Grundlingh v Commissioner for the South African Revenue Services (A33/2008) [2009] ZAFSHC 88 (17 September 2009)

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[2009] ZAFSHC 88
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Grundlingh v Commissioner for the South African Revenue Services (A33/2008) [2009] ZAFSHC 88; 72 SATC 1 (17 September 2009)

FREE STATE HIGH
COURT, BLOEMFONTEIN
REPUBLIC OF SOUTH
AFRICA
Appeal No.: A33/2008
In the appeal between:
J J GRUNDLINGH
Appellant
and
THE COMMISSIONER
FOR THE SOUTH
AFRICAN REVENUE
SERVICE
Respondent
_____________________________________________________
CORAM:
EBRAHIM, J,
et
JORDAAN, J
et
CLAASEN,
AJ
_____________________________________________________
JUDGMENT:
CLAASEN, AJ
HEARD ON:
24 AUGUST 2009
_____________________________________________________
DELIVERED ON:
17 SEPTEMBER 2009
_____________________________________________________
[1] The appellant resides
permanently in the Republic of South Africa. The appellant is an
attorney, admitted to practise as such
in both South Africa and the
Kingdom of Lesotho. The appellant is a partner of the firm Webbers
in Bloemfontein, South Africa.
The appellant is also a partner in a
separate Lesotho partnership known as Webber Newdigate. Webber
Newdigate is a partnership
of attorneys registered in the Deeds
Office in Lesotho and only conducts business in Lesotho. Webber
Newdigate’s fixed place
of business and office is in Lesotho where
it renders professional services. The professional services are
rendered by partners,
some of whom are residents of the Republic of
South Africa and others of Lesotho.
[2] The appellant shares
in the profits of Webber Newdigate. The appellant’s share of
Webber Newdigate’s profits in the 2002
and 2003 years of assessment
were taxed by the Lesotho fiscal authorities. The respondent
included these profits in appellant’s
taxable income for the
relevant years of assessment, but credited the appellant with the
amounts of tax paid to the Lesotho Revenue
Authorities.
[3] The issue on appeal
is whether the appellant’s share of the profits of Webber Newdigate
is taxable only in Lesotho or whether
it is taxable in Lesotho as
well as in South Africa. The appellant contends that his share of
the profits of Webber Newdigate
is taxable only in Lesotho in the
light of the provisions of Article 7(1) of the agreement between the
government of the Republic
of South Africa and the government of the
Kingdom of Lesotho for the avoidance of double taxation and the
prevention of fiscal
evasion with respect to taxes on income. (DTA)
This agreement appeared
in the Government Notice No. 607 of the Government Gazette 17948 of
22
nd
April 1997.
[4] The respondent
contends that on the correct interpretation of the article 7(1) of
the DTA, respondent was entitled to tax the
appellant on his share of
profits of Webber Newdigate. Alternatively the respondent contends
that he was entitled to tax the appellant
in terms of article 14 of
the DTA. The respondent was, however, obliged to deduct the taxes
paid by the appellant in Lesotho from
the taxes due according to his
South African fiscal law in terms of article 22(2) of the DTA.
[5] The disputed
assessment was first referred to the tax board, which ruled in favour
of the appellant. As the commissioner was
dissatisfied with the
decision of the board, the appeal was referred to the Tax Court of
South Africa held at Bloemfontein, to
be heard
de
novo
in
terms of section 83A(4) of the Income Tax Act, nr 58 of 1962. The
tax court found in favour of the respondent and the appellant

appealed to the full bench. Van der Merwe, J found that the
provisions of article 7(1) of the DTA can only apply if Webber
Newdigate
is liable for tax in Lesotho. The relevant ground of
appeal is that the court erred in not finding that Webber Newdigate
is an
enterprise of Lesotho for the purposes of article 7(1) of the
DTA in the light of the fact that the court accepted Webber Newdigate

carries on its business in Lesotho by appellant and other Lesotho
residents.
[6] The DTA was published
in the Government Gazette as aforesaid and enacted in terms of
section 108(2) of the Income Tax Act, nr.
58 of 1962. Article 7(1)
of the DTA provides,
“
The profits of an enterprise of a
Contracting State, shall be taxable only in that State unless the
enterprise carries on business
in the other Contracting State through
a permanent establishment situated therein. If the enterprise
carries on business as aforesaid,
the profits of the enterprise may
be taxed in the other State but only so much of them as is
attributable to that permanent establishment.”
[7] Article 3(1)(f)
reads:
“
the terms ‘enterprise of a
Contracting State’ and ‘enterprise of the other Contracting
State’ mean respectively an enterprise
carried on by a resident of
a Contracting State and an enterprise carried on by a resident of the
other Contracting State.”
[8] Article 3(1)(d) of
the DTA defines a “company” as a body corporate or any entity
which is treated as a company or body corporate
for tax purposes. It
is clear from what follows, that Webber Newdigate is not treated as a
body corporate for tax purposes.
[9] Article 3(1)(i) of
the DTA defines the term “person” to include an individual, a
company and any other body of persons which
is treated as an entity
for tax purposes. As will be seen the individual partners are
entities for tax purposes but not the partnership
Webber Newdigate.
[10] Appellant’s case
is therefore dependent on whether Webber Newdigate is liable to tax
in Lesotho. This proposition is unacceptable
for the following
reasons:
10.1 It is common cause
that since 1 January 2001 there was a change in the South African tax
regime. It changed from a source-based
to a residence-based
taxation. A South African resident is taxed on all income received
by or accrued to such resident, irrespective
of the source of income
or where the income was earned. That meant that
all
income, including foreign income, can now be included in the income
of a South African resident, unless such income falls within
one of
the exclusions reflected in the DTA. The appellant asserts that
article 7(1) of the DTA provides such an exclusion.
10.2 The Income Tax Act,
nr. 9 of 1993 of the Kingdom of Lesotho reads as follows:
“
Principle of taxation for
partnerships
75(1) The partners rather than the
partnership are taxed, but the partnership is required to file a
partnership return of income.
Taxation of partners
77(1) The gross income of the resident
partner includes the partners’ distributive share of partnership
income.
(2) The gross income of a
non-resident partner includes the partners’ distributive share of
the Lesotho/source of partnership
income.
(3) A resident partner is allowed
a deduction for the partners’ distributive share of partnership
loss.
(4) A non-resident partner is
allowed a deduction for the partners’ distributive share of
partnership loss but only to the extent
that the activity given rise
to the loss would have given rise to Lesotho/source income if a loss
had not been incurred.
(5) Income, expenses, or losses
derived or incurred by a partnership retain their character as to
geographic source and type of
income, expense or loss in the hands of
the partners.
(6) A partners’ distributive
share of partnership income or loss is equal to the partners’
percentage interest in the partnership.
(7) A partners’ distributive
share of partnership loss is allowed only to the extent of the
adjusted cost base of the partner’s
interest in the partnership at
the end of the year of assessment in which the loss occurred, and any
excess of such loss over such
basis may be carried forward.
10.3 The Income Tax Act
58 of 1962 and the Income Tax Order of the Kingdom of Lesotho nr 9 of
1993 does not recognise a partnership
as a separate legal taxable
entity. Partnerships are taxed on the same basis as partnerships in
South Africa. A partnership,
as such, is therefore not liable to any
tax in its own right.
10.4 The appellant, as a
partner of Webber Newdigate, is liable for tax and not the
partnership. It was common cause where partners
receive equal shares
of the partnership profits, that these partners are individually
taxed and may be taxed on different scales
10.5 It is common cause
that a partnership is not a person or legal entity both in South
Africa and in the Kingdom of Lesotho. It
is also clear that Webber
Newdigate is not treated as a body corporate for tax purposes and,
as aforesaid, the individual partners
are tax entities, liable to pay
taxes and not the partnership Webber Newdigate.
10.6 Article 22 of the
DTA eliminates double taxation as follows:
“
Double taxation shall be eliminated
as follows-
…
2. In South Africa, taxes paid by
South African residents in respect of income taxable in Lesotho, in
accordance with the provisions
of this Agreement, shall be deducted
from the taxes due according to the South African fiscal law. Such
deduction shall not, however,
exceed that part of the income tax, as
computed before the deduction is given, which is attributable to the
income which may be
taxed in Lesotho.”
10.7 Section 24H of the
Income Tax Act, nr. 58 of 1962 provides as follows:
“
(2) Where any trade or business is
carried on in partnership, each member of such partnership shall,
notwithstanding the
fact that he may be a limited partner, be deemed for purposes of this
Act to be carrying on such trade or business.
…
(5)(a) Where any income has in common
been received by or accrued to the members of any partnership, a
portion (determined in accordance
with any agreement between such
members as to the ratio in which the profits or losses of the
partnership are to be shared) of
such income shall, notwithstanding
anything to the contrary contained in any law or relevant agreement
of partnership, be deemed
to have been received by or to have accrued
to each such member individually on the date upon which such income
was received by
or accrued to them in common.”
10.8 The appellant are
therefore deemed to carry on the business of Webber Newdigate from
the viewpoint of the respondent. Any
portion of the profits received
is deemed to be generated by the appellant. Webber Newdigate is not
an enterprise, liable to pay
tax, in Lesotho and article 7(1) of the
DTA is not applicable.
[11] Because of the
finding in regard to article 7(1) of the DTA it is unnecessary to
deal with respondent’s contention regarding
article 14.
[12] For these reasons
the appeal dismissed is and the assessments confirmed.
___________________
J. Y. CLAASEN, AJ
I concur.
______________
S. EBRAHIM, J
I concur.
_______________
A. F. JORDAAN, J
On behalf of the
appellant: Adv. P. J. Loubser
Instructed
by:
Webbers
BLOEMFONTEIN
On behalf of the
respondent: Adv. P. J. J. Marais SC
With C Louw
Instructed
by:
The State Attorney
BLOEMFONTEIN
/em