THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Reportable
Case no: 401/2003
In the matter between:
MICHAEL WEARE Appellant
.
and
THE COMMISSIONER FOR SOUTH AFRICAN
REVENUE SERVICE Respondent
_____________________________________________________
Coram : SCOTT, FARLAM, MTHIYANE, CLOETE
JJA et ERASMUS AJA
Date of hearing : 13 SEPTEMBER 2004
Date of delivery : 29 SEPTEMBER 2004
Summary: Overpayment of VAT – refundable in terms of s 44(2)(a) of Act 89
of 1991, not in terms of s 44(1) – overpayment in terms of prevailing practice.
____________________________________________________
JUDGMENT
_____________________________________________________
SCOTT JA/…
2
SCOTT JA:
[1] The appellant carries on bus iness as a bookmaker. The
business is an ‘enterprise’ as de fined in s 1 of the Value-Added
Tax Act 89 of 1991 (‘the Act’) and the appellant is a registered
vendor in terms of s 23 of the Act. During the period September
1991 (when the Act came into operation) until the tax period for the
period June to July 1996 the appellant overpaid a total of
R1 432 038,83 in val ue-added tax (‘tax’). After deducting the tax
payable for the latter tax pe riod he claimed a refund of
R1 417 018,99. The appellant contended both in the Natal Income
Tax Special Court and in this court that he wa s entitled to a refund
in terms of s 44(1) re ad with s 16(3) and s 16(5) of the Act. The
respondent, on the other hand, co ntended that a refund was
payable in terms of s 44(2)(a). Whether the refund is to be made in
terms of s 44(1) or s 44(2)(a) is the first of the two main issues
requiring determination in this appeal. If the refund is to be made in
terms of s 44(1), the appell ant (and other bookmakers who
overpaid in similar circumstances) would be entitled to recover the
amount overpaid during a period of fi ve years preceding the claim,
which in the present case would cover the full amount of the
overpayment. If in terms of 44(2)(a), the appellant’s claim would be
3
subject to the further proviso that the refund would be limited to the
overpayment made during the pr eceding six months ‘if the
Commissioner is satisfied that such payment was made in
accordance with a practice generally prevailing at the said date’, ie
the date of payment. This proviso is contained in s 44(3) to which s
44(2)(a) is subject. (I shall refer in greater detail to these provisions
later in this judgmen t.) The respondent rule d that the payments in
question were made in accordan ce with a practice generally
prevailing and accordingly limited the amount repayable to the
appellant to R336 2 59,93. The existence or otherwise of the
practice is the second issue re quiring determination. The appellant
appealed unsuccessfully to the Special Cour t. The present appeal
is with the leave of that court granted in terms of s 86A(5) of the
Income Tax Act 58 of 1962, read with s 34 of the Act.
[2] In the ordinary course of t he appellant’s business he entered
into betting transactions with p unters, each of whom paid him a
sum of money against an undertak ing by him to pay a specified
multiple of the amount so paid depending upon the outcome of a
future event, typically the result of a horse race. In the event of a
punter’s wager proving successful the appell ant paid out winnings
to that punter. When the circumstances were such that the
appellant deemed it nece ssary to limit his risk exposure in relation
4
to the bets he had rece ived, he himself woul d place ‘cover’ or
‘take-back’ bets with other book makers who would similarly be
registered vendors in terms of the Act. When these proved to be
winning bets the appellant, of cour se, would receive ‘take-back’
winnings from the other book makers. It is these ‘take-back’
winnings which gave rise to the dispute which is the subject of this
appeal.
[3] In order to better understand the contentions of the parties it
is necessary to say something of the scheme of the Act and to
refer in some detail to certain of its provisions which are relevant to
bookmakers and have a bearing on the issues in question.
[4] Section 7(1)(a) levies tax ‘on the supply by any vendor of
goods or services supplied by him . . . in the course or furtherance
of any enterprise carried on by him . . .’ . Section 7(2) provides
that, except as otherwise provi ded in the Act, th e tax payable in
terms of s 7(1)(a) is to be paid by the vendor referred to in that
subsection. The Act embodies a self-assessment system of
taxation. A vendor is required to calculate the tax payable by him
in respect of each tax period during which he has carried on his
enterprise. Broadly sp eaking, this involves the calculation of both
his ‘output tax’ and his ‘input tax’ and deducting the latter from the
5
former. The result is the tax he ha s to pay. Output tax, ‘in relation
to any vendor’, is defined in s 1 as meaning -
‘the tax charged under section 7(1)(a) in respect of the supply of goods and
services by that vendor.’
Input tax, ‘in relation to a vendor’ is defined as meaning -
‘(a) tax charged under section 7 and payable in terms of that section by –
(i) a supplier on the supply of goods or services made by that
supplier to the vendor; or . . .
where the goods or services concerned are acquired by the vendor wholly for
the purpose of consumption, use or supply in the course of making taxable
supplies or, where the goods or services are acquired by the vendor partly for
such purpose, to the extent (as determined in accordance with the provisions
of section 17) that the goods or services concerned are acquired by the
vendor for such purpose’.
[5]
But for the deeming provision in s 8(13), a betting transaction
would not attract tax under the Act. This is because a betting
transaction would not constitute a ‘supply of goods or services’
within the meaning of s 7(1)(a) as transactions sounding only in
money are expressly excluded fr om the definition of ‘goods’ and
‘services’ in s1 of the Act. However, s 8(13) provides:
‘For the purposes of this Act, where any person bets an amount on the
outcome of a race or on any other event or occurrence, the person with whom
the bet is placed shall be deemed to supply a service to such first-mentioned
person’.
6
In terms of s 10(17) the consideration in money for the service
deemed by s 8(13) to be supplied shall in turn ‘be deemed to be
the amount that is received in respect of th e bet’. In the result, the
appellant is deemed to supply a service to punters who place bets
with him and the ap pellant’s output tax – for which he is
accountable to the respondent – is calculated on the amounts of
the bets so received.
[6] Section 16(3) provides that t he tax payable by a vendor is to
be calculated by deducting from the sum of the vendor’s output tax
the amounts of input tax for which provision is made in the section.
In the case of a bookmaker, wh at may be deducted is, first, the
input tax calculated on bet s laid with other bookmakers, ie take-
back bets. This is deductible by virtue of s 16(3)(a)(i) which permits
the deduction of input tax ‘in respect of supplies of goods and
services . . . made to the vendor during th at tax period’. The
second deduction that may be made is the inpu t tax calculated on
the winnings paid to successful punters. Th is is in terms of s
16(3)(d) which provides for the deduction of ‘an amount equal to
the tax fraction of any amount paid by the su pplier of the services
contemplated in section 8(13) as a prize or winnings to the
recipient of such services’.
7
[7] In 1996, subsequent to the period relevant to the present
proceedings, the Act was amended by the insertion of s 8(13A) by
s 20 of Act 46 of 1996. The effect of the ne w section was to deem
the tax fraction of the winnings re ceived by a bookmaker on take-
back bets placed by him with othe r bookmakers to be output tax
for the service rendered by him to the other bo okmakers. Prior to
the amendment there was, theref ore, no provision in the Act
requiring take-back wi nnings to be in cluded in the calculation of
the bookmaker’s output tax and hence the tax payable by him. The
tax he was obliged to pay was th e difference between, on the one
hand, the amount of hi s output tax calcul ated on the bets he
received from punters and, on the ot her, the input tax calculated
on the winnings paid by him to punters and on take-back bets
placed by him with other bookmakers.
[8] The absence in the Act of a prov ision such as that contained
in the inserted s 8(13A) appears to have been a hiatus overlooked
by the Commissioner and bookma kers alike. Indeed, it appears to
have been common cause that, gi ven the scheme of the Act, one
would ordinarily expect such winni ngs to be taken in to account in
the calculation of output tax just as the payment of winnings to
punters is taken into account in the calculation of a bookmaker’s
input tax. Take-back winn ings were, however, dealt with in the
8
Guide for Vendors VAT 404 whic h was issued in 1991 and
reissued in 1995. Paragraph 7.3.9.2 of both editions provides:
‘. . . Where a bookmaker wins a covering bet he will be required to account for
output tax on the amount received as winnings (including the original stake).
In order to calculate this amount the tax fraction is applied to the actual
amount received from the other bookmaker or the totalizator.’
[9] The overpayment of tax by the appellant during the period in
question occurred as a result of the appellant (in common with
other bookmakers) incl uding in his calculati on of the tax payable
by him the take-back winnings he had re ceived from other
bookmakers. In doing so he adopted a so -called ‘netting off’
method which differed from the me thod contemplated in both the
Act and the Guide. On the assumpti on that take- back winnings
were required to be taken into account in calc ulating the tax
payable, the method cont emplated in the Act and the Guide would
be the following:
(i) Output tax would be calc ulated on the tota l amount of
the bets placed by punters with the bookmaker plus the
total amount of the take-back winnings received by the
bookmaker.
(ii) Input tax would be calculat ed on the total amount of the
winnings paid to punters by the bookmaker plus the
9
total amount of the take- back bets placed by the
bookmaker.
(iii) The tax payable would be th e result of the calculation
referred to in (i) less the re sult of the calculation
referred to in (ii).
The method adopted by the appellant was the following:
(i) In calculating his output tax he took the total amount of
bets received (subject to output tax), deducted from
this figure the total amount of the take-back bets he
had placed with other bookmakers (subject to input tax)
and calculated his output tax on the difference.
(ii) In calculating his input tax he took the tota l amount of
winnings he had paid to punter s (subject to input tax),
deducted from this amount the total amount of take-
back winnings he had receiv ed from other bookmakers
(assumed to be subject to output tax) and calculated
his input tax on the difference.
(iii) He paid tax on the result of the calculation referred to
in (i) less the result of the calculation referred to in (ii).
Regardless of whether one or the other metho d is employed, the
result, of course, is the same. The ap pellant testified that the sole
reason for adopting th e method he did, was t hat the forms he had
10
to complete for his provincial bet ting taxes required him to furnish
information in this manner and it was convenient simply to take the
information from these forms when completing his VAT return.
[10] Counsel for th e appellant submitted, however, that because
of the fortuitous ad option by the appellant of the ‘netting off’
method of calculation, the refund to which he was entitled was a
refund in terms of s 44(1) and not s 44(2)(a). It was fortuitous, he
said, because had the tax payable been calcul ated in the manner
contemplated by the Act, the overpayment would have been
refundable in terms of s 44(2)(a) and not s 44(1).
[11] In order to appreciate the argu ment advanced by counsel it
is necessary to quote certain prov isions of the Act. The first is the
first proviso to s 16(3). At the relevant time it read:
‘Provided that where any vendor is entitled under the preceding provisions of
this subsection to deduct any amount in respect of any tax period from the
said sum, the vendor may deduct that amount from the amount of output tax
attributable to any later tax period to the extent that it has not previously been
deducted by the vendor under this subsection.’
In passing it is necessary to ob serve that the reference to what
may be deducted ‘under the preceding provisions’ is a reference to
the input tax that may be deducted, while the ‘said sum’ is a
11
reference to the sum of the vendor’s output tax. The next provision
relied upon is s 16(5). The relevant part reads:
‘If, in relation to any tax period of any vendor, the aggregate of the amounts
that may be deducted under subsection (3) from the sum referred to in that
subsection . . . exceeds the said sum, the amount of the excess shall, subject
to the provisions of this Act, be refundable to the vendor by the Commissioner
as provided for in section 44(1).’
Section 44(1), in turn, read at the time:
‘Any amount of tax which is refundable to any vendor in terms of s 16(5) in
respect of any tax period shall, to the extent that such amount has not been
set off against unpaid tax in terms of subsection (6) of this section, be
refunded to the vendor by the Commissioner: Provided that –
(i) The Commissioner shall not make a refund under this
subsection unless the claim for the refund is made within five
years after the end of the said tax period; or
(ii) Where the amount would be so refunded to the vendor is
determined to be R10 or less, the amount so determined shall
not be refunded in respect of the said tax period but shall be
carried forward to the next succeeding tax period of the vendor
and be accounted for as provided for in section 16(5)’
[12] Counsel’s contention, shortly stated, is as follows. Because
the ‘netting off’ method of calcul ation, as set out above, was
adopted by the appellant during the periods in question, ‘take-back
winnings’ were deduc ted from the amount of winnings paid to
12
punters (subject to inpu t tax) to arrive at the appellant’s input tax.
In the result, so the argument went, there was an under deduction
of input tax. Accord ingly, the amount of input tax not deducted
from output tax in re spect of previous tax periods could be
deducted in a later tax period in terms of the first proviso to s
16(3). This, it was argued, is what the appellant did for the tax
period in respect of June to July 1996, resulting in an excess of
input tax over output tax for that tax period. That excess, so the
argument went, was an excess with in the meaning of s 16(5) and
was accordingly refundable in terms of s 44(1).
[13] In my view the argument is un sound. The first proviso to s
16(3) makes provision for the deduct ion from output tax in a later
tax period of an amount in resp ect of input tax not previously
deducted from output tax. But in the present case all amounts in
respect of input tax which were deductible from output tax were
taken into account in the calculation of the tax payable in respect
of each tax period. What the ap pellant did was not to omit an
amount subject to inp ut tax but to include in each calculation his
take-back winnings as an amount subject to ou tput tax. Input tax
was not understated; ou tput tax was overst ated. It was this that
increased the tax payable and resulted in the overpayment. This is
so because regardless of the method of calcul ation used, in
13
substance the take-back winnings were treated as being subject to
output tax. Whether th ese were deducted from an amount subject
to input tax or added to an amount subjec t to output tax their
nature remained the sa me. That could not c hange simply because
one or other method of calcul ation was used when both methods
result in the same tax figure. It follows that in my judgment the
appellant’s reliance on the provis o in s 16(3) and hence the
provisions of s 16(5) is misplac ed. It follows too that the refund to
which the appellant is entitled is not one in terms of s 44(1).
[14] This brings me to s 44(2). It reads:
‘Subject to the provisions of subsection (3), where –
(a) any amount of tax, additional tax, penalty or interest paid by any
person in terms of this Act to the Commissioner was in excess
of the amount of tax, additional tax, penalty or interest, as the
case may be, that should properly have been charged under this
Act; or
(b) any amount refunded to a vendor in terms of subsection (1) was
less than the amount properly refundable under that subsection,
the Commissioner shall, on application by the person concerned,
refund the amount of tax, additional tax, penalty or interest paid in
excess or the amount by which the amount refunded was less than the
amount properly refundable, as the case may be.’
14
It was not in dispute that if the overpayment was not refundable
under s 44(1), it woul d be refundable under s 44(2)(a). But the
latter section is ‘subject to the provisions of subsection (3)’. I have
previously referred to the six-month limitation contai ned in s 44(3)
but for the sake of co mpleteness I quote s 44(3)(a), as it read prior
to its amendment in 1997.
‘The Commissioner shall not make a refund under subsection (2), unless –
(a) the claim for the refund of such excess amount of tax, additional
tax, penalty or interest is made within five years after the date
upon which payment of the amount claimed to be refundable
was made: Provided that if the Commissioner is satisfied that
such payment was made in accordance with the practice
generally prevailing at the said date, no refund shall be made
unless the claim for the refund is made within six months after
that date . . . . ’
[15] The question that arises is whether the overpayment was
made in accordance wi th a practice generally prevailing. Mr Peter
Franck, who holds the position of Director: Value Added Tax Policy
and Legislation in the South African Revenue Service, testified that
until the point was taken in the c ourse of 1996 it was accepted by
all in the revenue service that bookmakers’ winnings on take-back
bets were subject to output ta x. This, he said, was not only
consistent with the scheme of the Act but was reflected in both
15
editions of the VAT Guide 4 04. He said that once the lacuna in the
Act was discovered, steps were im mediately taken to have the Act
amended to rectify the situation . In the meantime, on making
inquiries, it transpired that near ly every bookmaker in the country
was seeking a refund. The inference arising from this evidence is
that prior to the discovery of the lacuna in the Act, there existed a
general practice of in cluding take-back wi nnings as an amount
subject to output tax in the calc ulation of the tax payable by
bookmakers. In terms of s 37 of the Act the onu s was upon the
appellant to show that the overpayment of tax made by him was
not in accordance with the practice generally prevailing. Mr Peter
Maxwell, a partner at Deloitte and Touche, who testified on behalf
of the appellant, suggested that there may have been some
bookmakers for whom he did not act who had not accounted for
take-back winnings. This somewh at vague suggesti on was clearly
insufficient to discharge the bur den of proof on the appellant.
Counsel also sought to ma ke something of the fact that the
method adopted by the bookmakers diffe red from that
contemplated in the Guide. But wh ether the one or other method
was employed is of little conseq uence; the result was the same.
The point is that the prev ailing practice was for bookmakers to
16
include in the calculati on of their tax the take -back winnings they
received as being subject to output tax.
(16) The appeal is acco rdingly dismissed with costs, including the
costs occasioned by the employment of two counsel.
________________
D G S C O T T
J U D G E O F A P P E A L
CONCUR:
FARLAM JA
MTHIYANE JA
CLOETE JA
ERASMUS AJA