Commissioner for the South African Revenue Service v Estate late R.F. Welch (A803/2001) [2002] ZAWCHC 44 (20 August 2002)

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[2002] ZAWCHC 44
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Commissioner for the South African Revenue Service v Estate late R.F. Welch (A803/2001) [2002] ZAWCHC 44; 2003 (1) SA 257 (C); 65 SATC 137 (20 August 2002)

IN
THE HIGH COURT OF SOUTH AFRICA
(Cape of
Good Hope Provincial Division)
Case No. A803/2001
In the appeal
between
THE
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE
SERVICE
Appellant
and
ESTATE
LATE R F WELCH
Respondent
JUDGMENT : DELIVERED ON 20 AUGUST 2002
DAVIS
J
INTRODUCTION.
Mr R F Welch was divorced from his wife Mrs K J
Welch on 25 October 1996. In order to make provision for
rehabilitative maintenance
of Mrs Welch and to contribute to the
maintenance of their minor child Tom, Mr Welch elected to settle
certain assets upon the
Carom Trust (‘the trust’), with a view
to generate income for the maintenance of Mrs Welch and Tom .
Mrs Welch accepted this proposal in a consent
paper entered into by the parties. The terms of the consent paper
were made an
order of court on the 25 October 1996 .
Mr Welch
(‘the deceased’) passed away on 16 December 1996 prior to the
transfer of the assets to the trust. Subsequently the
assets which
were specified in the consent paper were transferred to the trust.
According to information reflected in the liquidation
and
distribution account of respondent, the value of the assets
transferred to the trust amounted to R3 216 760.
Appellant
considered the settlement of these assets upon the trust to be ‘a
gratuitous disposal of property’ which fell within
the scope of
section 55 of the Income Tax Act 58 of 1962 as amended (‘the Act’).
Respondent objected to the treatment of this
settlement as a
donation. Appellant disallowed the objection and respondent appealed
to the Special Income Tax Court which allowed
the appeal and ordered
the assessment to be set aside. Appellant now appeals against the
judgment of the Special Income Tax Court.
FACTUAL
BACKGROUND.
When the Welchs’ were divorced on 25 October
1996,clause two of the consent paper, provided: ‘the Plaintiff
hereby recognises
his legal obligation to pay rehabilitative
maintenance to Defendant as well as to contribute towards the
maintenance of the party’s
minor child Tom. In discharge thereof,
the Plaintiff hereby elects, and the Defendant hereby accepts that
the Plaintiff shall settle
certain assets in Trust as per the draft
trust deed annexed hereto marked CP1 with the specific intention of
providing income as
follows:
In respect of Defendant an amount of R4
500,00 per month for a period of 60 months from date of divorce
until Defendant’s death
or remarriage, whichever shall occur
sooner.
2.3 As
regards the minor child Tom Christopher Welch, Plaintiff shall until
said child attains the age of 21 (twenty-one)
years or
become self supporting, whichever shall occur sooner, contribute
towards said child’s maintenance as follows:
By payment of the amount of R1000,00 per
month to Defendant, which amount shall increase on the anniversary
date of the divorce
by a percentage equal to the percentage
increase in the urban weighted average of the consumer Price
Index.
By payment of all school fees, school
uniforms, school books, extra mural activities, stationary and
equipment,
By payment of all medical, dental,
pharmaceutical, opthalmological and related medical expenses…
In the event of the minor child showing the
necessary aptitude in respect of any course of tertiary education
and subject to
his applying himself diligently thereto, then in
said events, notwithstanding the fact that said child may have
attained the
age of 21 (twenty-one) years, maintenance payable in
respect hereof shall continue until such time as said child has
completed
such course of tertiary study.
In the event of the Trust being for any
reason, unable to meet the aforegoing obligations to Defendant and
the minor child or
any portion thereof, said obligation shall
revert to Plaintiff.’
The trust includes as beneficiaries all children
born or to be born of the deceased., (Clause 19(b)(i)) the deceased
himself (Clause
19(b)(ii)) and Mrs Welch (Clause.19(b)(iii)). Clause
20 of the trust deed empowers the trustees to‘pay or apply the
whole or such
portion of the net income of the Trust as they in their
sole discretion from time to time may determine, to or for the
benefit (including,
without limiting the generality of the foregoing
or the Trustees right to determine the same, for the maintenance,
medical expenses,
education, support, advancement in life…. and
generally for such purposes as may, in the sole and absolute
discretion of the Trustees,
be considered to be for the benefit or
in the interest of the Beneficiary concerned) of all or such one or
more of the Beneficiaries
….provided that the trust shall first
settle amounts due in terms of the consent papers…’
Clause 21 provides that the ‘capital of the
Trust shall be held by the Trustees until the vesting date, whereupon
the capital then
still held in trust shall vest in and be paid in
equal shares to the beneficiaries as defined in clause 19(b)(i)
provided that if
any beneficiary shall die prior to the vesting date,
then the share of capital which would have devolved on him shall vest
in and
be paid to his descendents by representation per stirpes’
Thus, the capital beneficiaries consist only of
the children born or to be born of the deceased and expressly
excluded both the deceased
and Mrs Welch who are accordingly only
income beneficiaries.
The purpose of these arrangements was set out in a
letter written by the deceased’s attorney and addressed to Mrs
Welch on 25
September 1995 in which the following was recorded
‘Your present needs therefore relate to the provision of a
settlement which
will provide you with a reasonable income due regard
being had to the many factors which are generally taken into account
in such
matters. Our client envisages that this would take the form
of a cash settlement from which you will derive an income rather
than
the payment of formal maintenance…’
The consent paper implemented the deceased’s
intention that the transfer of stated assets to the trust would be
effected with
the intention of generating income to pay the
maintenance obligations as set out in clause 2 of the consent paper
and Mrs Welch
accepted it.
The dispute
between the parties initially turned on the question of estate
duty liability. Respondent claimed that there was
a liability for
R3 216 760,00 which was owed to the trust in terms of the deceased’s
divorce agreement. On 23 April 1998 Mr Gillespie,
on behalf of
appellant, wrote to Mr Gees, an executor in the estate of the
deceased as follows:
‘In terms of the divorce order the deceased has
certain obligations to meet in regard to paying rehabilitative
maintain to his ex
wife as well as maintenance of his child Tom. It
is these obligations that can be regarded as a debt due by the estate
and not the
full value of the assets settled in the trust. An
actuarial calculation must then be carried out to determine the above
debts due.
The value thus calculated will then form a liability in
the deceased’s estate. Once the calculation has been completed it
can
be submitted to this office for approval.’
Further correspondence was exchanged between the
parties .On 23 July 1998 Mr Gillespie wrote to Mr Gees suggesting
that ‘According
to my calculations the amount deductible as a
liability would be R754,000.. This amount is based on the following
calculations:.
‘Wife
R4,500 per month for 60 months = R270,000
Child
R1,000 per month for 7 years = R84,000
School Fees = R150,000
Medical = R50,0-00
Tertiary Education = R200,000
Total claim allowable = R754,000’
On 7 January 1999 Mr Gillespie wrote to
respondent’s advisor Mr Haupt advising that ‘After consultation
with our head office the
view has been taken that the settlement is
regarded as a ‘gratuitous disposition of property’ that falls
within the ambit of
section 55 of the Income Tax Act. …. As such
donation tax will be levied on the full value of the assets
transferred less R25,000.’
An assessment was then issued for an amount of
donations tax of R797 940 together with outstanding interest. That
the present
dispute relates only to donations tax is made clear by
the letter of objection written by Mr Haupt on 27 October 1999 in
which he
states:
‘I hereby object on behalf of the Estate late
Robert Frederick Welch to the donations tax assessment dated 11 May
1999 in the
amount of R797 940, plus interest’.
JUDGMENT OF THE COURT
A QUO
.
Foxcroft P held that the reason for the transfer
of assets to the trust was to be found in the matrimonial dispute
between the
Welchs’ which gave rise to ‘an ongoing obligation to
provide maintenance’. Accordingly the transfer of assets to the
trust
reflected the agreement in the consent paper ‘ for an amount
of money to be set aside in order to realise enough interest to
comply
with the obligations…The handing over of the money was
something which followed upon a court order and in all probability
followed
upon a realisation by the person handing over the money by
agreement in a court order that he was obliged to do so.’ Thus,
the
transaction was undertaken to discharge a legal obligation rather
than constituting a any gratuitous intention.
THE IMPOSITION OF DONATIONS TAX IN THE PRESENT
DISPUTE.
Section 54 of the Act provided at the time of this
dispute that ‘Subject to the provisions of section 56, tax shall
be paid for
the benefit of the National Revenue Fund to tax (in this
Act referred to as donations tax) on the value of any property
disposed
of (whether directly or indirectly and whether in trust or
not) under any donation which took or takes effect on or after 16
March
1988 by any person (in this Part referred to as the donor)who
in the case of a person other than a company , is ordinarily
resident
in the Republic’ Section 55(1) defines donation as ‘any
gratuitous disposal of property including any gratuitous waiver or
renunciation
of a right.’
Ms Fichardt ,who appeared on behalf of appellant
,submitted that the disposal of the assets to the trust was a
gratuitous disposition
in that it was not given in exchange for any
consideration . She contended that there was no evidence before the
court to show
that the deceased had received anything in
consideration for the transfer of the assets. She also submitted that
the disposal of
the assets could not be regarded as having been made
to discharge of an obligation to pay maintenance. The elimination of
an obligation
to pay maintenance could not be said to be the
quid
pro quo
for the disposal. She sought to justify this submission
by contending that the deceased had not eliminated his obligation to
pay
maintenance to his ex wife and his minor child Tom . In terms of
clause 2.3.5 of the consent paper he remained liable in the event
that the trust failed to provide Mrs Welch or Tom with the required
income. On this evidential basis Ms Fichardt sought to justify
the
submission that ,as the deceased had transferred assets to the value
of R3 216 760,00 the trust without receiving any consideration
in
respect thereof, the transfer constituted a gratuitous disposition of
property as defined in s55 of the Act. For this reason
the court
a
quo
had erred in finding ‘the essential point in this case is
that this is not something which happened out of a motive of
liberality.
The handing over of the money was something which
followed upon a court order.’
Mr Bremridge, who appeared on behalf of the
respondent, submitted that the entire dispute turned on the meaning
of the phrase ‘gratuitous
disposition’. Relying upon a judgment
of
Scott J
(as he then was) in ITC
1545; 54 SATC 464
(C) ,Mr
Bremridge submitted that a disposal of property is not gratuitous
unless it was motivated by ‘liberality and generosity’.
He also
referred to the following passage from judgment of
Trollip JA
in
Ovenstone v SIR
1980 (2) SA 721(A)
at 736 H – 737 A: ‘In a
donation the donor disposes of the property gratuitously out of
liberality or generosity, the donee being
thereby enriched and donor
correspondingly being impoverished, so much that, if the donee gives
any consideration at all therefore,
it is not a donation.’ He
submitted that as the settlement in Trust had been made pursuant to
a court order in order to satisfy
financial obligations to the
deceased’s ex-wife and his minor son there was insufficient
liberality or generosity to justify
a conclusion that the transaction
fell within the scope of the definition of donation in terms of
section 55.
Mr Bremridge contended that there was no room on
the basis of s54 read together with s55 of the Act for the argument
that the disposal
was gratuitous to the extent that the value
received in consideration of the disposal was less than the value
of the property which
was disposed. If that were the case appellant
would then have been required to act within the power granted in
terms of the
provisions of section 58 of the Act which provides
that: ‘Where any property has been disposed of for a consideration
which, in
the opinion of the Commissioner, is not an adequate
consideration that property shall for the purposes of this Part be
deemed to
have been disposed of under a donation: Provided that in
the determination of the value of such property a reduction shall be
made
of an amount equal to the value of the said consideration’.
Respondent’s argument can be summarised thus:
In a case where some consideration passes from the ‘donee’ to
the ‘donor’
which is not minimal or illusory so that the
transaction can be classified as partly onerous and partly
gratuitous, only section
58 of the Act imbues the Commissioner with
the authority to levy donations tax on the basis of an
apportionment. To the extent
that the Commissioner has failed to act
in terms of section 58, no apportionment could be applied to an
assessment issued in terms
of section 54 read together with section
55 of the Act.
He submitted further that the fact that it was
necessary to deem a disposal to be a donation where the value
received by the recipient
exceeded any value transferred by the
recipient to the disposer was evidence that a disposal for some
consideration could not be
considered to be gratuitous in terms of
the definition of donation in section 55. Were the converse to
apply and the Commissioner
was empowered to treat a disposition as
partly of a gratuitous nature in terms of sections 54 and 55 of the
Act read together, section
58 would effectively be rendered
redundant. Thus, the definition of donation as a gratuitous
disposal of property as set out
in s55 excluded a transaction where
some measure of consideration was given in exchange for the disposal
of property.
SECTION 58
AND ITS ROLE WITHIN PART V OF
THE ACT.
The word ‘consideration’ in section 58 is
employed in the sense of a
quid pro quo
, that is some form of
payment or compensation having some value. In my view, the purpose
of this section is clearly to prevent
a recipient from claiming that
the giving of a
quid pro quo
for the property transferred to
another , no matter the value thereof , prevents the disposal of
such property from falling within
the definition of donation in terms
of section 55(1) ,namely any gratuitous disposal of the property,
The Commissioner was therefore
given a discretion to deem such a
disposal to be donation, if in his opinion the consideration provided
was not adequate . See ITC
1387; 46 SATC 121
at 124.
In
Ogus v SIR
1978(3) SA 67(T) 79 F-H
Boshoff AJP
held that ‘ the word ‘consideration’ in
s58 implied that there had to be a reciprocal obligation in terms
of which the recipient
would provide a
quid pro quo
which had
been received.
In
Ogus, supra
the taxpayer donated a sum of R100,000 to trustees of a trust on
certain conditions. One of the clauses of the trust deed provided
‘It is an express condition of the donation by the donor that the
trust should be liable for and shall indemnify him against all
liability for donations tax in respect of the donation made in terms
of this deed’. The taxpayer contended,
inter alia
the this
clause imposed an obligation upon the trustees , the discharge of
which constituted consideration for the disposition which
had been
made by the taxpayer.
Boshoff AJP (
at 79 G – H
)
rejected this argument thus: ‘[c]lause 20 is merely a term in
the deed of trust dealing with the liability for the donations tax.

It is in its context no more than a circumstance under which a trust
was created by the appellant. It is certainly not in the
nature of
a reciprocal obligation. A reciprocal obligation is found in a
synallagmatic contract, that is a contract which contains
mutual
reciprocal engagements by each of the two parties towards the other
to perform his portion of the contract and this performance
must take
place
pari passu
…..There is nothing in the deed of trust
that warrants the view that the appellant disposed of the R100,000 to
the trustees for
a consideration of the kind contemplated in s 58,
and least of all, for a reciprocal obligation’.
Section 58 requires an examination of the
transaction and the consideration received for the property to
determine whether the
consideration was so inadequate an amount
as to enable the Commissioner to exercise his discretion and deem the
disposition to
be a donation.
Section 58 is not however relevant to this appeal.
Appellant adopted the approach that the transaction was a donation
in terms
of s54 read together with the definition of donation in
s55. In other words the appellant treated the disposal of property
to the
trust as a gratuitous disposition as defined. The disputed
assessment was based on these sections. The letter of objection was
based upon the contention that the transaction was not a donation as
defined. The resolution of this dispute , being whether
appellant
assessed respondent correctly , turns on the applicability of
section 54 read with the definition of donation in section
55 to
the facts of this case; that is was the appellant justified in
raising the assessment for donations tax. Donation is defined
in
s55 as being ‘a gratuitous disposal of property’. By contrast the
common law definition of donation connotes an act of pure
liberality
or generosity on the part of the donor.
Avis v Verseput
1943
AD 331
at 353
As
Fagan P
held in ITC
1448; 51 SATC 58
at
63 in contrast to the common law the definition of donation in s55
includes disposals of property for which nothing was received
in
return, that is no consideration was received.
In the present case the trustees paid no
consideration for the receipt of assets transferred to the trust.
The trust deed empowered
the trustees ‘ to pay or apply the
whole of such portion of the net income of the Trust, as they in
their sole discretion from
time to time may determine, to or for the
benefit….. of all or such one or more of the Beneficiaries….’.
To the extent that
such payment may have discharged the deceased
from his obligation to pay maintenance to his ex-wife or minor child
cannot itself
constitute consideration paid by the trustees to the
deceased in exchange for the receipt of the assets transferred to
the trust.
It simply amounts to the Trustees carrying out their
obligations in terms of the Trust Deed. It is not a consideration
which emanates
from the Trustees as a
quid pro quo
for the
transfer of the assets.
In terms of section 82 of the Act the onus rests
upon respondent to show ,on a balance of probabilities ,that the
assessment for
donations tax was incorrect. In order to, discharge
this onus, respondent was required to provide evidence of the
consideration
given by the trust in exchange for the assets
transferred by the deceased. Respondent restricted itself to the
approach that, because
the transferred assets took place as a result
of an agreement between the spouses which was made an order of court,
the transaction
had not be motivated by liberality or generosity.
Nowhere in the record is any such evidence provided.
There was some suggestion from respondent that
evidence of the value of consideration was provided in the letter
written by Mr Gillespie
on 23 July 1998 in which he suggested that an
amount of R754,000 be deducted as a liability for estate duty
purposes. No substantiation
of this figure is provided in the
letter . Mr Gillespie was not called as a witness nor was the letter
of 23 July 1998 presented
as evidence before the Special Court.. To
the extent that the trust accounts may be relevant, it does not
appear that any amount
of income was distributed to Mrs Welch for
the years February 1997 and 1998. In the 1999 accounts an amount of
R82,780 was awarded
to Mrs Welch (in addition to an amount of R54,000
in favour of minor child, Tom Welch). There is nothing record
which shows that
these amounts represented a discharge of the
maintenance obligation owed by respondent to Mrs Welch.
Absent any evidence which would provide proof
that consideration was given by the trust in exchange for the
transfer of the
assets, it cannot be said that respondent has
discharged the onus of showing that the transfer of assets to the
trust did not represent
a donation as defined in terms of section 55
and that accordingly appellant was not justified in issuing the
assessment which it
did. For these reasons I would issue the
following order.
The appeal
succeeds with costs.
The assessment of
the Commissioner 18/7/4/3/0783 is confirmed.
_________________
DAVIS J
I agree and it is so ordered
_______________
SELIKOWITZ J
I agree

______________
VAN REENEN J