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[2007] ZASCA 71
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MP Finance Group CC (in liquidation) v Commissioner for South African Revenue Service (41/06) [2007] ZASCA 71; 2007 (5) SA 521 (SCA); 69 SATC 141 (31 May 2007)
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IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
REPORTABLE
CASE NO 41/06
In the
matter between
MP FINANCE
GROUP CC (IN LIQUIDATION)
...............................
Appellant
and
COMMISSIONER
FOR THE SOUTH AFRICAN
REVENUE SERVICE
...............................
Respondent
________________________________________________________________________
CORAM: HOWIE P, NUGENT, LEWIS, VAN HEERDEN JJA et
SNYDERS AJA
________________________________________________________________________
Date Heard: 2 May 2007
Delivered: 31 May 2007
Summary: Amounts taken by illegal and fraudulent pyramid scheme
constitute amounts ‘received’ within the meaning of
‘gross
income’ in the Income Tax Act where intention of
scheme operator is not to contract with the investors but to
appropriate their
money to facilitate the fraud.
Neutral citation:
This judgment may be referred to as
MP Finance Group CC v
Commissioner for South African Revenue Service
[2007] SCA
71 (RSA)
________________________________________________________________________
J U D G M E N T
________________________________________________________________________
HOWIE P
HOWIE
P
[1] For some years beginning in 1998 one Marietjie
Prinsloo operated an illegal investment enterprise commonly called a
pyramid scheme.
As is the pattern with such schemes, it readily
parted greedy or gullible ‘investors’ from their money by
promising irresistible
(but unsustainable) returns on various forms
of ostensible investment. It paid such returns for a while to some
before finally collapsing
– owing many millions – when
the predictable happened and the total amount of supposedly due
returns vastly exceeded
the total amount of obtainable investment
money.
[2] The scheme was conducted by way of successively
created entities, incorporated and unincorporated. They were all
eventually insolvent.
By order of 4 February 2003 made by the High
Court at Pretoria, these original entities were, for ease of
administration and legal
practicality, consolidated into a single
entity named MP Finance Group CC (in liquidation) (the CC). The order
decreed, among other
things, that it did not prejudice claims against
an individual entity provided that only assets of that entity could
be realised
to meet such claims. It laid down, further, that the
joint liquidators of the CC (who are also the joint liquidators of
the original
entities) were to regard claims proved against any of
the individual entities as claims against the CC.
[3] Presumably pursuant to that order, the respondent
(the Commissioner) has regarded the CC as the taxpayer liable for the
taxes
respectively due by the original entities. He accordingly
assessed the CC to tax in respect of the tax years 2000, 2001 and
2002.
(These were revised assessments. It is unnecessary to refer to
the original ones.) The liquidators objected on behalf of the CC.
By
letter dated 15 December 2003 their attorneys ‘accepted that
the ... assessments are indeed assessments as contemplated
in Part II
of the Income Tax Act’ but contended, in the main, that
investment amounts (referred to by them and in the record
as
‘deposits’, among other terms) were not ‘received’
within the meaning of ‘gross income’ as
defined in the
Income Tax Act 58 of 1962 (the Act). (For convenience I shall refer
to the monies paid to, and accepted by, the entities
concerned as
deposits.)
[4] The objection was disallowed and the CC appealed.
The appeal was heard by the Tax Court at Durban, Levinsohn J
presiding. The
appeal was dismissed, the Tax Court concluding that
notwithstanding that the scheme was illegal, as also the investors’
transactions
in the course of the scheme, the deposits were
‘receipts’ within the meaning of the Act. With the
necessary leave, the
CC appeals to this Court.
[5] On behalf of the CC, its counsel advanced two
arguments in their heads. The principal one was that, as contended
before the Tax
Court, the deposits were not taxable because they were
not amounts ‘received’. The other submission was that any
tax
payable could not in law be owed by the CC because it was merely
a creature of convenience formed after the tax years in question.
[6] The second argument has no merit and was not
seriously pressed before us. Not only were the liquidators parties to
a consolidation
agreement which led to the Court order of 4 February
2003 but, as already stated, they accepted that the assessments in
issue were
appropriately raised on the CC. In terms of that order it
will still be a question of determining which deposits relate to
which
original entity and calculating the tax accordingly. The
convenience of consolidation will be that the tax can be claimed from
the
CC.
[7] Reverting to the main contention for the CC, it
relied essentially on a passage in a judgment of this Court
pertaining to the
same scheme in which the question was whether
repayments to investors were recoverable by the liquidators in terms
of
s 30(1)
of the
Insolvency Act 24 of 1936
.
1
On the premise that investors’ deposits were
loans, the passage in question reads as follows:
2
‘
All loans made to the scheme were –
in the light of at least the provisions of section 11 of the Banks
Act 94 of 1990 and a
prohibition under the Consumer Affairs (Unfair
Business Practices) Act 71 of 1988 – illegal and therefore
void; this proposition
of law is uncontested. The scheme never had
the least entitlement to retain investors’ money until the date
which had supposedly
been agreed as the due date for repayment. The
perpetrators of the scheme knew the investments to be illegal. There
is, on the other
hand, no evidence that any of the investors knew
their investments to be tainted, nothing from which to infer that any
of them acted
ex turpi causa.
That
being so, no question arises of relaxing the
in
pari delicto potior est conditio defendentis
rule ... . Upon receipt of a payment the scheme was liable promptly
to repay it to the investor who had a claim for it under the
condictio ob iniustam causam.
Instead it used the money to pay the claims of other investors who
had invested earlier. That was the whole idea of the scheme.’
[8] The argument for the CC was that because, on the
authority of the quoted passage, the scheme was liable in law
immediately to
refund the deposits, there was no basis on which it
could be said that the deposits were ‘received’ within
the meaning
of the Act. They were, it was argued, consequently not
subject to tax.
[9] In s 1 of the Act ‘gross income’ means
the total amount ‘received by or accrued to or in favour’
of a
taxpayer during a tax year. This case is concerned with receipt,
not accrual.
[10] To place the CC’s principal argument in
proper perspective I would make brief reference to the contents of
the statement
of agreed facts admitted into the record before the Tax
Court. The salient features may be summarised as follows. Prinsloo
operated
the scheme with the aid of family and employees, as also
so-called agents who solicited and transmitted investors’
deposits
in return for commission. She controlled the various
entities in the names of which the scheme was conducted and procured
their printing
of a range of convincing-looking documentation issued
to investors when they made deposits. This included acknowledgments
of receipt,
membership certificates and share agreements, all of
which purported to pertain to their investments. Most of the money
received
by the scheme was kept in cash and not banked. This cash
float provided the source of payments to investors. However,
substantial
amounts of it were appropriated by Prinsloo and her
accomplices. Some investors received repayment of their investments
plus returns.
The majority received less or nothing. What is of
essential importance in the present matter is that throughout the tax
years in
question ie 1 March 1999 to 28 February 2002, the
perpetrators of the scheme knew that it was insolvent, that it was
fraudulent
and that it would be impossible to pay all investors what
they had been promised.
[11] On those facts the inference must be that whatever
intention there was at any time on the part of investors to enter
into a contractual
relationship with the entities concerned and
whatever corresponding intention to contract there might possibly
have been on the relevant
entities’ part prior to 1 March 1999,
there can no longer have been any such corresponding intention after
that date. In short,
from that date onwards the entities run by
Prinsloo made their money by swindling the public. That was their
income. It must follow
that the amounts they were paid in that period
were ‘received’ within the meaning of the Act. It was for
the CC to prove
the contrary and that onus was not discharged.
3
[12] This Court’s judgment in the matter of
Fourie
NO v Edeling
NO cannot assist the CC. That
dealt with the relationship between investor and scheme. This case is
about the relationship between
scheme and fiscus. Even if, as
correctly stated in that matter, with respect, the scheme was legally
obliged to repay an investor
immediately on receipt, that was because
of the legal principles applicable to the parties to an illegal
contract, as between themselves.
An illegal contract is not without
all legal consequences; it can, indeed, have fiscal consequences.
4
The sole question as between scheme and fiscus is
whether the amounts paid to the scheme in the tax years in issue came
within the
literal meaning of the Act.
5
Unquestionably they did. They were accepted by the
operators of the scheme with the intention of retaining them for
their own benefit.
Nothwithstanding that in law they were immediately
repayable, they constituted receipts within the meaning of the Act.
In other words
it does not matter for present purposes that the
scheme was not entitled, as against the investors, to retain their
money. What matters
is that what they took in was income received and
duly taxable. The assessments were correctly raised.
[13] In dismissing the appeal before it the Tax Court
referred the case back to the Commissioner to consider the quantum of
the receipts
and if necessary to issue a further assessment. It has
not been suggested that such referral was unwarranted if the appeal
to that
Court was correctly dismissed.
[14] The appeal is dismissed, with costs, including the
costs of two counsel.
___________________
CT HOWIE
PRESIDENT
SUPREME
COURT OF APPEAL
CONCUR:
NUGENT JA
LEWIS JA
VAN
HEERDEN JA
SNYDERS
AJA
1
Fourie
NO v Edeling NO
[2006] 4 All SA 393
(SCA).
2
Para
13.
3
See
82 of the Act.
4
Commissioner
for Inland Revenue v Insolvent Estate Botha
[1990] ZASCA 2
;
1990
(2) SA 548
(A) at 556C-557B.
5
Ibid
at 557I-558A.