Commissioner for South African Revenue Service v Marx NO (A720/05) [2006] ZAWCHC 9; 2006 (4) SA 195 (C) (9 March 2006)

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[2006] ZAWCHC 9
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Commissioner for South African Revenue Service v Marx NO (A720/05) [2006] ZAWCHC 9; 2006 (4) SA 195 (C); 68 SATC 219 (9 March 2006)

IN THE HIGH COURT OF SOUTH AFRICA
(CAPE OF GOOD HOPE PROVINCIAL DIVISION)
Case No A720/05
In the
matter between:
THE
COMMISSIONER FOR
THE
SOUTH AFRICAN REVENUE SERVICE
Appellant
and
R M S
MARX NO
Respondent
JUDGMENT: 09 MARCH 2006
VAN ZYL
J:
INTRODUCTION
[1] This is an appeal against a judgment delivered in the Cape Income
Tax Special Court on 13 October 2004. In terms thereof Traverso
DJP
upheld an appeal against the decision of the appellant to levy
donations tax on four donations of five million rand each made
by one
M W Rush (“the donor”) to his four children as beneficiaries
(“the donees”). The learned judge set aside the appellant’s
assessment and ordered him to issue a revised assessment.
[2] Mr R F van Rooyen SC appeared for the appellant and Mr T S Emslie
SC for the respondent. The court expresses its appreciation
for their
helpful contributions on behalf of the respective parties.
BACKGROUND
[3] During 2001 the donor and donees concluded a written deed of
donation which provided as follows:
1. Donation
The donor donates (irrevocably) to the donees, as a donation
inter
vivos
, the sum of R5 000 000 (Five Million Rand) to each of the
donees.
2. Delivery
The donees shall be entitled on signature of this deed to a vested
right in the aforementioned asset but shall not receive any benefit
until the death of the donor.
3. Acceptance
The donees gratefully accept the donation.
[4] The donor died on 3 June 2002 and the respondent was appointed as
executor of his deceased estate. The appellant subsequently
levied
donations tax on the said donations, applying a value calculated in
accordance with the provisions of section 62(1)(
c
) and (2) of
the
Income Tax Act
58 of 1962, as amended (“the Act”).
This was determined with reference to an alleged “usufructuary
interest” which was deducted
from the amount donated for purposes
of establishing a so-called “bare
dominium
” value.
[5] The respondent objected to the donations tax assessment on the
ground that the donations were exempt from donations tax in terms
of
section 56(1)(
d
) of the Act, which provides:
Donations tax shall not be payable in respect of the value of any
property which is disposed of under a donation – …
in terms of which the donee will not obtain any benefit thereunder
until the death of the donor.
[6] The respondent’s objection was disallowed,
but his appeal to the court
a quo
succeeded on the basis that the
donations were indeed exempt from tax in terms of section 56(1)(
d
)
of the Act. Traverso DJP held in this regard that the donations were
“executory donations” in the sense that the delivery of
the
subject matter of the donations was to take place at a future date.
Inasmuch as they had been embodied in a written document
signed by
the donor and donees, they were valid in terms of section 5 of the
General Law Amendment Act
50
of 1956.
[7] In her judgment Traverso DJP referred to a
judgment of the Income Tax Court
1
and held:
2
As a matter of law the donees did not on the conclusion of the
agreement acquire a vested right to the subject matter of the
donation.
The only vested right which they received was the right to
claim payment of the sum of R5 000 000,00 each on the death of the
donor.
It is however important to bear in mind that the donor did not
donate to them the right to claim the R5 000 000,00. He in fact
donated
the money to them. The donees’ rights to claim payment on
the death of the donor arose from their acceptance of the donation of
R5 000 000,00. Whatever right the donees acquired was not immediately
enforceable. They were obliged to wait until the death of the
donor
before their claims became enforceable.
[8] Traverso DJP held further
3
that the acquisition by the donees of a “vested right” in their
respective donations meant no more than that they had a vested
right
to claim payment thereof upon the death of the donor. If these words
were to be excised from the deed of donation its legal
effect would
be no different. The donations hence fell squarely within the
provisions of section 56(1)(
d
)
of the Act.
[9] The learned judge then observed in
conclusion:
4
It is also important to remember that what was donated was
money
and that as a matter of law the donees cannot acquire ownership of
the money donated to them before it was paid to them. Accordingly
they acquired no ownership at the time of conclusion of the
agreement, and for this reason alone it is jurisprudentially
impossible
for the donees to have acquired the so-called
bare
dominium
of the money that was the subject matter of the
donation. I am therefore satisfied that the appeal on the merits must
succeed.
MAIN SUBMISSIONS ON BEHALF OF THE APPELLANT
[10] Mr Van Rooyen submitted that this was not a case in which the
donor had contractually agreed to make an irrevocable donation
to a
donee in terms of which its "whole operation" would be
suspended until the donor’s death or thereafter. There was,
he
suggested, no suspension of the donation in the sense that “no
delivery or transfer of the property or of any pecuniary advantage,
profit or gain” would take place before then. Traverso DJP had thus
erred by not reading the words “vested right” with the
words “in
the aforementioned asset” in clause 2 of the said deed.
[11] Under the rubric “Delivery”, Mr van Rooyen continued, the
parties had envisaged that each donee would, upon signature of
the
deed of donation, acquire an immediate “vested right” in the
amount of the respective donations. This, he said, demonstrated
an
intention to pass ownership in the donation with immediate effect, in
the sense that vesting implied the transfer of ownership
(
dominium
).
[12] Transfer of ownership, he argued further, was effected by way of
constructive or symbolic delivery (
constitutum possessorium
)
at the time the donees appended their respective signatures to the
deed of donation. The effect thereof, he submitted, was that
a tacit
or implied contract of loan (
mutuum
) came into existence
between them, the donees being the lenders and the donor the
borrower. This was subject thereto that the loan
would be
interest-free and would be repaid when the donor died. In terms of
the loan the donor would then be free to use or consume
the amount
constituting the donations and retained by him, provided it be
"returned" to the donees on his death.
[13] The reason why the loan to the donor would be interest-free, Mr
Van Rooyen submitted, was that the deed of donation had specified
that the donees would not receive "any benefit" until the
death of the donor. Upon signature of the deed by the donees,
however, they did receive an asset with "inherent value"
which could be "ceded or taken by creditors in insolvency".
This constituted an "immediate benefit" which qualified as
"any benefit" in terms of section 56(1)(
d
) of the
Act. This accorded with the intention of the legislature in
introducing donations tax.
[14] In any event, Mr Van Rooyen argued, if there should be any doubt
as to the correct meaning of the words used in the deed of
donation,
the respondent had failed to discharge the
onus
resting upon
him in terms of section 82 of the Act.
MAIN SUBMISSIONS ON BEHALF OF THE RESPONDENT
[15] At the outset Mr Emslie made it clear that there was no
reference in either the statement of the grounds of assessment or the
statement of the grounds of appeal to the appellant's contention
relating to
constitutum possessorium
. At no stage was it
raised as an issue and Traverso DJP hence did not deal with it in her
judgment. It was in fact raised for the
first time in Mr Van Rooyen's
heads of argument. This could clearly not be done, since it
prejudiced the respondent, who could have
adduced evidence to refute
it. In these circumstances, Mr Emslie submitted, it could not be
considered as an issue before this court.
[16] Even if it were a properly raised and competent issue, Mr Emslie
continued, there was no merit in it. There was no indication
in the
deed of donation of any intention that the donations would vest in
the donees with immediate effect, after which they would
lend it to
the donor by way of an interest-free loan, repayable by the donor on
his death. Nor could any such intention be implied
from the relevant
facts or the surrounding circumstances.
[17] In this regard Mr Emslie emphasised that
constitutum
possessorium
could not be presumed, particularly in view of the
appellant's failure to allege or rely on it. The donated money was
never transferred
to the donees and ownership therein never passed to
them. They were hence not empowered to dispose of it, by way of a
loan or otherwise.
The appellant had, therefore, erred in assessing
it as a "usufructuary interest" entitling it to levy
donations tax on
the "bare
dominium
" of the money
donated.
[18] It followed, Mr Emslie submitted, that the donees had not
received "any benefit" from the donation. Their "vested
right" to the donation entitled them only to claim payment
thereof on the death of the donor. This was incompatible with a
notional
transfer of ownership of the donation followed by a notional
interest-free loan thereof by the donees to the donor. The legal
effect
of the donation, he suggested, was that it was "a
particular kind of executory donation" in terms of which
performance
was postponed until the death of the donor. This brought
it under the aegis of section 56(1)(
d
) of the Act inasmuch as
it did not confer any benefit on the donees.
[19] Traverso DJP, Mr Emslie submitted, was quite correct in holding
that the donor had not donated the right to claim the donations,
but
had in fact donated the specified amount of the donation (R5 million
each) to them. Their "vested right" in the amount
donated
was qualified in that they were not to receive "any benefit"
until the donor's death. The use of the words "vested
right"
was, he suggested, a "jurisprudentially clumsy" way of
emphasising the fact that their right to the money donated
was not
subject to any contractual contingency. In any event, although they
would have the right to claim the money on the donor's
death, they
could not acquire ownership thereof until it was paid out to them.
The suggestion by the appellant that the "bare
dominium
"
value of the donation was a benefit and hence taxable was, Mr Emslie
submitted, based on a false premise that the acceptance
of the
donation by the donees constituted a taxable benefit.
CONSIDERATION OF THE ISSUE
[20] It is clear, as submitted by Mr Emslie, that
the appellant is not, at this stage of the proceedings, entitled to
rely on an argument
relating to issues never before alleged, raised
or canvassed by it, and never considered by the court
a
quo
. The appellant's suggestion, that
there was a symbolic transfer (
constitutum
possessorium
) of the amount donated
and an implied or tacit loan agreement
(
mutuum
)
between the donor and donees in respect thereof, raises a totally new
issue. The respondent certainly did not have the opportunity
to
address it before the court
a quo
and was in fact made aware of it for the first time when the
appellant's heads of argument in the present case were served on him.
This must necessarily be regarded as severely prejudicial to the
respondent.
[21] But even if the appellant were entitled to raise this new issue,
I agree with Mr Emslie that there is not the slightest merit
in it.
Although clause 2 of the deed of donation stipulates that, on signing
such deed, the donees acquired a "vested right"
in the
amount donated to each of them, this right was unequivocally
qualified by the express condition that they would "not
receive
any benefit until the death of the donor". The effect of the
word "vested" in this context, when read with
the word
"irrevocable" in clause 1 of the deed, was simply to give
the donees the assurance that they would be entitled
to claim payment
of the amount donated on fulfilment of such condition. When they
accepted the donation, a binding agreement came
into existence
between them and the donor, who undertook contractually not to revoke
the donation at any time before his death.
[22] It would appear that the appellant read more
into the words "a vested right in the aforementioned asset",
appearing
in clause 2 of the deed, than the donor ever intended. I
agree with Mr Emslie that the use of these words may probably be
attributable
to clumsy draftsmanship, inasmuch as the donor wished to
emphasise that the donation was made seriously and deliberately, and
that
he regarded himself as contractually and legally bound by it.
That this was his intention is confirmed by the provision, in clause
1 of the deed, that the donation is irrevocable, subject thereto that
the donees would receive no benefit from it before the donor's
death.
I agree with Traverso DJP that, if the words relating to a vested
right were to be excised from the deed, its legal effect
would remain
unimpaired.
[23] It must be borne in mind that a donation made
during the lifetime of the donor (
donatio
inter vivos
) becomes contractually and
legally binding from the moment the donees accept the donation. It
creates rights and obligations just
like any other consensual
contract, as appears from the following definition and elucidation in
LAWSA
:
5
A donation is an agreement which has been induced by pure (or
disinterested) benevolence or sheer liberality, whereby a person
under
no legal obligation undertakes to give something … to
another person, called the "donee', with the intention of
enriching
the donee, in return for which the donor receives no
consideration nor expects any future advantage.
[24] The donor's intention to make a donation
(
animus donandi
)
must arise from generosity (
liberalitas
)
or liberality (
munificentia
)
6
and be expressed as a promise (offer) to donate, which promise
(offer) must be accepted by the donee before a binding contract of
donation comes into existence. Once this happens the donation is
perfected and it may be revoked only under certain circumstances.
7
The resultant contract is not sufficient, however, for purposes of
transferring the donated asset into the ownership (
dominium
)
of the donee. Performance of the obligation arising from the
donation, in the form of delivery (
traditio
)
of the asset donated, first has to take place, as appears from the
following
dictum
of
Jansen JA in
Mankowitz v Loewenthal
:
8
At the outset it must be remembered that a contract of donation and
the performance thereof, viz the delivery of the article donated,
are
two separate juristic acts: the one directed at creating an
obligation and the other at transferring possession (and
dominium
).
[25] An executory donation is so called because it
still requires to be effected or perfected, in the sense that
something is required
to be done before it can be regarded as
completely performed.
9
In the present case Traverso DJP held that the donation was executory
because delivery thereof would take place at some future time,
namely
when the donor died. As such it was valid and enforceable in terms of
section 5 of the
General Law Amendment
Act
50 of 1956, the relevant portion of
which reads:
No donation concluded after the commencement of this Act shall be
invalid merely by reason of the fact that it is not registered
or
notarially executed: provided that no executory contract of donation
entered into after the commencement of this Act shall be
valid unless
the terms thereof are embodied in a written document signed by the
donor …
[26] After suggesting, in his discussion of this
section, that the first question is what qualifies or does not
qualify as a donation,
Christie continued:
10
The second question raised by the section is what is, and what is
not, an executory contract of donation. The section obviously
requires
that a distinction should be drawn … between an accepted
promise to donate, giving the promissee a personal right of action
against
the donor to compel him to fulfil his promise by delivery or
the passing of transfer, and a donation completed by delivery or
transfer,
which gives the donee a right
in rem
. The latter,
the completed donation, cannot be described as an "executory
contract of donation" and therefore falls outside
the section.
[27] If the donation takes the form of a cession
of rights the donation is completed simultaneously with the cession
and there is
hence no question of an executory contract, as explained
by Botha J in the
Weiner
case:
11
I agree with counsel for the respondents that the family arrangement
arrived at was an agreement whereby a cession was effected of
the
rights of Julius and the third respondent to their inheritances in
Nathan's estate, in favour of Rose. They divested themselves
of their
rights and Rose acquired those rights from them. Counsel for the
applicant did not attack the legality of an agreement of
this nature,
and I am unable to think of any reason for doubting its validity.
Matters such as the liability for donations tax and
transfer duty do
not affect the validity of the agreement. No doubt the cession of
rights constituted a donation by Julius and the
third respondent to
Rose, but since a transfer of rights takes place by the mere
agreement of cession, this was not an executory
donation requiring
writing for its validity in terms of the proviso of sec. 5 of Act 50
of 1956; in any event, the actual delivery
of the assets in Nathan's
estate to Rose would have precluded any reliance being placed on the
statutory provision mentioned.
[28] It is clear from these authorities that the
contract of donation, which came into existence when the donees
accepted the donation
contained in the deed of donation, created
personal rights in terms of which the donees could claim transfer of
the donation when
the donor died. Only when transfer had effectively
taken place, would they acquire ownership in the respective amounts
donated to
each of them. The vesting of a personal right in a donee
in circumstances such as the present cannot be equated with transfer
of
ownership of, or of any other right in, the donation. The deed
makes it clear that such transfer cannot take place before the death
of the donor. This accords, in my view, with the following extract
from the judgment of Trollip J in the matter referred to by Traverso
DJP:
12
It may be asked in what case then, other than donations
mortis
causa
(for they are specially exempted under the preceding
paragraph of s 56(1)), was it intended that the exemption should
apply.
The kind of case to which it would apply seems to be those in which
the donor contracts to donate irrevocably property to a beneficiary,
or to a trustee for the benefit of a beneficiary, in terms of which
its whole operation is suspended until his death or thereafter;
that
is, no delivery or transfer of the property or of any pecuniary
advantage, profit or gain therefrom is to take place until then.
As stated above, the mere contractual right thereby vested in the
‘donee’ is not a ‘benefit obtained by the donee thereunder’
so as to preclude the exemption from operating, and the donation
would not be a
donatio mortis causa
, because it would not be
revocable, which are both essential characteristics of the latter
kind of donation (
Meyer & others v Rudolph’s Executors
1918
AD 70
at 83, 88).
[29]
There is hence no merit in Mr van Rooyen’s argument that the
reference in the deed of donation to a “vested right” in the
donation
evinced the intention of the immediate transfer of
ownership. In certain circumstances this may be the case,
13
but not so in the present case. On my reading of the deed such
transfer has been unequivocally postponed to the occurrence of a
future
event, namely the death of the donor.
[30] In this regard there is no question of
transfer of ownership in the donation having been effected by
constructive, symbolic or
fictitious delivery in the form of
constitutum possessorium
,
as argued by Mr van Rooyen.
14
There is nothing in the deed of donation, or in the surrounding
circumstances, from which it may be inferred that the donor had
intended
to transfer ownership of the donation from himself to the
donees, but would continue to retain it, in a different capacity, on
behalf
of the donees. Even less is there any indication, in the deed
or the surrounding circumstances, that the donor would henceforth
hold
the donation in terms of a loan for consumption (
mutuum
),
which loan would be interest-free and repayable (presumably by his
estate) on his death. If this had been his intention, and that
of the
donees, it would undoubtedly have been expressed in the deed. The
appellant has clearly come nowhere near making out a case
on this
basis, as a cursory survey of the following lucid exposition of the
law
will
demonstrate:
Constitutum possessorium
is never presumed. The party alleging
it must prove that the following requirements have been fulfilled:
the transferor must be the owner and the possessor of the thing at
the moment of transfer;
the transferor must cease to possess the thing for himself and begin
to hold the thing in the name of the transferee;
the transferee must consent that detention be retained by the
transferor; and
there must be a clearly proved
causa detentionis
in the form
of a clearly proven contractual relationship under which the
transferor becomes the detentor for the transferee.
From the foregoing it is clear that an intention
simpliciter
to transfer ownership is not sufficient. The intention must be that
the transferor will henceforth hold the thing on behalf of the
transferee under a new contractual relationship. This involves an
agreement that the transferor will henceforth hold the thing as
detentor on behalf of the transferee as well as a distinct
causa
detentionis
for holding so.
The
causa detentionis
can either be the result of an express
agreement between the parties or it can take the form of a tacit
agreement deduced from the
surrounding circumstances. In principle
there is no restriction on the type of
causa detentionis
on
which the parties may decide but
causae
which envisage only
slight benefits for the transferor are viewed with a great deal of
suspicion.
Finally, the bona fides of the parties must be
beyond doubt. It must be proved that the parties had the genuine
intention to transfer
and accept ownership. If the arrangement is
merely a sham or if it smacks of bad faith, the courts are reluctant
to accept that ownership
passes especially if the rights of third
parties will be prejudiced.
15
[31] Even if the appellant were able to persuade
this court that ownership of the donation had indeed passed from the
donor to the
donees by way of
constitutum
possessorium
, it would not be able to
get over the insurmountable hurdle of demonstrating that they then
concluded a tacit agreement of loan for
consumption.
16
It is trite that a tacit agreement can be inferred only from the
clear and unambiguous conduct of the parties thereto.
17
In the present case the parties gave no indication whatever, by their
conduct or otherwise, that they intended concluding such an
agreement. It can simply not be deduced from their conduct, in the
context of the known facts and circumstances of the case, that
they
agreed to make the donation the subject of a loan agreement in terms
of which the donor, divested of his ownership of the donation,
would
henceforth retain it as the borrower of the amount of the donation.
It goes without saying that it would be virtually impossible
to show
that they agreed that the loan would be interest-free and repayable
on the death of the donor.
[32] It follows that the appeal must be dismissed
with costs.
D H VAN ZYL
Judge of the High Court
I agree.
D M DAVIS
Judge of the High Court
I agree.
N J YEKISO
Judge of the High Court
1
ITC 1192
(1965) 35 SATC 213
at 219.
2
In par [10] of her judgment.
3
In par [11] of her judgment.
4
In par [12] of her judgment.
5
2
nd
ed 2005, vol 8 part 1, par 301 at 370. See also
Avis
v Verseput
1943 AD 331
at 347-352;
Potter and Another v Rand
Townships Registrar
1945 AD 277
at 290;
Commissioner for
Inland Revenue v Estate Hulett
6
See D 39.5.1 pr.:
…
et propter nullam aliam causam facit, quam ut liberalitatem et
munificentiam exerceat
.
7
See Inst 2.7.2: …
quae
si fuerint perfectae, temere revocati non possunt
.
8
1982 (3) SA 758
(A) at 765A.
9
See
Nezar v Die
Meester en Andere
1982 (2) SA 430
(T)
at 436E;
Savvides v Savvides and Others
1986 (2) SA 430
(T) at 436E;
Stander
v Commissioner for Inland Revenue
1997
(3) SA 617
(C) at 622D-E.
10
R H Christie
The Law of Contract in South Africa
(4
th
ed 2001) 141.
11
Weiner NO v The Master and Others NNO (1)
1976
(2) SA 830
(T) at 842B-D.
12
See note 1 above. The extract appears more fully
in par [9] of Traverso DJP’s judgment.
13
See
Jewish Colonial
Trust, Ltd v Estate Nathan
1940 AD 163
at 175-176;
Estate Dempers v Secretary
for Inland Revenue
1977 (3) SA 410
(A)
at 425E-426A. The Income Tax Court cases relied on by Mr van Rooyen
in this regard (ITC 76
(1927) 3 SATC 68
(U) at 70 and ITC 1552
(1989) 55 SATC 82
(T) at 86) are distinguishable and do not support
his contentions. On the various meanings of “vested” see Cameron
and others
(eds)
Honoré’s South
African Law of Trusts
(5
th
ed 2002) par 347 at 556-557.
14
On the nature and ambit of
constitutum possessorium
see
Jefferson, Executor of Stewart v De Morgan
1882 ECD 205 at
216-221;
Goldinger’s Trustee v Whitelaw & Son
1917 AD
66
;
Mankowitz v Loewenthal
(note 8 above) at 766A-G;
Epol
(Edms) Bpk v Sentraal-Oos (Koöperatief) Bpk en Andere
1997 (1)
SA 505
(O) at 510E-G.
15
LAWSA (
1
st
reissue 2002) vol 27 par 372 at 308.
16
See in general LAWSA (1
st
reissue 1999) vol 15 par 268-283 at 154-162.
17
See the discussion in Christie (note 10 above) at 91-101.