)
[2018] ZASCA 155
(20
November 2018)
Coram:
NAVSA ADP, WALLIS and MATHOPO JJA and MATOJANE and
NICHOLLS AJJA
Heard
:
6 November 2018
Delivered
:
20 November 2018
Summary:
Income Tax – purchase price of
erven in a township sold by developer – sales occurring in one
tax year and all suspensive
conditions fulfilled in that year –
transfer registered and purchase price received in following year –
whether purchase
price deemed to have accrued in year that sale
agreements concluded – s 24(1) of Income Tax Act 58 of
1962 –
stare decisis
ORDER
On
appeal from:
Tax Court, Cape Town
(Binns-Ward J and assessors)
The
appeal is dismissed with costs, such costs to include the costs
consequent upon the employment of two counsel.
JUDGMENT
Wallis
JA (Navsa ADP, Mathopo JA and Matojane and Nicholls AJJA concurring)
[1]
The appellant, the
Milnerton Estates Limited, is a property developer. The proceeds of
sales of stands in its developments constitute
income in its hands,
forming part of its gross income and ultimately attracting a
liability to pay income tax. Sometimes an agreement
of sale in
respect of a stand is concluded in one tax year, while transfer of
the property to the purchaser and payment of the
purchase price
occurs in the following tax year. In such cases a question may arise
whether the purchase price is to be brought
to account in the earlier
year, rather than the later year when it is received. The reason is
that the definition of gross income
in s 1 of the Income Tax Act
58 of 1962 (the Act) provides that gross income includes ‘the
total amount, in cash or
otherwise, received by or accrued to or in
favour of’ the taxpayer in relation to that tax year. This
Court has held that
‘accrued to’ means that the taxpayer
has become entitled to the amount in question, even though its right
thereto may
not be immediately enforceable.
[1]
Those circumstances arose in the present case. The respondent, the
Commissioner for the South African Revenue Service (SARS or
the
Commissioner as the case may be) contended that the purchase price of
certain stands was to be included in the earlier tax
year, when the
agreements of purchase and sale were concluded, while Milnerton
Estates contended that it should only be included
after it was
received in the following year. Was SARS or Milnerton Estates
correct?
[2]
The facts are pleasantly uncomplicated and
common cause between the parties. In 2013 Milnerton Estates concluded
twenty-five sale
agreements of erven in the Parklands Residential
Estate. The purchasers were required to pay a nominal deposit of
R5 000 and
the balance of the purchase price was payable against
transfer. In sixteen instances, where the purchaser had to raise
finance
and furnish a guarantee, the contracts contained a suspensive
condition providing for the eventuality of the finance not being
obtained. In all of them the suspensive condition was fulfilled
before the end of the 2013 tax year. In the other nine sales the
purchaser either deposited the purchase price in cash with the
conveyancers or provided a guarantee from a financial institution
for
the payment of the price. The net result was that in all twenty-five
cases the purchase price was fully secured before the
end of the 2013
tax year.
[3]
Before Milnerton Estates could give
possession of an erf to the purchaser it had to obtain the approval
of the local authority,
the City of Cape Town Municipality, by way of
what was referred to as a s 31 certificate, to permit the
passage of vehicular
traffic on the completed roads in the
development. In all but five instances that certificate had been
obtained before conclusion
of the sale agreement and in the remaining
instances it was obtained shortly afterwards. In respect of each erf
the s 31 certificate
was obtained before the end of the 2013 tax
year and Milnerton Estates was, therefore, able to give possession to
the purchaser
(and in some instances had done so) before the end of
that tax year.
[4]
Milnerton Estates was obliged to give
possession of the erven to each purchaser, either once the purchase
price had been secured
and the s 31 certificate obtained, or
within sixty days of the date of signature of the sale agreement,
whichever was the
later. Once possession was given Milnerton Estates
was obliged, within thirty days, to register transfer of the stands
into the
names of the purchasers, provided the latter had complied
with all their obligations in terms of the agreements. By the end of
the 2013 tax year purchasers had in eighteen instances been given
possession of their stands. In several cases rates certificates
had
been obtained and conveyancing documents had either been prepared or
were in the course of preparation. The costs of effecting
transfer
had either been paid or secured.
[5]
No doubt on the principle that ‘there’s
many a slip, twixt cup and lip’, the appellant contended that
at the end
of the 2013 tax year its entitlement to the purchase price
remained conditional on its performance of the remaining tasks
necessary
to effect transfer of the stands into the names of the
purchasers. It accordingly omitted the purchase prices of these
twenty-five
stands from its gross income for that year. SARS
disagreed. It contended that the purchase price in each instance had
accrued to
Milnerton Estates in the 2013 tax year, or alternatively
that it was deemed to have done so by virtue of the provisions of
s 24(1)
of the Act. It accordingly issued an assessment in which
it included amounts totalling nearly R6.8 million in Milnerton
Estates’
taxable income, attracting a liability for income tax
of slightly less than R1.9 million. Milnerton Estates’ appeal
to the
Income Tax Court, Cape Town (Binns-Ward J and assessors) was
dismissed on the second ground relied on by SARS and, but for that,
would have failed in part on the first ground. Binns-Ward J gave
leave to appeal directly to this court.
[6]
The appeal raised two issues. They were:
(a) Whether the appellant’s right to receive the
purchase price under these sale agreements accrued to it during the
2013
tax year?
(b) In any event, whether the deeming provision in s
24(1) of the Act deemed those amounts to have been received by the
appellant
during the 2013 tax year.
There
was no need for the Commissioner to rely on the deeming provision in
s 24(1) if in fact the purchase price of these stands
accrued to the
appellant during the 2013 tax year. In that sense, the question
whether there was an actual accrual was anterior
to the application
of the deeming provision. However, in the light of my conclusion that
the previous judgment of this Court in
Silverglen
Investments
[2]
on the effect of s 24(1) is binding authority on the point, it is
unnecessary to canvas the potentially complicated question of
whether
there was an accrual in accordance with ordinary principles.
[7]
Section 24(1) reads as follows:
‘
Credit
agreements and debtors allowance
Subject
to the provisions of
section 24J
,
if any taxpayer has entered into any agreement with any other person
in respect of any property the effect of which is that, in
the case
of movable property, the ownership shall pass or, in the case of
immovable property, transfer shall be passed from the
taxpayer to
that other person, upon or after the receipt by the taxpayer of the
whole or a certain portion of the amount payable
to the taxpayer
under the agreement, the whole of that amount shall for the purposes
of this Act be deemed to have accrued to the
taxpayer on the day on
which the agreement was entered into.’
[8]
The Commissioner contended that the
requirements of the section were met in that:
(a) the taxpayer (Milnerton Estates);
(b) had entered into agreements with other persons (the
purchasers of erven);
(c) in respect of immovable property (the erven);
(d) the effect of which agreements was that transfer
would be passed from Milnerton Estates to the purchasers;
(e) upon or after the receipt by Milnerton Estates of
the whole of the amount payable to it under the agreements.
On
that basis the Commissioner contended that the whole amount was
deemed to have accrued to Milnerton Estates on the date on which
the
agreements were entered into.
[9]
Save in respect of item (e) Milnerton
Estates did not challenge this analysis. I will revert to that item
in dealing with the judgment
in
Silverglen
Investments
, but first it is necessary
to address the other elements of Milnerton Estates’ primary
argument. It argued that the section
is not concerned with cash sale
agreements of this type, but only with agreements for the sale of
immovable property on credit.
It drew a distinction between cash
sales and sales of immovable property, where the purchase price was
to be paid in instalments
over time, with transfer only being given
once the full purchase price had been paid. While not confined to
such sales, broadly
speaking the distinction for which counsel
contended was that between cash sales of immovable property and
alienations of land
in terms of a contract as defined in
s 1
of
the
Alienation of Land Act 68 of 1981
, where the price would be paid
in two or more instalments over time.
[10]
In support of this argument counsel drew
attention to the opening words ‘subject to the provisions of
s
24J
’. That section deals with contracts under which interest
may accrue to the creditor as part of the transaction and provides
for the method by which the accrual of interest in any accrual period
is to be determined. It is true that this is not a
provision
applicable to the sales in issue here, but I do not think that
suffices to remove them from the ambit of
s 24(1).
The effect of
the insertion of the reference to
s 24J
in
s 24(1)
was to
bring the latter section fully into line with the former, so that, in
the case of agreements falling under both, the determination
of the
accrual in respect of interest would take place under
s 24J.
[11]
Reliance was also placed on
s 24(2)
which empowers the Commissioner, where at least twenty-five percent
of the amount payable under an agreement falling within
s 24(1)
only becomes due and payable on or after the expiry of a period of
not less than 12 months after the date of the said agreement,
to make
an allowance over and above the allowance under
s 11(j)
for
potential bad debts. I accept that the predominantly this provision
will find application with conventional finance agreements
in respect
of movables. However, it was contended that
s 11(j)
had no
application to a cash sale of the type in this case. I accept that it
is difficult, and may be impossible, to envisage a
situation in which
it could find application to a cash sale. Even if that is correct,
however, it does not necessarily follow that
the effect of
s 24(2)
is to remove from the ambit of
s 24(1)
agreements that otherwise
fall within its terms. Nonetheless, it is a factor that together with
other factors might point in favour
of a more restrictive
construction of
s 24(1)
in relation to the range of agreements
covered by it.
[12]
The argument then
focussed on the heading to the section and its express reference to
both credit agreements and debtors allowance.
[3]
The point was stressed that these agreements were not credit
agreements, but cash sales. A debtor’s allowance, or provision
for doubtful debts, has little application in relation to such
agreements. This was reinforced by its obvious reference to the
provisions of
s 24(2)
and the reference therein to s 11(j)
of the Act, which provides for the deduction from income of an
allowance in respect of
doubtful debts in the course of determining
the taxpayer’s taxable income. There is undoubtedly some force
in this and it
is reinforced by the fact that in the original version
of the Act in 1962 the heading was ‘Hire-purchase or other
agreements
providing for postponement of passing of property
concerned’. That was amended to read ‘Credit agreements
and debtors
allowances’ in 1986, no doubt in the light of the
repeal of the Hire-Purchase Act 36 of 1942 and its replacement by the
Credit
Agreements Act 75 of 1980. However, that force is mitigated by
the fact that the amendment was effected after the judgment in
Silverglen
,
without any corresponding amendment to exclude cases of the present
type from the ambit of the section.
[13]
Lastly, counsel urged upon us cases that
hold that in undertaking statutory interpretation the court should
adopt a practical approach
and that provisions in a statute should be
construed having regard to their situation in the statute, so that,
chameleon-like,
they take colour from their surroundings. The latter
is hardly a strong argument when the surrounding provisions of the
Act do
not demonstrate any significant pattern. If one goes back to
the Act as it stood in 1962 the three preceding sections bore
respectively
the following headings: ‘Deduction of alimony,
allowance or maintenance’; ‘Amounts to be taken into
account in
respect of values of trading stocks’; and
‘Deductions not allowed in determination of taxable income’.
The two
that followed were ‘Income of beneficiaries and estates
of deceased persons’, since amended to read ‘Taxation
of
deceased estates’, and ‘Determination of taxable income
from farming’. I am unable to discern any pattern
from these,
much less from the multitudinous intervening sections that have over
the years been inserted into the Act between these
original
provisions.
[14]
I am unconvinced that these arguments, even
taken collectively, would suffice to permit a restrictive
interpretation of the language
of s 24(1) to confine its
application to credit agreements properly so called, as opposed to
all sale agreements, where ownership
passes from seller to purchaser
‘upon or after receipt by the taxpayer of the whole or a
certain portion of the purchase
price’. Saying that ownership
passes on or after receipt of the whole purchase price is an apt
description of cash sales,
while saying that ownership passes upon or
after receipt of a certain portion of the purchase price encompasses
sales on credit.
[15]
This takes me back to
the Commissioner’s point (e) in the analysis in para 8 above.
Counsel for Milnerton Estates seized upon
the requirement that
ownership should only pass ‘on or after’ receipt of the
purchase price. He pointed out that, for
ownership to pass in respect
of immovable property, it is necessary for the transfer of the
property from seller to buyer to be
registered in the Deeds Registry.
In the ordinary course, and certainly as applied in these twenty-five
cases, that would occur
before the seller received the purchase
price. The common and almost inevitable practice, as happened here,
is that a guarantee
is provided for payment that is only payable on
proof of registration into the name of the purchaser. There may be
cases where
a stakeholder, such as the conveyancer or possibly an
estate agent, holds the purchase price in trust until registration
and then
pays the seller, but the occasions on which a seller
receives the purchase price prior to transfer will be rare. Payment
simultaneously
with transfer is physically impossible.
[4]
Counsel relied on this, both to buttress his argument that s 24(1)
is only concerned with credit agreements, and also as a
separate
argument that the particular transactions in this case did not fall
within the section.
[16]
Whatever appeal this argument might
otherwise have had, it is incompatible with the decision of this
Court in
Silverglen Investments
.
The background to that decision was the following. The taxpayer
concluded a contract for the sale of property to one Ebrahim.
In
terms of the provisions of the Group Areas Development Act 69 of
1955, as amended, this triggered a pre-emptive right to acquire
the
property in favour of the Group Areas Development Board. The Board
exercised that right by way of a letter dated 10 December
1962 and
the terms of its acquisition had been agreed by 30 May 1963. The 1963
tax year ended on 30 June 1963. Transfer was effected
and the
purchase price paid in August 1963. The taxpayer was obliged to
account for this as part of its taxable income. If it could
do that
in the 1963 year it would benefit from certain allowances, but if it
had to do so in the 1964 year those allowances would
have been
removed.
[17]
On those facts the taxpayer contended that
s 24(1) applied and that the whole of the purchase price should, for
the purposes of
the Act, be deemed to have accrued to it when its
contract with the Board was concluded, either in December 1962 or by
no later
than 30 May 1963. The Secretary contended that the deeming
provision had no application. The first ground for this contention
was
said to be that the arrangements under which the Board acquired
the property did not constitute an agreement within the meaning
of
that expression in s 24(1) of the Act. The Court rejected that
contention and it need not detain us.
[18]
The second contention
was that the purchase price had to be payable before or
simultaneously with transfer, whereas under the arrangements
in that
case, no amount was payable until transfer had been effected. The
Court rejected this contention saying:
[5]
‘
Counsel
for the appellant made the further point that sec. 24 of the Income
Tax Act deals, in relation to immovable property, with
an agreement
under which transfer is to be passed upon or after receipt by the
owner of the whole or a certain portion of the amount
payable to him
under the agreement, i.e. according to counsel, an agreement under
which the passing of ownership is suspended notwithstanding
that the
purchaser is given time to pay, and the consideration is payable
before transfer, whereas in this case no amount is payable
until the
transfer has been effected. There is no substance in this. The
meaning of “amount payable . . . under the agreement”
is
not limited to an amount payable before transfer, and in the case of
an immovable it is inappropriate to speak, as in the case
of movable
property delivered under a hire-purchase agreement, of the suspension
of the passing of ownership, as ownership could
in any case not pass
under an agreement before transfer.
In my opinion
the Board acquired these affected properties by an agreement such as
is described in sec. 24, and the consideration
payable under the
agreement must be deemed to have accrued on or before 30 May 1963,
i.e. during the tax year ended 30 June 1963.’
[19]
It is a well-known
expedient of our law to treat the provision of a guarantee for
payment against transfer, or the lodging of the
purchase price with a
suitable stakeholder, as discharging the purchaser’s obligation
to pay the purchase price
pari
passu
with
transfer.
[6]
It is I think clear that, in saying that in regard to immovable
property it was inappropriate to speak of the suspension of the
passing of ownership, as ownership could not pass before transfer,
the Court had in mind that expedient. In law the guarantees
provided
by the purchasers of erven from Milnerton Estates constituted payment
of the purchase price, such payment being concurrent
with transfer of
ownership by registration in the Deeds Registry. The agreements
accordingly provided for Milnerton Estates to
pass ownership to the
purchasers upon or after receipt of the whole of the purchase price
in terms of s 24(1). The purchase
price was therefore deemed to
be received in its entirety in the 2013 tax year, not the 2014 year,
when payment was in fact made.
That is what was decided in
Silverglen
Investments
and it
applies equally to the present case.
[20]
As a last resort
counsel sought to contend that
Silverglen
Investments
was
wrongly decided. The fact that this argument was not contained in the
heads of argument perhaps explains the failure to address
the limited
circumstances in which this Court departs from its previous
decisions.
[7]
Be that as it may, I am not only unpersuaded that this is a proper
case to do so, but am of the view that
Silverglen
Investments
was
correctly decided. Counsel’s strongest point, in favour of the
contention that the Court fell into error, was that the
consequence
of upholding the interpretation in
Silverglen
Investments
would
be to bring all sales of immovable property subject to suspensive
conditions within the ambit of s 24(1). The consequence,
so he
submitted, was that sellers of immovable property might be liable to
pay income tax on amounts the recovery of which was
uncertain and in
circumstances where, if the worst happened and the transaction failed
for any reason, they might not be able to
recover the tax they had
paid. He also instanced the potential for the sale to give rise to a
capital gain in the first year and
a capital loss in the second in
circumstances where the taxpayer might have no corresponding gain
against which to offset that
loss.
[8]
[21]
I am not convinced that
these points, even if valid, are sufficient justification for
departing from a considered judgment of this
court. If there are such
anomalies and they are as serious as was suggested the remedy lies in
the hands of the legislature. However,
I am not convinced that either
point is valid. In
Corondimas
v Badat
[9]
this Court held that when a contract of sale is subject to a true
suspensive condition ‘there exists no contract of sale
unless
and until the condition is fulfilled’. While that decision has
been subject to fierce academic criticism,
[10]
it has not been overruled. The agreements with which s 24(1) is
concerned will in the ordinary course be agreements of purchase
and
sale. If subject to a true suspensive condition then, until the
condition is fulfilled, on a proper interpretation of the section
there may well be no binding agreement that ownership be passed upon
or after receipt of the amount payable to the taxpayer. I
make no
definite finding on a point that does not arise for decision. We have
not had the benefit of full argument, nor do we know
whether there is
any significance in the accounting treatment of these agreements, but
this may provide an answer to counsel’s
concern.
[22]
As regards the other concern with capital
gains, the determination of the amount of any capital gain falling to
be included in the
taxpayer’s taxable income is a matter dealt
with in the Eighth Schedule to the Act. It is not apparent to me that
the provisions
of s 24(1) apply in determining when an accrual
occurs for the purpose of para 3 of the Eighth Schedule. There is no
reference
back to s 24(1) and on its face the Schedule seems to
provide a self-contained method for determining whether a capital
gain
or loss has arisen. Again I refrain from any definitive decision
on the point, but it may be an answer to the concern expressed
by
counsel. For present purposes both points raised in criticism of the
decision in
Silverglen Investments
are
not sufficiently weighty to justify our departing from the decision
of our predecessors.
[23]
The Tax Court was accordingly correct to
dismiss the appeal on the grounds that it was bound by
Silverglen
Investments
. This appeal must suffer
the same fate. It is dismissed with costs, such costs to include the
costs consequent upon the employment
of two counsel.
___________________________
M J D WALLIS
JUDGE OF APPEAL
Appearances
For
appellant: T S Emslie SC (with him S R Kotze)
Instructed
by: David Borman & Strong, Cape Town;
Webbers,
Bloemfontein.
For
respondent: R T Williams SC (with her C D Tsegarie)
Instructed
by: State Attorney, Cape Town and Bloemfontein.
[1]
Commissioner for Inland
Revenue v People’s Stores (Walvis Bay) (Pty) Ltd
1990
(2) SA 353 (A).
[2]
Secretary for Inland Revenue v Silverglen
Investments (Pty) Limited
1969 (1) SA 365
(A) (
Silverglen Investments
).
[3]
As to the permissibility of
referring to the heading see
President,
Republic of South Africa and Another v Hugo
[1997]
ZACC 4
1997 (4) SA 1
(CC) para 12, fns 13-15. A reference to the
section’s amendment by s 16(1) of the Income Tax Act 65
of 1986 makes
it clear that this is a heading and resolves the
doubts expressed in
S
v Liberty Shipping & Forwarding (Pty) Ltd and Others
1982
(4) SA 281 (D).
[4]
For the reasons explained in
Breytenbach v Van
Wijk
1923 AD 541
at 546-547.
[5]
At p 74A-F.
[6]
Breytenbach v Van Wijk
supra, 546-547
endorsing
Trichardt
v Muller
1915 TPD
175
at 178. See also
Hammer
v Klein and Another
1951
(2) SA 101
(A) at 105E-G.
[7]
Recently reaffirmed in
Patmar Explorations (Pty)
Ltd and Others v Limpopo Development Tribunal and Others
[2018] ZASCA 19
2018 (4) SA
107
(SCA) para 3.
[8]
Relying on
New
Adventure Shelf 122 (Pty) Ltd v Commissioner: South African Revenue
Service
[2017]
ZASCA 29; 2017 (5) SA 94 (SCA).
[9]
Corondimas and Another v
Badat
1946 AD 548
at 551.
[10]
Geue v Van der Lith
[2003] ZASCA 118
;
2004
(3) SA 333
(SCA) paras 8-12.