IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
REPORTABLE
CASE NO 353/04
In the matter between
LIBERTY INVESTORS LIMITED (IN MEMBERS’ VOLUNTARY
LIQUIDATION) Appellant
and
THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE
Respondent
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CORAM: HOWIE P, STREICHER, BRAND, LEWIS et PONNAN JJA
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Date Heard: 22 August 2005
Delivered: 30 August 2005
Summary: Dividends from a subsidiary tr ansferred to company’s share capital and
share premium account and capitalisation sh ares issued – later liquidation of the
company – sums transferred deemed by proviso (i) of definition of ‘dividend’ to be
profits of revenue nature and thus not exempted from secondary tax on companies.
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J U D G M E N T
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HOWIE P
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HOWIE P
[1] Between March 1995 to August 1996 the appellant company received
dividends in the amount of R156 831 00 0 from its wholly owned subsidiary,
DGI Holdings (Pty) Ltd. This amount was capitalised in due course by
transferring some of it to the appellant’s share capital and the rest to its share
premium account. Pursuant to these transfers the appellant utilised the amount
in issuing capitalization shares to its shareholders.
[2] On 5 July 1999, during the 2000 tax y ear, the appellant was, in terms of
a special resolution of its members, pl aced in voluntary liquidation. On the
same date the appellant declared, in the course of the liquidation, a dividend to
shareholders of some R5 565 million.
[3] In terms of subsection (2) of s 64B of the Income Tax Act 58 of 1962,
as amended, a tax known as the seconda ry tax on companies must, subject to
certain exemptions, be levied on any dividend declared by a company on or
after 14 March 1996.
[4] One of the exemptions is provided for in subsection (5)(c). The material
terms of that provision exempt
‘so much of any dividend distributed in the course of the liqui dation … of a company, as is
shown by the company to be a distribution of … profits of a capital nature.’
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[5] In calculating this tax in the pres ent matter the respondent regarded the
amount of R156 831 000 as a distribu tion from revenue reserves and,
calculating the relevant net portion of that amount as R148 370 619, levied the
tax, at the prescribed rate, on the la tter sum. The appellant’s resultant
secondary tax liability thus calculated was R18 546 327,38.
[6] The appellant appealed to the Tr ansvaal Tax Court, contending for the
absence of any such tax liability. E ssentially, the appellant’s case was that
the amount of R156 831 000 comprised ‘profits of a capital nature’. That court
dismissed the appeal but granted leave to appeal to this court. The crux of its
reasoning in dismissing the appeal wa s that the dividends the appellant
received from its subsidiary were profits of a revenue natu re and never lost
that character. In the Tax Court’s view
‘the mere fact that the amount was capitalised to the comp any’s share capital and share
premium account did not change its nature nor can it render a subs equent distribution a
distribution of profits of a capital nature …’.
[7] Counsel for the appellant re lied principally on the case of Commissioner
for Inland Revenue v Collins 1 for the proposition that the amount of
R156 831 000 (the amount in issue) had b een transferred from revenue profits
to capital. Accordingly, so the ar gument went, when the amount in issue
1 1923 AD 347
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came to be included in what was distributed on liquidation it could not have
constituted anything other than ‘profits of a capital nature’.
[8] Although Collins’s case demonstrates the flaw in the reasoning of the
Tax Court cited above, what that Court, the parties before it and counsel have
in any event overlooked are the terms of paragraph (i) of the proviso to the
definition of ‘dividend’ in s 1 of the Act.
[9] In the 2000 tax year the relevant wording of the definition and the
proviso was as follows:
‘ “dividend” means any amount distributed by a company to its shareholders … and in this
definition the expression “amount distributed” includes –
(a) in relation to a company that is being … liquidated, … any profits distributed … other
than those of a capital nature, earned before … the liquidation … ;
(b) …
(c) …
(d) …
but does not include –
(e) the nominal value of any capitalization shares awarded to a shareholder to the extent to
which such shares have been paid up by mean s of the application of the whole or any
portion of the share premium account of a company; or
(f) …
(g) …
(h) the nominal value of any cap italization shares awarded to shareholders as part of the
equity share capital of a company;
(i) …
Provided that, for the purposes of this definition –
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(i) where a company has on or after 1 January 1974 transferred any amount from reserves
(excluding any share premium account) or undistr ibuted profits to the share capital or the
share premium account of the company without applying the amou nt in paying up
capitalization shares or has applied the amou nt in paying up capitalization shares the
nominal value of which did not in whole or in part constitute an amount distributed as
contemplated in the foregoing provisions of this definition, the amount so transferred
(reduced by so much thereof as constitutes such an amount distributed) shall be deemed –
(aa) to the extent that such amount (as so reduced) is shown to c onsist of profits of a
capital nature, to be a profit of a capital natu re available for distribution by the company to
shareholders who, in the event of a distribution by the company at any time (whether before
or during the winding-up or liquidation of the company) of profits of a capital nature would
be entitled to participate in such a distribution; and
(bb) to the extent that subpa ragraph (aa) does not apply, to be a profit which is not of a
capital nature and is availabl e for distribution by the compa ny to shareholders who, in the
event of a distribution by the company at an y time (whether before or during the winding-
up or liquidation of the company) of profits which are not of a capital nature would be
entitled to participate in such a distribution, regardless of whether in either case the
company in fact has or has not any profits available for distribution;’
[10] Quite apart from whether th e amount in question, having been
capitalised, could correctly be called prof its, the terms of su b-paragraph (bb)
of the proviso are destructive of the a ppellant’s case. Plainly, that amount
when received from the s ubsidiary comprised profits of a revenue nature and,
despite capitalization thereafter, must ne vertheless be deemed to be profits of
a revenue nature available for distribution to shareholders. It follows that the
amount in question cannot be shown to comprise profits of a capital nature as
required to establish the s 64B(5)(c) exemption.
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[11] The appeal is dismissed with co sts including the costs of two counsel.
CT HOWIE
PRESIDENT
CONCURRED:
Streicher JA
Brand JA
Lewis JA
Ponnan JA