Commissioner for the South African Revenue Services v Higgo (A967/05) [2006] ZAWCHC 71; 2007 (2) SA 189 (C) (18 August 2006)

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[2006] ZAWCHC 71
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Commissioner for the South African Revenue Services v Higgo (A967/05) [2006] ZAWCHC 71; 2007 (2) SA 189 (C); 68 SATC 278 (18 August 2006)

IN
THE HIGH COURT OF SOUTH AFRICA
CAPE
OF GOOD HOPE PROVINCIAL DIVISION
CASE
NO :
A967/05
In
the matter between :
THE
COMMISSIONER FOR THE
SOUTH
AFRICAN REVENUE SERVICE
Appellant
and
G
H HIGGO
Respondent
______________________________________________________________________________
JUDGMENT DELIVERED THIS 18
TH
DAY OF AUGUST, 2006
______________________________________________________________________________
FOXCROFT, J :
This is a Full
Bench Appeal against the judgment of the Special Court delivered in
this matter on 30 August, 2005, upholding the
Respondent’s
objection to income tax assessments. For the years of assessment
dated 28 February 2001 and 2002 he had submitted
returns of his
income wherein he –
indicated
the receipt of certain income from Momentum Life Ltd;
sought
to deduct the following
‘management fees’
as deductions
from his income mentioned in (a) above :
2001 - R58 027,24
2002 - R55 809,10
The Commissioner, however, in the
determination of the Appellant’s taxable income for the said years
of assessment, disallowed
and added back the
‘management fees’
aforementioned and on this basis issued assessments for normal tax
on the Appellant for those years of assessment.
The Commissioner’s attitude was
that Respondent was subject to tax on the basis that amounts paid to
him in terms of his contract
with Momentum Administration Services
(“Momentum”) constituted annuity payments and thus gross income
in terms of paragraph
(a) of the definition of gross income in
section 1 of the Income Tax Act, No 58 of 1962. Respondent contended
that the proper
construction of his contract with Momentum is that
Momentum administered capital on behalf of Respondent and that he was
assessable
only on so much of the payments as constituted taxable
income derived from the investment.
Respondent succeeded in the Special
Court and the Commissioner has appealed to this Court.
There were two preliminary questions.
The first was an application for condonation of the late filing of
the Record on appeal by
Appellant, which was supported by an
affidavit from Mr Jorge, an employee of the SA Revenue Service and by
Mr Wilken, an attorney
in the office of the State Attorney, Cape
Town. In short, Mr Jorge deposed to the fact that he despatched by
courier to the State
Attorney, Cape Town on 16 March 2006, the Record
of the appeal for service the following day, the last day for filing.
Unfortunately,
the State Attorney did not receive the Record by
17 March, but only on 20 March, and he immediately attended to the
service and
filing of the Record on its receipt.
Mr Wilken confirms this information,
and commendably took steps on 17 March to record that he had not yet
received the Record and
would do so as soon as it arrived.
Mr
Meyerowitz,
who appeared
for Respondent, did not oppose condonation of the late filing, but
suggested that the Court should voice its displeasure
at the
tardiness of Appellant in waiting until the day before the Record was
due to be filed before attending to the matter. The
criticism is
justified and while condonation will be granted, the Appellant is
enjoined to ensure that the records in tax appeals
on the
Commissioner’s behalf are compiled by the staff of the Registrar
of the Tax Court in a more expeditious manner. That
will remove the
necessity for, and the cost of, applications for condonation.
The next preliminary matter was an
application that facts set out in three affidavits be received as
further evidence on appeal.
It was acknowledged in the affidavit of
Mr Jorge that the case was argued in the Special Court on the basis
of undisputed facts
set out in a final minute dated 11 August 2005.
[Record, 140-145]. Mr Jorge then adds that
“
The
appellant was represented in the special court by in-house legal
counsel.”
The affidavit continues to explain
that appellant briefed ‘external counsel’ to represent him in the
appeal to this Court, and
in December 2005
“
counsel
drafted the notice of appeal but at the same time advised that it
might be desirable to supplement the facts contained in
the minute.
He raised certain matters for investigation and clarification.”
It appears that counsel’s query is
related to legal process by which Respondent’s pension benefit had
been transferred from
the Reckit & Colman Pension Fund [
‘RCPF’]
to Momentum with effect from September 1998.
It is then stated that
“
SARS
was only able to furnish the State Attorney with instructions on
these matters on 9 May 2006. The delay was mainly attributable
to
the difficulty SARS encountered in scheduling a meeting with
Alexander Forbes, the pension fund consultants who had advised
Reckit
& Colman at the time of its conversion from a defined benefit
fund to a defined contribution fund in 1998 and had assisted
Reckit &
Colman in the resultant transfers.”
The additional evidence sought to be
placed before this Court was first, Annexure ‘A’ to the Rules of
the RCFP dealing with
the position of defined benefit members,
pensioners and deferred pensioners of that fund as at 1 September
1998. Respondent in
this matter was a pensioner of the RCPF at that
date.
An option form presented to all
pensioners in connection with the proposed conversion and transfer to
Momentum was also sought to
be introduced. A copy of Alexander
Forbes’ application dated 7 February 2001 for the approval of the
transfer of business
to Momentum and the approval were also documents
which Appellant wished to be added to the Record on appeal. The
application claims
that the question to be determined is of
“
great
practical importance in the taxation of pension benefits, and it is
undesirable that confusion and uncertainty should exist
or that a
case such as the present one should be decided on incomplete facts.”
In paragraph 18 of his affidavit Mr
Jorge goes on as follows :
“
It
appears that in the special court both parties in good faith sought
to facilitate and expedite the hearing by way of agreed facts.
At
least on SARS’ side, however, there appears to have been an error
in judgment as to the sufficiency of those facts.”
The second affidavit in the
application is signed by Mr D.A.S. Badenhorst, who confirms that an
amount of R6 099 778,00 was paid
by RCPF to Momentum in September
1998 in respect of Respondent. That is not in dispute and the
admission of his affidavit would
take the matter no further. Mr
A.L.A. Raphahlela also deposed to an affidavit confirming the
correctness, at 1 September 998,
of the RCPF Rules sought to be
introduced into evidence.
The application to supplement the
evidence on appeal was opposed by Respondent, who pointed out that
it was at the instance of
Appellant’s in-house legal counsel that a
set of facts was agreed between the parties and set out in the final
minute presented
to the Special Court. He stated further that
“
Apart
from the Dossier, no other evidence was adduced by the parties. The
matter was in effect decided as a stated case.”
He added that no reasonable
explanation has been given as to why the ‘new evidence’ was not
placed before the Special Court
at the hearing of the matter. He is
correct in adding that it is
“
clearly evidence
that was easily obtainable at the time.”
Mr Rogers,
who appeared for
Appellant, attempted to persuade us that no prejudice would be caused
to Respondent if the further factual information
sought to be
included were allowed. He stressed that this case turned on a legal
question to which these facts were secondary.
He submitted that he
was not attempting to introduce a new case on the facts, but only
adding certain additional facts which
did not substantially alter the
factual framework upon which the legal question had to be decided.
In my view, the resistance to this
application raised by
Mr Meyerowitz
was well founded. He
submitted that there is no relationship between the pension
provisions of the Pension Fund and the contractual
terms entered into
between Respondent and Momentum. The new material was therefore
irrelevant and for that reason alone,
Mr Meyerowitz
submitted,
it should not be admitted.
In my view, counsel was also correct
to point out that, in general terms, the Appellant had not shown any
sufficient reason why
the evidence which was available at all times
to SARS was not proffered for inclusion in the agreed statement of
facts concluded
in the Special Court. It is perhaps not surprising
that there appears to be no decided case or authority for permitting
an appeal
court to add to the agreed facts on which Appellant and
the taxpayer argued a dispute in the Special Court. In my view, this
is in the nature of a stated case and any alteration to the facts
agreed upon in a stated case must amount to an attempt to bring
a new
case. The appeal before us is against the decision on the agreed
case, and it would seem to me to be totally incompetent
for an appeal
to be heard on an agreed case supplemented by new and disputed
factual material, which was not before the Special
Court.
The application to adduce further
evidence on appeal is accordingly dismissed with costs.
THE MAIN ARGUMENT
Mr Rogers
submitted that the
case was dealt with in the Special Court on the basis of facts
recorded in the pre-trial minute, the final draft
of which was dated
11 August 2005 (Record, 140], as read with a bundle of documents.
He submitted that the Special Court had
erred by referring to an
earlier draft which one finds at page 117 of the Record, and he drew
our attention to the main differences
between the two versions as
identified in paragraph 1.2 of the Commissioner’s notice of appeal
[Record, 164-165].
Paragraph 1 of the minute makes clear
that the nature of the RCPF was changed from a
‘defined benefit
fund’
to a
‘defined contribution fund’.
Pensioners
in the position of Appellant were given a choice of remaining with
the fund and having their pension enhanced by a percentage
arising
from an actuarial surplus, or of leaving the fund subject to
investing the amount payable, namely the actuarial valuation
of their
previous benefit plus a percentage arising from the surplus in what
was termed a
‘retirement income option’
. Paragraph 2 in
its final form read as follows :
“
2. The
Appellant chose the latter and the said amount was transferred to
Momentum Life Limited.”
Paragraph 3 of the final minute makes
clear that Momentum and not the Respondent [
‘the taxpayer’
]
would invest the amount on the taxpayer’s behalf. There are other
less important differences.
Mr Meyerowitz
referred to
“the ultimate agreed facts” as appearing at p.140-142 of the
Record and submitted that he had annexed this ultimate
statement to
his Heads of Argument in the Special Court. He submitted further
that it was of no legal significance whether the
Court quoted from
the original draft minute in the Dossier or an earlier version,
since this had no material consequence in
the Court coming to the
conclusion to which it did”. He proceeded to submit that the issue
for determination was and remained
the legal effect of the contract
which determines whether what became payable was an annuity or a
payment out of capital, which
Momentum was obliged by the contract to
pay to Respondent, and after his death to his beneficiaries, until
the capital was exhausted.
Mr Meyerowitz
submitted that
it was common cause that, on 26 August 1998, Respondent entered into
an agreement with Momentum in terms on Respondent’s
behalf in a
living annuity with Momentum with effect from 1 September 1998, which
would provide Respondent with an initial income
of R41 666,66 per
month, the first instalment being of which Momentum would invest an
amount just in excess of R6 million payable
on 30 September 1998,
This amount could be revised annually at the instance of Respondent
subject to his being limited at the
time of revision to direct
Momentum to pay him monthly amounts equal to not less than 5% and not
more than 20% annually of the
total value of the investment on the
anniversary of 1 September. The Respondent revised the monthly sum
to R50 000,00.
Mr Meyerowitz
submitted that
the Respondent had effectively entered into an agreement for the
return of his capital together with income derived
therefrom until
the capital had been exhausted. In other words, the Agreement
envisaged a payment in instalments of a capital
sum together with
interest thereon.
In support of this argument he
referred to the case of
DEARY
v DEPUTY COMMISSIONER FOR INLAND REVENUE,
1920 CPD 541.
In that matter the Court referred to an English case,
JONES
v CIR, 1920 [1] KB 611,
where the following was said :
“
A
man may sell his property for a sum which is to be paid in
instalments and when you see that is the case, that is not income

nor any part of it. ….. A man may sell his property for what is
an annuity – that is to say he causes the principal to disappear

and an annuity to take its place.”
Central to the case was the
submission that the amount of R6 099 778,00 was paid by the Pension
Fund to Momentum on behalf of Respondent.
The Special Court decided this case
on the basis of facts recorded in a pre-trial minute which went
through several drafts. The
final minute dated 11 August 2005
[Record, 140] did
not
record that the money received by
Momentum at any stage
belonged
to the taxpayer.
Is the fact that the taxpayer did not
become the owner of the transferred sum, if that indeed is the legal
position, dispositive
of the fiscal question?
Mr Rogers
submitted that the
true position can be simply stated, namely
“
During
his employment the taxpayer and his employer contributed to the RCPF
at the rates specified in the latter’s rules. Because
the RCPF was
a defined benefit fund these contributions “disappeared”, the
taxpayer’s only interest on retirement being the
right to receive a
defined pension benefit (which would bear no particular relation to
the contributions paid).
…
There can thus be no doubt that the pension, for as long as it was
paid by the RCPF, was an annuity.
Because
of the RCPF’s conversion, the enhanced actuarial value of the
taxpayer’s annuity (not of his original contributions)
was
transferred to another retirement fund or insurer. The taxpayer did
not, and could not legally have, become the owner of the
transferred
amount. …
The
transfer did not change the character of the periodic payments which
the taxpayer received. They remained an annuity procured
by means of
the contributions paid to the RCPF by the taxpayer and his employer
while the taxpayer was still an in-service member
of the RCPF. Those
contributions had long since “disappeared” and been replaced by
a right to an annuity, and the right to
an annuity never ceased –
only its provider changed.”
Mr Rogers
filed Supplementary
Heads of Argument on the question of
‘disappearance of capital’
,
which included a survey of a number of foreign cases. None is
precisely in point, although the different situations with which

other courts have had to deal are helpful.
Mr Rogers
laid
some emphasis on the case of
ANZ
SAVINGS BANK LIMITED v FCT
,
a decision of the
Federal Court of Australia in 1993, where a purchase of 50 million
units in a trust fund for a total consideration
of $50 million was
held to amount to the purchase of an annuity and not to a contract of
loan. At page 372 of the report in
[1993] FCA 282
;
25 ATR 369
, DAVIES J said the
following :
“
A
fundamental distinction between an annuity transaction and a loan
transaction is that, when monies are lent, there is an obligation
on
the part of the borrower to repay the loan. If an annuity is
purchased, there is no obligation on the part of the annuity provider

to repay the price paid. The obligation is to pay the agreed annuity
and no relationship of debtor and creditor exists with respect
to the
price paid.”
In the main judgment of the Court,
HILL, J investigated the history of annuities and their identifying
characteristics. In
FOLEY v
FLETCHER, 1858 [3] H & 769
[1858] EngR 1107
; ;
157 ER 678
,
WATSON, B
said the following :
“
But
an annuity means where an income is purchased with a sum of money,
and the capital has gone and has ceased to exist, the principle

having been converted into an annuity.”
HILL, J continues as follows :
“
This
passage has been cited with approval in virtually every case decided
after FOLEY v FLETCHER, although without close analysis
of what it
meant by the words “the capital has gone and has ceased to exist”.”
After further examination of the
English cases, HILL, J said at 391 against marginal number 35 :
“
There
is good reason why the question whether a particular payment is an
instalment of an annuity or part repayment of capital with
interest
must be determined as a matter of form, rather than substance. In
every case where the term annuity is involved, the
substance of the
transaction will involve an investment of a capital sum by an
investor to produce a return to the annuitant, calculated
by
reference to that capital sum to which is applied an agreed or
defined percentage interest rate.”
Remembering that HILL, J was deciding
whether an amount constituted a loan or an annuity, his comments at
392, marginal letter
10, shed further light :
“
The
metaphor of disappearance may perhaps be misleading, in that in one
sense the moneys paid, whether as the purchase price of
the annuity
or as the principal sum lent, are not traced to see whether the
actual bank notes remain in existence. Money is a
fungible. A
consequence of the transaction being a loan will be that in the event
of breach the capital outstanding may be sued
for in debt. Where the
transaction is an annuity and there is a breach, then, but subject
to the terms of the annuity, the cause
of action of the annuitant
will lie in damages for breach of the contract.”
Mr Rogers
submitted that
similar considerations applied to the present matter. He also argued
that if the underlying assets had belonged
to the taxpayer and if
Momentum was merely an agent to hold those assets on his behalf,
there might not have been an annuity, but
that that would have
nothing to do with the ‘disappearance of capital’ principle.
In such a case the taxpayer would simply
have used his own money to
buy units and the interest and dividends thereon would accrue to him
not by virtue of a contractual
right of payment against Momentum,
but because he was throughout the owner of the units. He went on to
submit that in the present
case nothing supports the view that the
taxpayer owned the underlying assets or that Momentum was his agent.
While a
rei
vindicatio
might not be an appropriate claim in
the hands of the taxpayer on the facts of this case, Momentum was not
a beneficial owner of
what it received from RCPF. The R6 million
which it received was money it received on behalf of Respondent. In
my view, it also
received that money for the benefit of Respondent,
although
Mr Rogers
was at pains to differentiate between
these two concepts. While he was constrained to agree - since the
agreed minute said so
- that the money was received on behalf of
Respondent, he disputed that it was received ‘for his benefit’.
In my view the money which Momentum
received on behalf of Respondent was money which it was obliged to
invest for the benefit of
Respondent in order to carry out its
contractual obligation to make periodic payments to Respondent. The
money which had been
transferred by RCPF to Momentum and used to
purchase the “underlying assets was not merely the measure of the
cash payments
which Momentum was obliged to make”, as
Mr Rogers
submitted, but was the guarantee for payment to him of that to
which he, and after his death his dependants, were entitled.
It seems to me that the
‘disappearance of capital’
test is particularly
misleading in a situation such as the present. As HILL J said,
money is a fungible and the actual money
obviously disappears when
investments are bought with that money. Throughout his life, the
Respondent will be in control of the
investment of his capital or the
capital which was paid by RCPF to Momentum for his benefit,
whichever way one wishes to describe
it. Respondent is entitled to
regulate within agreed limits how much of this fund is to be paid to
him annually. In a very
real sense, therefore, the capital paid to
Momentum on Respondent’s behalf and for his benefit cannot
be said to have
‘disappeared’. It had to be held by Momentum to
cover Momentum’s obligation to Respondent until that obligation was
entirely
fulfilled.
In the result, it is ordered as
follows :
the application to adduce further evidence is dismissed with costs;
the appeal is dismissed with costs.
_______________________________
J G FOXCROFT
DAVIS, J,
:
I agree.
_______________________________
D M DAVIS
WAGLAY, J
:
I agree.
_______________________________
B WAGLAY
****** REPORTABLE
REPORTABLE
JUDGMENT
IN
THE HIGH COURT OF SOUTH AFRICA
CAPE
OF GOOD HOPE PROVINCIAL DIVISION
CASE
NO :
A967/2005
In
the matter between :
THE
COMMISSIONER FOR THE
SOUTH
AFRICAN REVENUE SERVICE
Appellant
and
G
H HIGGO
Respondent
_________________________
____________________________________________________
Counsel
for Appellant : Adv O Rogers [SC]
Instructed by : The State Attorney
CAPE TOWN
Advocate for Defendant : Adv D Meyerowitz
Instructed by : Ince Wood & Raubenheimer
Dates of Hearing : 26 July 2006
Date of Judgment : 18 August 2006
G
H HIGGO
/ . . . . .