Wyner v Commissioner for The SA Revenue Service (1991/01) [2002] ZAWCHC 12 (8 March 2002)

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[2002] ZAWCHC 12
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Wyner v Commissioner for The SA Revenue Service (291/01) [2002] ZAWCHC 12; 2002 (4) SA 744 (C); 64 SATC 254 (8 March 2002)

IN
THE HIGH COURT OF SOUTH AFRICA
(CAPE
OF GOOD HOPE PROVINICIAL DIVISION)
REPORTABLE
CASE
No.: 291 / 01
In
the matter between:
C
M WYNER
Appellant
and
COMMISSIONER
FOR THE SOUTH AFRICAN
REVENUE
SERVICE
Respondent
JUDGMENT
BY : JH CONRADIE,J et HC NEL, J et AP BLIGNAULT, J
For
the Appellant : Adv. T. S. Emslie SC
Instructed
by : MESSRS HOFMEYR HERBSTEIN & GIHWALA INC.
21
st
Floor, 2 Long Street,
CAPE
TOWN, 8001
P.O.
Box 1221
CAPE
TOWN, 8000
(Ref.:
Mr. R. G. Bricout) Tel: (021) 405 6026
For
the Respondent : Adv. O. Rogers SC
Adv.
L. Fichardt
Instructed
by : THE STATE ATTORNEY
Liberty
Life Centre
22
Long Street
CAPE
TOWN, 8001
Private
Bag X9001
CAPE
TOWN, 8000
(Ref.:
Mr. S Omar) Tel: (021) 421 0116
Date
of Hearing : Monday, 28
th
January 2002
Judgment
delivered on : Friday, 8
th
March 2002
THE
HIGH COURT OF SOUTH AFRICA
(CAPE
OF GOOD HOPE PROVINCIAL DIVISION)
REPORTABLE
CASE NO: 291/01
In
the matter between:
C.M.
WYNER Appellant
and
COMMISSIONER
FOR THE SA REVENUE SERVICE Respondent
___________________________________________________________________
JUDGMENT
DELIVERED ON :
8
th
MARCH 2002
___________________________________________________________________
CONRADIE, J
This is an appeal against the judgment of Traverso
D JP delivered in the special court for hearing income tax appeals.
She held that
the proceeds of the sale of erf 484 Clifton, sold by
the appellant in the 1996 year of assessment constituted gross
income. The
appellant contends that the proceeds of the sale were
capital so that the assessment in terms of which she was taxed on
this receipt
should not have been confirmed.
Before
the Cape Town suburb of Clifton became the playground of the rich it
was the dumping ground of the poor. During the early part
of the
twentieth century, when the land at Clifton still belonged to the
British Admiralty, holiday sites at Clifton were leased
to campers.
After 1918 demobilized World War I soldiers were allowed to erect
structures on the land in order to help overcome a
serious housing
shortage. The arrangement was not intended to be a permanent one.
Tenure was held by way of short term leases.
In 1923 the Clifton
bungalow area was donated by the British Admiralty to the City of
Cape Town (‘the Council’). In the same
year the Clifton and
District Bungalow Owners’ Association (‘the Association’) was
formed. The papers show that as early as
1935 the inhabitants of the
area thought of themselves as a settled community and wished to
transform their tenure, which had remained
as precarious as before,
into something more durable.
In
1948 calls for freehold tenure were renewed. The Council was not
unsympathetic, but there was an obstacle to surveying the land.
By
1972, however, diagrams for each site which were up to deeds office
standard could be produced, and by 1984 the Council’s Housing
Committee recommended that all the leasehold titles in Clifton be
converted to freehold on condition that the entire area be declared
a
national monument. This was proposed in order to preserve the
character of the area, and indirectly was an acknowledgement of the
Clifton tenants’ contribution to its attractiveness. A provisional
declaration was made in August of the same year.
In
1986 the Council resolved to sell bungalow sites to the existing
lessees. However, the area (which was zoned public open space)
had to
be rezoned and subdivided and this took time. In May 1988, sites
were being offered for sale to their lessees, but it was
not until
1992 that four sites on fourth beach Clifton were sold by auction.
This prompted the Association to bring an action against
the Council
for transfer of sites to their members. There was an abortive attempt
by the Council to sell the sites in 1993 and again,
on slightly
different terms, in 1994.
In
the course of the last eighty years or so there was much debate about
the anomalous situation of the Clifton bungalow owners.
I say
‘owners’ because it was - despite what the leases said - always
accepted by the Council that the structures erected on
the land
belonged to the lessees. This was one reason that termination of the
short - term leases was never envisaged. Another was
the Council’s
desire to retain the uniquely attractive features of the Clifton
beachfront. Yet another was that the lessees, many
of whom had been
there for many years, had spent time and money on beautifying the
area and should not be displaced by wealthy newcomers
who had made no
such contribution.
I
think it is safe to say that at least since 1948 the Council’s
attitude was that the Clifton bungalow owners were there to stay.

People began selling their sites or, more accurately the
improvements, which, as we have seen, were considered to belong to
them.
In every sale the Council readily agreed to enter into a
similar (short- term) lease with the new ‘owner’. It was the
furthest
thing from anyone’s mind that such a lease might be
terminated for any reason other than non-performance.
The
appellant was one of the people who bought a bungalow from someone
else. On 10 September 1973 she concluded a lease with the Council

for one year, terminable on one month’s notice. The appellant paid
R38 000 to the seller for the improvements on the site. This
was a
considerable sum in 1973: adjusted by the consumer price index it
would be the equivalent of R571 903 in 1995. The improvements
were
almost entirely demolished to make way for a new home. The cost of
rebuilding was an estimated R30 000. (R451 502 in 1995 values).
In
1982 and 1986 further improvements were made to the site at an
estimated cost (in 1995 terms) of R264 212. By 1995, the appellant
had invested in the site (in 1995 values) R1 287 617. This is what
she stood to lose if she were to be evicted from the site.
Eventually
in 1995 came the long-awaited offers to the Clifton bungalow owners
to sell the sites to them. In the appellant’s case
the price
demanded by the Council was R802 000. The appellant would have dearly
liked to buy the site and remain in the house but
she did not have
the money to do so. Even if she could have borrowed the R802 000, she
would not have been able to pay the interest.
The
appellant could not save her investment by ceding the lease because
by that time the Council would no longer agree to the cession
of
leases; the offer to purchase which it made to bungalow owners was
also not cedeable.
At
the same time the Council made an alternative offer to bungalow
owners to hire their sites. In terms thereof, the appellant was
given
the opportunity of entering into a lease for twenty years with an
option to purchase the site at market value at any time during
the
currency of the lease. While she was a lessee she would be expected
to pay rent at rates dictated by the market from time to
time. It
was, the appellant considered, not a satisfactory solution to her
predicament. She had no idea whether she would in the
years to come
be able to pay a market rental for the site, and no assurance that
she would be financially able to buy it later.
The
appellant accordingly decided to follow the only course which was
sensibly open to her: she decided to buy the property and, because
she could not afford to keep it, resell it as soon as she could.
Investec Bank provided the money. It structured a package in terms
of
which the whole purchase price was lent to the appellant and interest
was capitalized for a year. This meant that the appellant
would not
be burdened by repayments if she managed to resell the property
within a year. Everything went according to plan. Little
more than a
year later, the site was resold for R2 850 000. This sale and, it
seems, others as well, attracted the attention of the
Commissioner.
Mr
Rogers
on the Commissioner’s behalf contended before us that the appellant
owned nothing of any value before she accepted the Council’s
offer
to sell the site to her. It was only by accepting the offer that she
acquired a disposable asset. She acquired it, what is
more, with the
admitted intention of reselling it as soon as she could.
I
agree that usually this would indicate a scheme of profit-making and
make the proceeds of the transaction subject to tax. However,
this
is an unusual case. There is a public law, or at least a public
policy, dimension to it that I think, with respect, the court
a
quo
overlooked. The lease
gave the appellant no more than the right to remain on the property
until a notice of termination came from
the lessor. But the lessor
was also the Council which, as local authority, was vested with
powers of control over the area; and it
decided that, for policy and
developmental reasons, it would, whatever its lease said, not give
such a notice. Its promises as lessor
conflicted with its conduct as
administrator. I think that in determining the tax consequences of
the relationship between the parties
it would be wrong to take
account only of the former and ignore the latter. The appellant did
not have common law ownership of the
property, but the mix of private
rights and public forbearance that she enjoyed gave her a
sui
generis
claim to the
property that was close to ownership. Had the appellant been the
owner of the property and sold it at the time when
she did the
proceeds would without a doubt have been of a capital nature. The
question really is whether the claim which she had
to the site which
was less than ownership but more that a monthly tenancy was
sufficiently distinct from ownership to change the
fiscal
characterization of the proceeds of its sale. I do not consider that
it was. She was to all intents and purposes entitled
to treat the
site as if it was her own, and I think that one should notionally put
her in the same category as one who, by force
of circumstance, is
forced to sell her home. If the appellant had had her way, she would
not have sold it. She had lived there for
more than twenty years and
she would have wished to continue living there. She was compelled to
sell the property because, in the
circumstances which developed (and
over which she had no control), she could no longer afford to keep
it. Her primary concern, and
she said so repeatedly, was to salvage
what she had invested in the property. She had nothing but the
property and could not afford
to lose it. This was her subjective
intention. The objectively ascertainable facts set out above do not
conflict with it.
For
the proceeds of the sale of an asset to be classed as revenue a
taxpayer must have embarked on a scheme of profit-making. If
one
sells only or mainly to make the best of a bad situation, any
resultant profit is not taxable. In
ITC
1283
41 SATC 36
a
Portuguese resident of Angola fled to Namibia. Since he could not
export currency, he bought coffee beans and exported these to
Namibia. In this way he smuggled his capital out in coffee beans.
When he converted the coffee beans into South African currency,
he
made a profit. The court held that his purpose was not to carry on a
trade but to save as much as he could of his investments
in Angola.
Similarly, the appellant’s purpose was not to carry on a trade but
to safeguard her investment. The sale to her should
be seen as a
device for turning her inchoate title into one that was
transmissible.
The
respondent in
Commissioner
for Inland Revenue v Paul
1956 (3) SA 335
(A) bought more land than he needed because the
seller would not part with a smaller portion. At the time of the
purchase he intended
selling the portion that he did not require. The
court held that despite the purchase of the land with the intention
of immediately
reselling some of it the transaction was not a
profit-making scheme. Similarly, the purchase and immediate resale in
the present
case, exceptionally, does not indicate a profit-making
purpose. The price paid to the Council should be seen as an amount
to convert
the appellant’s inchoate title into a registrable one.
In
ITC 427
50
SATC 25
the taxpayer exercised an option with the intention of
turning it to immediate account. It was held, following
Commissioner
for Inland Matla Coal Ltd v
Revenue
1987 (1) SA 108
(A), that the taxpayer’s intention was to be
determined at the time the option had been acquired. In the present
context the case
illustrates no more than that the intention of a
taxpayer at a time prior to the decision to buy and sell may properly
be taken into
account to determine the character of the sale
proceeds.
In
Commissioner for Inland
Revenue v Pick ‘n Pay Employee Share Purchase Trust
1992 (4) SA 39
(AD) the Trust, in the words of Smalberger JA who
gave the judgment for the majority, ‘bought when it was obliged to
and sold
when it was required to.’ There was found to have been no
profit-making scheme and the proceeds of the sales of shares which
were
held for the benefit of employees were not revenue receipts. I
think that the same can be said of the appellant in this case. She
bought when she had to and sold when she had to. If what she had to
do can appropriately be described as a ‘scheme’, it was a
salvage
and not a profit-making scheme. The profit was an incidental, though
I dare say not unwelcome, by-product of the sale. But
that was not
enough to have turned it into a revenue receipt.
There
are other indications from the objective facts that the appellant had
no wish to embark on a scheme of profit-making. She had
never dealt
in immovable property before. After repaying Investec Bank’s loan,
she spent part of the proceeds of the sale of the
site on buying
another bungalow in Clifton and invested the rest, exactly as one
would expect a person who merely changes investments
to do. In my
view she has discharged the onus of showing that the proceeds of the
sale were a capital receipt.
The
appeal succeeds with costs which are to include the costs of senior
counsel.
………
.…………
J.H. CONRADIE
I
agree:
…………………
H.C. NEL
I
agree: .…….…………….
A.P. BLIGNAULT