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[1992] ZASCA 190
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Commissioner for Inland Revenue v Friedman and Others NNO (14/91) [1992] ZASCA 190; 1993 (1) SA 353 (AD); [1993] 1 All SA 306 (A) (5 November 1992)
Case
No 14/91
THE
COMMISSIONER FOR INLAND REVENUE
APPELLANT
and
FRIEDMAN
AND OTHERS N N O
RESPONDENTS
JOUBERT
,
JA:
Case No
14/91
IN THE SUPREME COURT OF SOUTH AFRICA
APPELLATE
DIVISION
In the
matter between:
THE
COMMISSIONER FOR INLAND REVENUE
APPELLANT
and
FRIEDMAN
AND OTHERS N N 0
RESPONDENTS
Coram
:
JOUBERT, BOTHA, KUMLEBEN, J J A
et
NICHOLAS,
HARMS A J J A.
Date of
Hearin
g: 18 May 1992
Date of Delivery
: 5 November 1992
JOUBERT
,
JA:
2
JUDGMENT
This an
appeal against a judgment of McCREATH J in the Witwatersrand Local
Division granting an application by the respondents in
their
capacities as trustees ("the Trustees") of the Phillip
Frame Will Trust ("the Trust") for a declaratory
order
against the Commissioner for Inland Revenue ("the Commissioner")
as appellant. The declaratory order was granted
in terms of prayers 1
and 2 of the Notice of Motion, dated 22 November 1989. Prayer 1
provided as follows: "An order declaring
that -
(a) The
Phillip Frame Will Trust ('the Trust') created by the late Phillip
Frame in terms of his will dated 24 July 1974 is not a
'legal
persona
'and therefore is not a person within the meaning of that word in the
Income Tax Act No 58 of 1962 (as
3
amended)
('the Act') ; and (b) therefore the Respondent was and is not
entitled-(i) to levy taxation on the Trust, in terms
of the
Act, or (ii) to appoint applicants, in terms of
section
95(1) of the Act, as the Trust's 'representative taxpayers'".
Prayer 2 sought an order for costs against the Commissioner.
With
leave of the Court
a quo
the Commissioner appeals to this
Court. The judgment of the Court
a quo
, delivered on 29
October 1990, has been reported :
Friedman and Others NNO v
Commissioner for Inland Revenue
:
In re Phillip Frame Will
Trust v Commissioner for Inland Revenue
1991(2) SA 340 (W).
The facts
material to this appeal are not in dispute. They may be summarized as
follows: 1. The late Phillip Frame in terms of clause
13 of his
4
Will,
dated 24 July 1974, created the Trust in respect of the residue of
his estate and the income derived therefrom. After providing
in
clause 16(a), (b), (c) and (d) for certain payments to be made by the
Trustees from the income of the Trust, he directed them
in clause 16
(f) to deal with the balance of the income (termed "Nett
Income") as follows. Firstly, they were to decide
and determine
in what manner and to what extent the whole or any portion of the
"nett income" was to be utilised by them
for the
maintenance, education and reasonable pleasures of his grandchildren
bom or to be born of his two daughters until each grandchild
attained
the age of 25 years. Secondly, the balance of the "nett income"
not utilised by them for the aforementioned purposes
was to remain
undistributed by being accumulated and added to the capital of the
Trust (Clause 16(f)). On the accepted interpretation
5
of the
Will the undistributed trust income did not
accrue to any
potential income beneficiary of the Trust
. According to Clause
16(g) a share of the "nett income" of the Trust was to
"accrue" to a grandchild on attaining
the age of 25 years
subject to further directions not relevant to the present matter.
Finally, upon a grandchild attaining the age
of 50 years his or her
share of the trust capital was to vest in and be paid over to him or
her (Clause 17(a)). 2. For the tax years
from 1984 onwards the
Commissioner levied income tax on the undistributed trust income
which had neither accrued to nor been received
by any income
beneficiary of the Trust. All the assessments in question were raised
against the Trust and not against the Trustees.
The Commissioner,
however, in terms of sec 95(1) of the Income Tax Act 58 of 1962 ("the
1962 Act") treated the Trustees
as the
6
representative
taxpayers of the Trust.
3. In the
judgment of the Court
a quo
(p 344 F) reference
is made to
a
lacuna
in the 1962 Act to create liability
for income tax
in respect of the undistributed trust
income as described
supra
.
This
lacuna
has been
partially filled by amendments
introduced by Income Tax
Act 129 of 1991 with retrospective effect
to the years
of assessment which commenced on or after 1 March
1986.
The amendments, however, do not affect the years
of
assessment
prior
to that of 1 March 1986, i.e.
the
undistributed trust income for the 1984, 1985 and 1986
tax
years are not affected by the amendments
introduced by the Income
Tax Act 129 of 1991
.
4. The
legal dispute between the parties concerning the
validity of the
levy of income tax on the undistributed
trust income for the 1984,
1985 and 1986 years of
assessment accordingly has to be determined
according to
7
the law as
it stood
before
the passing of Income Tax Act 129 of 1991. 5.
The parties are agreed that the income tax paid by the Trustees for
the 1984 to 1986
years of assessment will be refunded to them should
the appeal by the Commissioner fail.
At the
commencement of the hearing of the appeal the Trustees were granted
an order of amendment to substitute the following clause
for clause
1(b)(ii) of their Notice of Motion dated 25 November 1989 viz.
"(ii)
to treat the Applicants, in terms of section 95(1) of the Act, as the
Trust's representative taxpayers in respect of any
income of the
Trust in any of the tax years in question which was not utilised in
terms of Clause SIXTEEN (f) of the Will for the
benefit of the
testator's grandchildren but was added
8
to and
formed part of the capital of the Estate."
Three
issues fall to be decided.
First Issue
. Does the 1962 Act
impose on the Trust
per se
as a taxpayer any liability for
income tax on its undistributed income which does not accrue to any
potential income beneficiary ?
"Taxpayer"
is defined in sec 1 as "any
person
chargeable with any
tax leviable under this Act - - -." (My underlining).
The
heading of sec 5 is "Levy of normal tax and rates thereof".
The relevant provisions of sec 5(1) provide as follows:
"- -
- there shall be paid annually for the benefit of the State Revenue
Fund, an income tax (in this Act referred to as the
normal tax) in
respect of the taxable income received by or accrued to or in favour
of
9
any
person
---------
any
person
- - - - -
any
person
- - - - -
any
company
during every financial year of such company."
(My
underlining). Sec 5(1) is the charging section which provides for the
levy of income tax in respect of taxable income received
by or
accrued to any
person
or
company
during the years of
assessment.
Various
categories of incorporated associations and registered companies are
included in the definition of "company" in
sec 1.
"Person
" is defined in sec 1 as including "the estate of a
deceased person" for purposes of the 1962 Act. Sec
2(x) of the
Interpretation Act 33 of 1957 assigns to "person" an
inclusive meaning comprising "any company
10
incorporated
or registered as such under any law" and "any body of
persons corporate or unincorporated' This statutory definition
does
not mention a trust.
Is a trust
a legal
persona
? According to the Anglo-American law of
trusts a trust has no legal personality. P. W. Duff,
Personality
in Roman Private
Law
, Cambridge University Press, 1938 at
p 206:
"Maitland
showed [
Collected Papers
, vol 3 (1911) p 321-404)] that by
vesting property in trustees, rather than in corporations or
associations, English lawyers evaded
many questions that have caused
difficulty abroad." See R. W. Ryan in his unpublished Cambridge
doctoral thesis entitled
The Reception of the Trust in the Civil
Law
(1959) at p 11: "A trust is certainly not a legal
person". The position is the same in our law of trusts. See
Commissioner for Inland Revenue v MacNeillie's Estate
,
1961
11
(3) S A
833
(A) at p 840 G-H : "Neither our authorities nor our Courts
have recognised it as a
persona
or entity. - - - It is trite
law that the assets and liabilities in a trust vest in the trustee."
Consult also
Braun v Blann and Botha N N O and Another
,
1984(2) S A 85) (A) at p 859 E-H : "In its strictly technical
sense the trust is a legal institution
sui generis
- - - The
Trustee is the owner of the trust property for purposes of
administration of the trust but
qua
trustee he has no
beneficial interest therein." It is clear therefore that a trust
is not an incorporated company. Nor is a
trust a body of persons
unincorporate whose common funds are the collective property of all
its members. There is also no basis for
a submission that because the
statutory definition of "person" in sec 1 of the 1962 Act
was extended to include a deceased
estate, it should by analogy be
further extended to include a trust. The conclusion is inescapable
that a trust is not a "person"
12
within the
meaning of that word in the 1962 Act.
The answer
to the First Issue is therefore No. In view of the nature of the
Second and Third Issues such answer is, in my judgment,
not by itself
conclusive of the entire declaratory order as sought by the Trustees.
The Second and Third Issues still remain for
determination.
Second
Issue
. Is the Trust despite its lack of legal personality
nonetheless for purposes of the 1962 Act a "taxable entity"
that is
liable as a "person" for income tax in regard to
its undistributed trust income which does not accrue to any potential
income beneficiary ?
The Second
Issue is based on a contention advanced by Mr
Levin
on behalf
of the Commissioner. According to
The Shorter Oxford English
Dictionary
the word "entity" has the following
meanings:
"1.
Being, existence, as opp. to non-existence; the
existence,
as dist. from the qualities or relations
13
of
anything. 2. That which makes a thing what it is; essence,
essential
nature 1643. 3.
Concr
. An ENS, as dist. from a function,
attribute,
relation etc 1628. 4. 'Being' generally 1604." The word "ENS"
means: "
Philos
a. A
being, entity, as opp. to an attribute, quality
etc. 1614.
b. An
entity as an abstract notion 1581."
Juridically it is
well-known to refer to a natural person or
a legal
persona
as a being in law. A "taxable entity" in
the sense of a
taxable being (as an abstract notion) other
than a natural person
or a legal
persona
would seem to be,
juridically speaking,
an extremely loose concept which would
be of very little use in
fiscal legislation. It is
14
accordingly
by no means surprising to find that the Legislature does not avail
itself of the expression "taxable entity"
in the 1962 Act.
A "taxable entity" can only be construed as such if it can
be brought within the ambit of sec 5(1) as
the charging section. The
Legislature has not purported to do so. Moreover, I can find nothing
in the 1962 Act which manifests an
intention of the Legislature to
regard a trust as a "taxable entity". Nor was Mr
Levin
able to refer to any authority or provision in the 1962 Act in
support of his contention. In my view his contention is manifestly
unsound and cannot prevail.
The answer
to the Second Issue is accordingly No.
Third
Issue
. Was the Commissioner legally entitled to treat the
Trustees in terms of sec 95(1) of the 1962 Act as representative
taxpayers for
the purpose of levying income tax in respect of the
undistributed income of the Trust which
15
did not
accrue to any potential income beneficiary ?
Before
Union, there was legislation for the paying of tax on incomes in
force in the Cape Colony and Natal, but not in the Transvaal
and the
Orange River Colony. The
Income Tax Act
28 of 1914 introduced
a general income tax, and it was followed by the
Income Tax
(Consolidation
)
Act
, 41 of 1917; the
Income Tax Act
,
40 of 1925; the
Income Tax Act
, 31 of 1941; and the 1962 Act
currently in force. All these Acts derived from the New South Wales
Act of 1895, 59 Victoria C. 15,
which the draftsman of the 1914 Act
used as his model. (See Ingram,
The Law of Income Tax in
South
Africa
, 1933, pp 1 and 2).
The 1914
Act provided in sec 32(a) to (d) for the payment of the tax by
"representative taxpayers". These provisions were
based on
secs 18 and 19 of the New South Wales Act (See Ingram's annotations
to secs 48 and 49 of the 1925 Act). With some variation
in wording,
but
16
none of
fundamental principle, these provisions were re-enacted in each of
the succeeding Income Tax Acts, including the 1962 Act,
which however
defines "representative taxpayer", not in a separate
section as in the previous enactments, but in the definition
section
(sec 1).
"Representative
taxpayer" according to sec 1 means:
"(a)
in respect of the income of a company, the public
officer
thereof: (b) in respect of the income under his management,
disposition or control, the agent of a person, including an agent
appointed as such under the provisions of section
ninety-nine
,
and for the purposes of this paragraph the term 'agent' includes
every person in the Republic having the receipt, management or
control of income on behalf of any person permanently or temporarily
absent
17
from the
Republic or remitting or paying income to or receiving moneys for
such person;
in
respect of income the subject of any trust
or in respect of the
income of any minor or mentally disordered or defective person or
any other person under legal disability,
the
trustee
,
guardian, curator or other person entitled to the receipt,
management, disposal or control of such income or remitting or
paying
to or receiving moneys on behalf of such person under
disability;
in
respect of income paid under the decree or order of any court or
judge to any receiver or other person, such receiver or other
person, whoever may be entitled to the benefit of such income, and
whether or not it accrues to any person on a contingency or
an
uncertain event;
in
respect of the income received by or accrued to
18
any
deceased person during his lifetime and the income received by or
accrued to the estate of any deceased person, the executor or
administrator of the estate of such deceased person, but nothing in
this definition shall be construed as relieving any person from
any
liability, responsibility or duty imposed upon him by this Act."
(My underlining).
This
definition enumerates a limited number of "representative
taxpayers" in relation to certain classes of income under
their
management and control but in respect of which they themselves have
no beneficial interest.
In para
(a) of the definition, the person represented is a company; in para
(b) the principal of the agent; in the second part of
para (c) any
minor, or mentally disordered or defective person, or any other
person under legal disability; and under (e) a deceased
person or
19
the estate
of any deceased person. It is only in the first part of para (c) -
"in respect of income the subject of any trust"
- and in
para (d), that the person represented is not expressly or
specifically referred to.
In para
(d) of the definition the representative taxpayer is a "receiver"
who is well-known in our law and the law of England.
He is a person
who is appointed by the court to protect and preserve, in the
interests of parties or litigants, property including
income which is
the subject-matter of litigation until its resolution, e.g. the
management of a business, the liquidation of a partnership,
the
division of a joint estate etc. He is an officer of the court, not
the agent or the trustee of the parties who cannot control
him and he
is answerable to the court for his conduct and administration. See
Boehm v Goodall
,
[1911] 1 Ch D 155
at p 160,
Gillingham v
Gillinqham
,
1904 T S 609
at p 613,
20
Banks v
Clements N O
,
1920 E D L 187
at p 194,
Johnson v Johnson and
Another
,
1935 C P D 325
at p 328,
Revill v Revill
,
1969
(1) S A 325
(C) at p 326 C-327 H. Kerr, On
the Law and Practice as
to Receivers
, 13th ed., p 5 133, 145. According to para (d) the
receiver to whom income of the subject-matter of litigation is paid
by order of
the court pending the resolution of the dispute is a
representative taxpayer "
whoever may be entitled to the
benefit of such income
,
and whether or not it accrues
to any
person on a contingency or an uncertain event
."
It does not appear that the meaning or applicability of para (d) has
ever been considered by a South African court and it
may be that the
true meaning of the words emphasized could be ascertained only in the
light of a knowledge of the law and practice
in the law of New South
Wales in 1895 relating to the decrees or orders referred to. In
regard to the interpretation of para (c),
para (d) can I think be
ignored.
21
Para (c)
of this definition requires closer examination:-
(i) It
deals with two classes of income, viz "income the subject of any
trust" and "income of any minor or mentally
disordered or
defective person or any other person under legal disability". A
"trustee" is the designated "representative
taxpayer"
of the first class of income whereas the "representative
taxpayers" of the second class of income are guardians
or
curators. See
Estate Smith
v
Commissioner for Inland Revenue
, 1960(3) S A 375 (A) at p 378 F-H
where the wording of sec 69(c) of Income Tax Act 31 of 1941, which is
in all respects identical
with that of paragraph (c), was examined.
(ii) The notion "income the subject of any trust"
signifies
that the income is subject to or charged
22
with a
trust. Both in common parlance and in legal literature such income is
referred to as trust income. The latter expression, however,
does not
signify that the income belongs to a trust in ownership, since a
trust does not possess legal personality as indicated
supra
under the First Issue, (iii) "Trust" is not defined in the
1962 Act. It must therefore be given its common law meaning,
viz an
entity whose assets and liabilities vest in its trustee for purposes
of administration, as explained
supra
under the First Issue.
(iv) In sec 1 s.v. "Trustee" the following definition is
provided for trustee:
"in
addition to every person appointed or constituted as such by act of
parties, by will, by order or declaration of court or
by
23
operation
of law, includes an executor or administrator, tutor or curator, and
any person having the administration or control of
any property
subject to a trust, usufruct, fideicommissum or other limited
interest or acting in any fiduciary capacity or having,
either in a
private or in an official capacity, the possession, direction,
control or management of any property of any person under
legal
disability." An identical definition of "trustee",
which was included in sec 1 of Income Tax Act 31 of 1941,
was
carefully considered in
Estate Smith
's case (
supra
) at
p 378 H- 381 G.
This
statutory definition of "trustee" while it includes "any
person having the administration or control of any property
subject
to a trust" (i.e. the trustee of
24
trust
property) is also widely extended to encompass a number of persons
who would not ordinarily be regarded as trustees, e.g. executors,
administrators, tutors and curators who administer or control
res
alienae
the ownership of which does not vest in them for purposes
of administration. See
Huldiqingsbundel Daniel Pont
(1970) at
p 166. Furthermore, reference is also made to certain relations of
property subject to a usufruct (
res usufructuaria
),
fideicommissum (
res fideicommissaria
) or other limited
interest which are not ordinarily considered to be relations of
trusteeship. In
Estate Smith
's case (
supra
) at pp 379
G-H, 381 C-D it was correctly held that a trustee, as statutorily
defined, qualifies as a representative taxpayer only
if the income in
question is trust income (which is owned by the trustee for purposes
of administration of the trust).
It is
convenient to recapitulate the main
25
principles
for levying income tax on trust income as canvassed thus far. They
are the following:
Sec 5(1),
as the charging section, provides for the levy of income tax on
income received by or accrued to any
person
or
company
during the year of assessment.
A trust
which lacks legal personality is neither a person as defined nor a
company.
A trust
is not
per se
liable for income tax on its undistributed
income which does not accrue to any potential income beneficiary
(First Issue).
Nor is a
trust a taxable entity that is liable as a "person" for
income tax in regard to its undistributed income which
does not
accrue to any potential income beneficiary (Second Issue).
A trustee
is the designated representative taxpayer in respect of trust income
owned by him
qua
trustee without any beneficial interest
therein for purposes of
26
administration
of the trust.
I turn to
analyse the notion of a "representative taxpayer" with
special regard to the position of a trustee.
According
to sec 90 income tax is payable by a representative taxpayer or by a
real taxpayer who received the income or in whose favour
it accrued
or who is legally entitled to the receipt thereof. See
Thorne and
Another
NNO v Receiver of Revenue
, 1976(2) S A 50 (C) per
VAN WINSEN J at p 51 A-B: "It seems to me that the Act
contemplates two capacities in which a person
becomes liable for
income tax, i.e. in his personal capacity and in his representative
capacity". The personal capacity refers
to a real taxpayer while
the representative capacity relates to a representative taxpayer.
Sec 95(1)
imposes on a "representative taxpayer" in his
representative capacity liabilities in
27
regard to
income. It provides as follows:
"Every
representative taxpayer shall as regards the income to which he is
entitled in his
representative capacity
, or of which in
such
capacity
he has the management, receipt, disposal, remittance,
payment or control, be subject in all respects to the same duties,
responsibilities
and liabilities as if the income were income
received by or accruing to or in favour of him beneficially and shall
be liable to assessment
in his own name in respect of that income,
but any such assessment shall be deemed to be made upon him
in his
representative capacity
only". (My underlining). The
representative capacity of a
"representative
taxpayer" confers on him a representative
28
function
to represent someone. That he represents a
"person"
appears unmistakenly from the following sections,
viz.
(i) Sec 95
(2) in dealing with a "representative taxpayer": "Any
abatement, deduction, exemption or right to
set off a
loss which could be claimed
by the
person represented by
him
shall be allowed in the assessment made upon the
representative taxpayer in his capacity as such."
(ii) Sec
95 (3):
"Any
tax payable in respect of such assessment shall, save in the case of
an assessment upon the public officer of a company,
be recoverable
from the representative taxpayer, but to the extent only of any
assets belonging to
the person whom he
represents
which
may be in his possession or under
29
his
management, disposal or control." (iii) Sec 96(1):
"Every
representative taxpayer who, as such, pays any tax shall be entitled
to recover the amount so paid from
the person on whose behalf it
is paid
, or to retain out of the moneys that may be in his
possession or may come to him in his representative. capacity, an
amount equal
to the amount so paid." (My underlining).
A
"representative taxpayer" represents someone for purposes
of assessment and payment of income tax viz a "person".
The
taxable income on which the income tax is levied is that of the
represented person, i.e. the real taxpayer, who is primarily
liable
for payment of the income tax.
Support
for some of the aforegoing is provided by the judgment in
Mount
Moreland Town Lands Board v C I R
30
1929 A D
73.
The facts
briefly were that the appellant board been constituted a body
corporate by a statute which provided
inter alia
that all
amounts accruing to the board should be vested in the board for the
benefit of certain erfholders and that after payment
of certain sums
the balance should be appropriated amongst the erfholders in such
manner as might be determined at a meeting of erfholders.
The
Commissioner for Inland Revenue levied an assessment in a nominal
amount of R100 on the board in respect of its income for the
year
ending 30 June 1923. The board objected to the assessment, but the
Special Court confirmed it. A number of questions of law
were stated
for submission to the Natal Provincial Division, the third of which
was -
"Whether
the trust income is taxable as a whole in the hands of the said board
in its capacity as a representative taxpayer,
or
31
whether it
is taxable separately in respect of each erfholder benefiting ?"
The
Provincial Division concluded that -
"The
Acts incorporating the board, and the facts of this case establish
that the board is the trustee of one trust for the benefit
of the
erfholders as a class, and the whole of the income of this trust fund
is, therefore, taxable in the hands of the appellant
board in its
capacity as a representative taxpayer."
STRATFORD
J A said at 80 - 81:
"In
challenging this conclusion on appeal to this Court it was contended
for the appellant that the provisions of secs. 16 and
18 of the
1887
Law
32
clearly
showed that, though the
dominium
of the property was vested in
the board for the purpose of administration, these two sections made
the erfholders the sole beneficiaries
of the
corpus
as well as
the revenue to be derived therefrom. In supporting this contention
counsel relied upon the earlier history of this property
and on the
fact that, apart from the special power to expend sums upon roads
and, on the direction of a resolution of erfholders
in regard to
other matters, no other person or persons had any interest whatever
in such revenue. From this it was inferred that
the board was in
effect the trustee for each individual erfholder, it being claimed
that such trustee stood in the same relation
to the erfholders as if
they as joint holders of a property had entrusted it to the
management of an agent or manager
33
appointed
by them. The argument is thus advanced for the purpose of applying
the provisions of sees 74, 75 and 76 of the Income Tax
Act 41 of 1917
and in particular to entitle the appellant to claim the privilege set
out in the proviso to sec 75. Dealing first
with sec 74, it will be
noticed that 'representative taxpayer' is defined in each sub-section
'in respect of income,' from which
it appears to be contemplated,
particularly if one has regard to what follows, that the
representative must not only represent the
real taxpayer, but also
must represent him in respect of a specific sum which he holds or
controls on such taxpayer's behalf. Then
follows sec 75, the
provisions of which are in agreement with this view. It provides, in
the first portion, that the representative
'as regards the income to
which
34
he is
entitled in his representative capacity or of which he has the
management, receipt, disposal, remittance, payment or control'
shall
be personally responsible for the amount of the tax as if the income
were his own, the liability not to exceed, however, the
amount he has
in hand. Then comes the proviso which appellant invokes :-'Provided
that nothing herein contained shall in any case
where the
representative taxpayer acts as agent or trustee or in any other
capacity for several persons, prevent him from claiming
that each
agency or trust or other capacity shall be treated separately for the
purpose of claiming any exemption or deduction provided
by this Act.'
From this passage it would seem that a trustee such as the board
cannot claim to be a representative
35
taxpayer
of each erfholder within their meaning unless it can be shown that he
holds or controls a specific sum on behalf of such
person."
From these
passages the following two propositions can be extracted :-
The
"representative taxpayer" must represent a real taxpayer.
He must
represent him in respect of a specific sum which he holds on the
real taxpayer's behalf.
Those
propositions apply equally under the 1962 Act. So applying them to
the facts of the present case, it is clear that the trustees
do not,
in respect of undistributed income, represent any taxpayer. It is
also manifest that they do not represent potential beneficiaries
as a
class. Such a class is not a "real taxpayer" - it is not a
taxpayer at all : it is not a "person", and income
is
neither received by, nor accrues to it. It is only when
36
income is
distributed to beneficiaries that there arises a direct
representative relationship between the trustees and each
beneficiary.
As
indicated
supra
, sec 5(1) as the charging section provides for
the levy of income tax upon "persons" and "companies"
as real
taxpayers by whom taxable income is received or to whom
taxable income accrued. The question that arises in the present
matter is
who is the "person", or real taxpayer, that is
represented by the Trustees as "representative trustees" in
respect
of the undistributed trust income. Three possibilities were
suggested during argument which may be disposed of forthwith. It
obviously
cannot be the Trust since it does not qualify as a "person"
or "taxable entity" as shown supra. It would be futile
to
suggest that the Trustees as "representative taxpayers"
represent themselves as trustees of the undistributed trust
income.
Furthermore, there is no provision in the 1962
37
Act which
independently of the charging provisions of sec 5(1) imposes a levy
on trustees
qua
trustees in respect of trust income. The
undistributed trust income, moreover, did not "accrue" to
the Trustees on their
own behalf or for their own benefit in
accordance with the accepted meaning given to the word "accrue"
in revenue statutes.
See
Minister of Finance and Another v Law
Society, Transvaal
, 1991(4) S A 544 (A) at p 557 C-D. Finally, it
cannot be said that the unascertained potential income beneficiaries
qualify as representees
or real taxpayers since the undistributed
trust income neither accrued to them nor was received by them. I
agree with the submission
by Mr
Welsh
on behalf of the
Trustees that a trustee can be taxed only as a representative
taxpayer where the trust income has accrued to a beneficiary
but has
not been received by him. That, however, is not the position in the
present matter. According to our common law an agent
or
38
representative cannot represent a
non-existent principal. See
Mc Cullogh v Fernwood Estate Ltd
,
1920 A D at pp 207, 208,
Sentrale Kunsmis Korporasie (Edms) Bpk v
N K P Kunsmisverspreiders (Edms) Bpk
, 1970(3) S A 367 (A) at p
384 G-H, 390 B, LAWSA , vol 1 s.v.
Agency and Representation
,
para 111. There can be no representation of a person not yet in
existence except in the case of a contract concluded for a company
to
be formed as provided for in sec 35 of the Companies Act 61 of 1973,
formerly sec 71 of the Companies Act 46 of 1926. The curator
ad
litem
is no exception to this rule of the common law since he is
appointed for procedural purposes to represent the contingent
interests
of unborn issue, not to act in their stead. See
Ex Parte
Sadie
,
1940 A D 26
at p 30,
Wolman & Others v Wolman
,
1963(2) S A 452 (A) at p 459 F-H. It follows that in the present
matter the Trustees cannot as "representative taxpayers"
represent the unascertained trust beneficiaries.
39
Moreover,
under the 1962 Act "income" is indissolubly bound up with
some "person" who receives it or to whom it
accrues.
Without such person there cannot be income as contemplated by the
1962 Act. Accordingly where trust income has not accrued
to trust
beneficieries, it is not "income" within the contemplation
of the 1962 Act.
In the
light of the aforegoing the appeal cannot succeed.
In the
result the following orders are granted: 1. The appeal is dismissed
with costs, which include the
costs of
two counsel. 2 In the light of the amendment granted in this Court
the following order is substituted for the order of the
Court a
quo
:
(a) The
Phillip Frame Will Trust ("the Trust") created by the late
Phillip Frame in terms of his will
40
dated 24
July 1974 is not a "legal person" and therefore is not a
"person" within the meaning of that word in
the Income Tax
Act 58 of 1962 as amended ("the Act"); (b) the Respondent
was and is not entitled
(i) to
levy taxation on the Trust, in terms of the Act (ii) to treat the
Applicants, in terms of sec 95(1) of the Act, as the Trust's
representative taxpayers in respect of any income of the Trust
in any of
the tax years in question (1984 to 1986) which was not utilised in
terms of Clause Sixteen (f) of the Will for the benefit
of the
testator's grandchildren but was added to and formed part of the
capital of the Estate.
41
(c) The
Respondent is ordered to pay the costs of the application including
the costs of two counsel.
C P
JOUBERT J A. KUMLEBEN J A concur. NICHOLAS A J A
LL
Case
No 14/1991
IN THE
SUPREME COURT OF SOUTH AFRICA
APPELLATE
DIVISION
In the
matter between:
THE
COMMISSIONER FOR INLAND REVENUE
Appellant
and
FRIEDMAN
AND OTHERS NNO
Respondent
CORAM
:
JOUBERT,
BOTHA, KUMLEBEN JJA, NICHOLAS
et HARMS
AJJA
HEARD
:
18
MAY 1992
DELIVERED
:
5 NOVEMBER 1992
JUDGMENT
2
I have had
the advantage of reading the judgment of JOUBERT JA. With respect, I
am unable to
agree with
his conclusion that the income in issue was not taxable in the hands
of the respondents as trustees of the testamentary
trust. In my
judgment it was, and the appeal should be allowed, for the reasons
following.
At the
outset, with a view to the arguments which were addressed to this
Court, it is necessary to comment briefly on the unamended
paragraph
1 of the trustees' notice of motion, which is quoted in the judgment
of JOUBERT JA (and in accordance with which the Court
a quo
granted its declaratory order). The terms of the notice suggest that
the question whether or not the trust is a "person"
within
the meaning of the Income Tax Act is decisive of the broad issue
whether the trustees are liable to tax in respect of the
income of
the trust. The suggestion.
3 entails
two suppositions: that the trustees cannot be liable to tax on any
ground other than that the trust is a "person"
as envisaged
by the Act; and
that this
applies to all the income of the trust. In this Court, however, it
became clear that the notice of motion was not to be
read in this
way. In response to a request by the Court, conveyed to counsel on
both sides prior to the hearing of the appeal, to
submit argument on
a number of questions relating to the two suppositions I have
mentioned, supplementary heads of argument were
filed and
applications were made on behalf of the trustees to place further
facts before the Court on affidavit and to amend the
notice of
motion. These applications were granted (the amendment appears from
the judgment of JOUBERT JA). In consequence of these
develop-ments ,
and of the ensuing debate in this Court, the suppositions under
discussion require to be
4
qualified, as follows. As to the first, the outcome of the appeal
does not depend solely on the question whether or not the trust
qualifies as a "person" in terms of the Act. In regard to
that question, counsel for the trustees accepted, in express
terms,
that it was open to this Court to consider whether the trustees were
liable to tax in respect of the trust income on any basis
at all,
and, if it decided that they were, on a basis other than that
postulated in the question, that the appeal would nevertheless
be
allowed and the order of the Court
a quo
replaced by an order
dismissing the application to it. As to the second, the relief sought
by the trustees is confined to that portion
of the net income of the
trust, referred to in clause 16(f) of the will, which was not
utilised by the trustees for any of the purposes
mentioned therein
and was accordingly added to and formed part of the capital of the
estate, in
5 terms of
that clause. It was assumed, on behalf of the trustees, and not
placed in issue on behalf of the Commissioner, that that
portion of
the income had not accrued to the ultimate beneficiaries. Such
portion was referred to in argument as "the undistributed
income of the trust"; in regard to it, the potential and
ultimate beneficiaries were unascertained and indeterminate.
Having
regard to what has been said above, and on the overall view I take of
the matter, some aspects of it may be disposed of in
a few words.
Firstly, counsel for the Commissioner did not contend that a trust is
a "legal
persona
"; I accept that it is not.
Secondly, I do not find it necessary to consider whether the Act
leaves room to work with the concept
of a "taxable entity"
other than a "person"; assuming that it does, I assume
further that a trust does not qualify
as such. And thirdly, I accept
that
6 a trust
is not a "person" within the meaning of that word in the
Act.
I turn to
the fundamental issue, which is whether the trustees are liable to
tax in respect of the undistributed income of the trust
(the latter
phrase being used in the sense indicated above). The answer to this
issue must be sought in the following provisions
of the Act: section
1 - the definitions of "taxpayer", "representative
taxpayer", and "trustee"; section
5(1) - the so-called
charging section; section 90 - dealing with the payment and recovery
of tax; and sections 95(1), (2), (3) and
96(1) - dealing with
representative taxpayers. I shall consider these provisions in turn,
and in the sequence indicated.
The
relevant definitions contained in section 1 are quoted in full in the
judgment of JOUBERT JA and I do not propose to quote them
again.
7
The
definitions of "taxpayer" and "trustee" are not
controversial.
In regard to the latter, it is clear
that the
trustees in the present case fall squarely
within
its terms; counsel representing them rightly
did not
contend to the contrary. It is paragraph
(c) of the
definition of "representative taxpayer"
that calls
for consideration, the all-important words
in it
being:
"in
respect of income the subject of any
trust , the trustee "
These are
wide and unqualified words. They contain no hint that the Legislature
intended to differentiate between trust income
which has accrued
to the trust beneficiaries and trust income which has not so accrued.
To find such an intention on the part of
the Legislature it would be
necessary to read limiting words into the definition, which the
Legislature has chosen not to express.
No such implication
8
arises
from the context of paragraph (c) as a whole. Counsel for the
trustees argued that the suggested
limitation
was to be found in the notion of representation which is
implicit in the expression "representative taxpayer":
a trustee is able to represent beneficiaries who have become entitled
to receive the income, but when the income has not accrued
to any
beneficiary, there is no one who can be represented. Counsel
postulated the existence of a "real taxpayer" as an
indispensable prerequisite for the notion of a "representative
taxpayer". In my view the argument is unsound, for the reasons
following.
In the
first place, I do not consider that the word "representative"
provides a warrant for limiting the phrase "representative
taxpayer" to cases where there is in existence a person
represented who is himself liable to tax. The concept of
representation
does not justify such a limitation,
9 either
linguistically or notionally. It is common, for example, to speak of
someone who is "representing" a company
yet to be
formed, or of a curator who is "representing" unborn heirs
under a will. As a matter of law we know, of course,
that it is
impossible for someone to enter into a valid contract as agent for a
non-existent person, but there is no reason to project
that principle
of law onto the Legislature's use of the word "representative"
in relation to a taxpayer in terms of the
Act.
Counsel
derived his use of the phrase "real taxpayer" from the
remarks of STRATFORD JA in
Mount
Moreland Town Lands Board
v Commissioner for Inland
Revenue
1929 AD 73
at 80, where
he referred to the definition of "representative taxpayer"
in the 1917 Act as appearing to contemplate that
the representative
must not only represent a real taxpayer, but must also represent him
in respect of a specific sum.
10 In my view these remarks, when
read in their context, were no more than a convenient way of
addressing the problem that was to
be resolved in that case, with
reference to its particular facts;
they cannot
properly be construed as laying
down a principle of
general application. That this is
so is clear, in my
opinion, from the judgment of
CENTLIVRES JA in
Bell's
Trust v Commissioner for Inland
Revenue
1948 (3) SA
480 (A) at 492. In that case the
Court was concerned
with the apportionment of the
undistributed profits
of a company to its shareholders,
one of whom was a
trust, to which CENTLIVRES JA
referred in the
following terms:
"... the Trust as a
registered shareholder
representing unascertained beneficiaries
";
and, after pointing out that in
the
Mount Moreland
case
supra
the
beneficiaries under the trust were
ascertained, he went on to say:
"So too in the present case
where the
11
beneficiaries
are, in respect of undistributed profits unascertained, the
taxpayer is the registered shareholder
as repre
senting
these unascertained beneficiaries
. "
The words
I have emphasized demonstrate that the representation of
unascertained beneficiaries is a familiar and unobjectionable concept
in the field of tax legislation. For clarity I should add that I do
not regard the actual decision in either the
Mount
Moreland
case
supra
or the
Bell's Trust
case
supra
as
having a bearing on the present case; I have referred to them merely
to show that counsel's argument concerning a "real taxpayer"
is not well-founded.
There is a
further, and in itself compelling, reason for rejecting
counsel's argument on this point. It is to be found in paragraph
(d)
of the definition of "representative taxpayer", which I
quote with emphasis on the important words:
12
"in
respect of income paid under the decree or order of any court or
judge to any receiver or other person, such receiver or
person,
whoever may be entitled to the benefit of such income, and
whether
or not
it accrues to any person on a contingency
or an
uncertain event
."
The
significance of these words is self-evident. Counsel for the trustees
sought to avoid the impact of them by arguing that, since
in this
instance it was considered necessary to provide expressly for the
eventuality of the income not accruing to an ascertained
beneficiary, it must be presumed that the Legislature, by omitting a
similar provision in paragraph (c), intended such eventuality
to be
excluded in the case of a trustee. I cannot agree. The kind of case
addressed in paragraph (d) is not one of everyday occurrence
and it
is readily understandable that the Legislature wished to clarify
the ambit of its operation. But there is nothing obscure
in the case
addressed in the words of paragraph (c):
13
"income
the subject of any trust". It is so common an occurrence for a
trustee to receive and hold trust income on behalf
of unascertained
and indeterminate beneficiaries, that such an eventuality is directly
conveyed by the very words used; there was
no need to spell it out.
Moreover, I am unable to think of any reason why the Legislature
would wish to ordain that a trustee should
be a representative
taxpayer when he receives truat income accruing to a beneficiary,
but not when the income does not so accrue.
In truth, such an
arrangement relating to the taxation of trust income would be so
devoid of reason as to be absurd. I do not believe
that the
Legislature could have contemplated it. The point about the
wording of paragraph (d), then, is that it is wholly destructive
of
counsel's argument that the idea of representation contained in the
expression "representative taxpayer" connotes
the
existence of a "real
14
taxpayer" who is being represented. With the sub-stratum of the
argument gone, it must be accepted that a trustee can represent
indeterminate beneficiaries, and so effect can be given to the
plain meaning of paragraph (c). I do not consider that this
conclusion,
or the reasoning on which it is based, is detracted from
by pointing to the source of the definition of "representative
taxpayer"
in our income tax legislation.
In my
judgment, therefore, it is not open to doubt that the definition of
"representative taxpayer" applies to the trustees
in the
present case, in respect of the undistributed income of the trust.
I turn to
section 5(1). It levies an income tax "in respect of the taxable
income received
by
or accrued to or in favour of any person",
as
enumerated in paragraphs (a), (b) and (c) (and
15
"any
company" as mentioned in paragraph (d)). If the
language
of the section is taken at its face value,
the income
in question in this case was "received by"
and
"accrued to" the trustees. Accordingly, having
regard to
the views expressed above, I agree fully
with
the following passage at 362 of
Honore's South
African
Law of Trusts
4th ed, by Honoré and Cameron,
writing
after publication of the judgment of the
Court
a
quo
:
"It
was however the clear intention of the legislation that income the
subject of a trust should be taxable in some person's
hands. Nor
is that person far to seek. Where income is assessed neither to the
beneficiary nor the donor but to a trust as such the
person to whom
the income accrues for tax purposes is the trustee, in whom the
rights and liabilities in a trust normally vest. Since
the trust
income accrues to the trustee, who is a natural or juristic person,
he is prima facie taxable on it."
Counsel
for the trustees argued, however,
that
the trustees could not be brought within the
16
provisions of section 5(1), because they did not receive the trust
income for their own benefit and the income did not accrue to
them on
their own behalf. The argument was founded on the judgment in
Minister of Finance and Another v Law Society, Trans
vaal
[1991] ZASCA 88
;
1991 (4) SA 544
(A) at 557C, where GOLDSTONE JA said, with reference
to the words "received by or accrued to":
"Those
words in a revenue statute, over many years, have been judicially
interpreted to describe a receipt by, or an accrual
to, the
taxpayer on his own behalf of for his own benefit: Meyerowitz and
Spiro on
Income Tax
paras 138-44;
Gelden-
huys v
Commissioner for Inland Revenue
1947 (3) SA 256
(C) at 265-6;
Secretary for
Inland Revenue v Smant
1973 (1) SA 754
(A) at 764B-C."
For ease
of reference I shall refer to the statement
embodied
in this passage as "the benefit formula".
At first
blush it certainly supports the argument. I
am
nevertheless of the view that it cannot avail the
17
trustees, for the reasons which follow.
The
benefit formula is based on the two cases cited by GOLDSTONE JA,
Geldenhuys supra
and
Smant
supra
(as is the passage in
Meyerowitz and Spiro
to which
he refers). In order to appreciate the ambit of the benefit formula
it is necessary to consider what the issues were and
what was decided
in the two cases. In the
Geldenhuys
case
supra
the
taxpayer was a widow who held a flock of sheep as usufructuary, the
owners being her children, who had been appointed heirs under
a
mutual will. She sold the sheep and invested the proceeds. With
regard to her farming activities she was liable under section 14
of
the 1941 Act to income tax in respect of all amounts received for
which livestock had been disposed of by her during the year
of
assessment. In issue was the correctness of the decision of the
Commissioner pursuant to this provision to levy tax
18
on
the proceeds of the sale of the sheep. The Full
Court
decided that the proceeds should not have been
included
in the taxpayer's taxable income. STEYN J
delivered
the main judgment. The salient points of
his
reasoning (at 265-7) may be summarized as
follows.
He held that
"the
proceeds did not accrue to her personally. The proceeds accrued
to the heirs."
With
reference to the definitions of "income",
"taxable
income" and "gross income", he held that in
the latter
the words "received by or accrued to or in
favour of
any person" relate to the taxpayer, and
that the
words "received by" must mean "received by
the
taxpayer on his own behalf for his own benefit".
With
regard to section 14, he said that it did not
purport to
create a new definition of "taxable
income",
and that
in the
determination of a farmer's taxable income we continue to be
concerned with
19
amounts
received by or accrued to him, i e such amounts as are received by
him for his own benefit."
Accordingly,
the words "disposed of" in the section can only mean
"disposed of" for his, the farmer's, benefit.
Consequently
the proceeds in question did not represent an amount for which
livestock had been "disposed of" by the taxpayer
within the
meaning of section 14. In the concurring judgment of HERBSTEIN AJ (at
269) it was held that the expression "received
by" meant
that the money must be received by the taxpayer in such circumstances
that he becomes entitled to it; that the words
"accrued to or in
favour of' indicate that the amount which accrues must accrue to the
person who is to be charged; that, though
the usufructuary received
the purchase price of the sheep she did not become entitled to the
money, which remained the property of
the remaindermen; and that
"it never became part of her "gross
20
income".
OGILVIE THOMPSON AJ agreed with the views expressed in both
judgments.
It will be
seen from the above analysis that in the reasoning of the learned
Judges the
requirement
of benefit or entitlement on the part of the taxpayer was linked to
the words "received by". It was not coupled
with "accrue
to". There was no room for doing that, since the income in
question did not in fact accrue to the taxpayer
at all, but to the
heirs. To the extent that reference was made to the expression
"accrue to" in both judgments, in relation
to the taxpayer,
it may be said that it was implicit in the reasoning that income that
was "received by" the taxpayer not
for her own benefit, or
in her own entitlement, could not be thought to have "accrued
to" her. On the facts of the case,
that assumption was no doubt
a valid one. But this observation leads me directly to point to the
vital feature of that
21 case,
which distinguishes it fundamentally from the situation in the
present one. There, the income in question which was received
by the
taxpayer vested in
ownership
in the heirs, to whom it thus accrued; here, the income in question
which was received by the taxpayer (i, e the trustees)
did not vest
in or accrue to anyone else; it vested in the trustees as owners and
thus accrued to them.
In
Smant
's
case
supra
the facts relevant for present purposes may be
stated briefly. The taxpayer had entered into a contract with a
company, referred
to as "Media", under clause 5(1) of which
he was entitled to receive certain payments. He then ceded his right
to receive
those payments to one Plank. Despite the cession, he
continued to receive the payments from Media, retaining them, with
the consent
of Plank, in reduction of a debt due by Plank to him; The
issue was whether the taxpayer was
22
liable to
income tax in respect of the payments so
received
and retained by him. HOLMES JA, in
delivering
the judgment of the majority of the Court,
said (at
764A-C):
"As
to the cession, in the particular circumstances of this case I
consider that it divested the taxpayer of his right to receive
future
payments under clause 5(1) before they accrued to him, and vested
that
right in
Plank The position is,
therefore,
that the latter payments (which are the ones in question in this
case) never accrued to the taxpayer, and he was antecedently
obliged
to transmit them to Plank if he received them from Media, and he did
not receive them for his own benefit. In the result,
they never
formed part of his gross income, and are not taxable."
It is
clear that in this case, too, it was held that the income in question
had not accrued to the taxpayer at all, and that
the requirement
"for his own benefit" was applied only to his receipt of
the income. It is also clear that this case is
distinguishable
from the present one on the same grounds
23
as
mentioned above in regard to the
Geldenhuys
case
supra
:
the income had accrued to another person, whereas here there is no
other person involved and
the income
accrued to the trustees themselves.
Reverting
to the benefit formula, it follows from what has been said above
that, in my respectful opinion, it goes further than
is warranted by
the authority of the cases referred to, to the extent in which it
postulates a requirement of benefit to the
taxpayer in relation
to income which accrues to him, over and above and independently of
the requirement relating to the receipt
of the income. In the vast
majority of cases in practice this will not give rise to problems.
But generali-zations often do not cater
for exceptional cases. An
example of a case which is not catered for in the benefit formula is
to be found in
Ochberg v Commis-
'
sioher for Inland Revenue
1931 AD 215
, in which a
24
taxpayer
had been allotted shares in a company in which he already held
practically all the shares and where, so it was found, he
had not
been benefited by the transaction. It was held by the majority of the
Court (at 225-9) that he was nevertheless liable to
tax in respect of
that income. In the present matter we are dealing with a situation
which can be regarded as peculiar. The trustees
did not receive the
income in question for their own benefit, but it did accrue to them;
they acquired the ownership of it, but not
beneficially for
themselves; they hold it as representatives of the potential
ultimate beneficiaries, but these are unascertained
and
indeterminate. This kind of situation was not adverted to in the
benefit formula, which consequently does not preclude us from
considering the issue under discussion as a matter of principle.
In"
Commissioner
for Inland Revenue v Genn &
25
CO
(Pty) Ltd
1955 (3) SA 293
(A) at 301B-302A SCHREINER JA discussed
the question whether borrowed money is received by or accrues to a
taxpayer within
the
meaning of the definition of "gross income", or
of section
12(f) of the 1941 Act. That question does
not, of
course, bear directly on the issue in the
present
case, but since I have found valuable
guidance
in the remarks of the learned Judge, I
propose to
quote rather extensively from them:
"It
certainly is not every obtaining of physical control over money or
money's worth that constitutes a receipt for the purposes
of these
provisions. If, for instance, money is obtained and banked by someone
as agent or trustee for another, the former has not
received it as
his income. At the same moment that the borrower is given possession
he falls under an obligation to repay. What is
borrowed does not
become his, except in the sense, irrelevant for present purposes,
that if what is borrowed is consumable there
is in law a change of
ownership in the actual things borrowed.
It may be
accepted, on the authority of the majority judgments in
Ochberg v.
Com
missioner for Inland Revenue
,
1931 A.D.
26
215 at pp
225 to 229, that the presence or absence of a benefit to the taxpayer
from something that passes into his possession does
not provide a
proper test in applying the definition of 'gross income'. But the
Court was there dealing with a case where the shares
issued to the
taxpayer became his own in full ownership, without any accompanying
obligation to return them. The transaction was
of a type in which
benefit was notionally possible, to the extent at least that what
before the transaction did not belong to
him became, as a result
of it, his property absolutely. The question whether anything is
'received' by a taxpayer, although it is
only on loan, was not in
issue or considered, and the case is not authority for the view that,
in deciding that question, no regard
should be paid to the fact that
a borrowing, by its very nature, involves a correspondence between
what is obtained and the obligation
to repay or redeliver."
When
SCHREINER JA referred to a trustee, in
the
expression "as agent or trustee of another", it
is clear
from the context, in my view, that he was
referring
to a trustee who was acting on behalf of an
existing
"principal", as in the case of an agent.
The
significance of his remarks about a trustee of
27 that
kind, and his ensuing observations about the position of a borrower,
in relation to the issue in the present case, becomes
apparent when
one places
into
contrast the position of a trustee who receives money on behalf of
unascertained beneficiaries (and thus, in effect, non-existent
"principals"). In the former case (the one dealt with by
the learned Judge), the money received by the trustee belongs
to the
person represented and therefore it cannot be said to be "his"
(the trustee' s) income. In the latter case (like
the one we are
dealing with) the money received by the trustee does not accrue to
anyone else and it is difficult to see how it can
be anything but
"his" income. In the case of a borrower, he is on receipt
of the money under an immediate obligation to
repay it; in our case,
the trustee has no such obligation when he receives the money, nor
whilst he is holding it, until such time
28
as the
beneficiaries are ascertained and the money accrues to them. The
money received by a borrower does not become his, except in
the sense
that, being a consumable, ownership passes by operation of law, which
is irrelevant for tax purposes; in our case, the
money received by
the trustee becomes his because by law ownership of trust property
invariably, even if not consumable, vests in
the trustee; no reason
suggests itself why that should be irrelevant for tax purposes. The
taxpayer in
Ochberg
's case
supra
received the shares in
full and absolute ownership, without any accompanying obligation to
return them; in our case the trustee does
not receive the income
benefically for himself, but he is nonetheless under no obligation to
restore it to anyone, unless and until
it accrues to the
beneficiaries.
Ultimately,
the question is one as to the intention of the Legislature. Where a
taxpayer
29
receives
income which accrues to another existing person, it is easy to see
why the Courts recognized the need to interpret the words
"received
by", by cutting down their ostensibly wide meaning, and to
restrict their ambit of operation by means of the
requirement of
receipt "for his own benefit". In such a case, the obvious
person to whom the Legislature would look,
for tax purposes, is
the one to whom the income accrues, and the Legislature could not
have intended that the one who merely receives
it without benefit for
himself should (also) be liable to tax. But where there is no other
existing person to whom the income can
accrue, and the income in fact
accrues to the recipient of it, albeit not benefi-cially for himself,
the position is quite different,
in my judgment. In this situation I
can perceive no sensible reason for surmising that the Legislature
did not' intend to hold liable
to tax the person by
30
whom the
income is received and to whom it also accrues. To hold that such a
person is liable to tax does not involve changing the
meaning of
"received by", as interpreted by the Courts; it simply
involves declining to read any similar limiting notion
into the
expression "accrued to". With regard to the facts of this
case, I am firmly of the view that there is no justification
for a
restrictive interpretation of the expression "accrued to",
so as to exclude the trustees from liability to tax in
terms of
section 5(1), in respect of the undistributed income of the
trust. It is common cause that they are liable to tax as
representative taxpayers in respect of the income of the trust which
has accrued to the beneficiaries. In my view it would be wholly
irrational to hold that they are not likewise liable in respect of
the undistributed income of the trust. I am unable to ascribe
such an
intention to the
31
Legislature.
In particular, I cannot agree with the view that such income is not
"income" within the contemplation of the
Act.
But
counsel for the trustees had another string to his bow, concerning
section 5(1). He argued that since this was the charging section,
it
could not be construed as applying to representative taxpayers. I do
not agree. In my opinion the question whether or not a particular
taxpayer is brought home under the provisions of the section, whether
as a taxpayer in his own right or in a representative
capacity,
falls to be decided with reference to the wording of those provisions
as such, and without antecedently assigning any particular
significance to the fact that they constitute the charging section.
To be sure, most categories of representative taxpayers do fall
outside the section, for instance those contemplated in paragraphs-
(a),
32
(b) and (e) of the definition of
"representative taxpayer", as well as most of those
contemplated in paragraph (c) itself.
But that is so, as I see the
position, because in each instance
the income in question does not qualify as income "received by"
or "accrued to"
the person concerned, reading the former
expression in its restricted sense and the latter in its ordinary
sense. In the present
case, however, the undistributed income of the
trust was income "accrued to" the trustees, within the
meaning of section
5(1), as I have attempted to show. I see no
warrant for not applying the section to the trustees.
I turn to the other sections
mentioned earlier. Of these, sections 90 and 95(1) can be disposed of
briefly. I need say no more about
them than that I can find nothing
in them which is inconsistent with the views I have expressed
above.
33
There
remains for consideration sections 95(2) and (3) and 96(1). Counsel
for the trustees
relied
strongly on them, in support of his contention
that a
representative taxpayer requires to have some
determinate
person whom he represents (the "real
taxpayer"
again). The sections now being considered
are fully
quoted in the judgment of JOUBERT JA, but
for ease
of discussion I quote again section 95(2):
"Any
abatement, deduction, exemption or right to set off a loss which
could be claimed by the person represented by him shall
be allowed in
the assessment made upon the representative taxpayer in his capacity
as such."
In
essence, the argument is this: the words "the
person
represented by him" show that, if there is no
such
person, there can be no representative taxpayer.
I do not
agree. The fallacy in the argument, in my
view, is
that it seeks to elevate a mere supposition
into a
substantive requirement. The provision pre-
34
supposes that a person represented exists, but if no such person is
to be found, it does not follow that there can be no representative
taxpayer (as defined);
it simply
means that the provision can find no application in that particular
situation. It requires no straining of interpretation
to read the
reference to a person represented in the sense of "if there is
one". That kind of supposition is common in
legislative
provisions. In fact, it is demonstrated in the first part of section
95(2) itself. The reference to "any abatement,
deduction",
etc does not signify that if there is no abatement, deduction etc
which can be claimed, there is no representative
taxpayer. In the
same way, if regard is had to the whole of the situation dealt with,
i. e any abatement, deduction, etc which could
be claimed by the
person represented, and it appears that it cannot be applied to a
given case because a person represented cannot
35
be
identified, the result is merely that the provision does not
come into operation in that case. In effect, counsel's argument
amounts to this, that the reference to "the person represented"
must be taken to qualify the meaning of "representative
taxpayer". That will not do. The Legislature has itself defined
"representative taxpayer". According to the plain
meaning
of the definition (as I have found) a trustee who receives trust
income on behalf of unascertained and indeterminate beneficiaries
falls within the definition. The provisions of section 95(2) do not
require the definition to be qualified, for the reasons explained
above. And the same considerations apply to sctions 95(3) ("the
person whom he represents") and 96(1) ("the person
on
whose behalf it is paid").
I
conclude, therefore, that the trustees in the present case were
correctly assessed to tax in
36 respect of the undistributed
income of the trust. I would add that this conclusion is in
conformity with what has been regarded
as axiomatic in income tax law
for more than half a century - see, for instance, ITC 10,
1 SATC 113
(1923); ITC 37
,
2 SATC 65
(1925); ITC 400
,
10 SATC 102
(1937); and
this has been reflected in the legal literature and in the practice
of the Revenue department, until recently. The practice,
which is a
mattei of common knowledge (and the acceptance of its correctness),
had become well established before the passing
of the 1962 Act.
The earlier statutory provisions in question were re-enacted in
substantially the same form in the 1962 Act. In
Ex parte Minister
of Justice : In re R v Bolon
1941 AD 345
at 359 TINDALL JA cited
the principle enunciated in various English cases that -
"when a particular form of
legislative
enactment which has received
authoritative
interpretation,
whether by judicial deci
sion or by a long course of
practice, is
37
adopted in
framing a later statute, it is a sound rule of construction to hold
that the words so adopted were intended by the Legislature
to bear
the meaning which has been so put upon them."
(See also
S v Theron
[1984] ZASCA 1
;
1984 (2) SA 868
(T) at 877C-
878C.) On
my interpretation of the provisions in question there is no need for
me to invoke this rule of construction. I refer to
it merely to make
the final point that the conclusion reached in this judgment appears
to me to be an entirely satisfactory one.
I would
therefore allow the appeal with costs and set aside the order of the
Court
a quo
, substituting for it an order dismissing the
application with costs, the costs in both instances to include
the costs of two
counsel.
A S
BOTHA JA
HARMS AJA
CONCURS