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[2018] ZASCA 109
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Commissioner for the South African Revenue Service v Respublica (Pty) Ltd (1025/2017) [2018] ZASCA 109; 81 SATC 175 (12 September 2018)
Links to summary
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case no: 1025/2017
In
the matter between:
THE
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE
SERVICE
APPELLANT
and
RESPUBLICA
(PTY)
LTD
RESPONDENT
Neutral
citation:
CSARS v Respublica
(Pty) Ltd
(1025/2017)
[2018] ZASCA 109
(12 September 2018)
Bench:
Ponnan, Wallis, Mbha and Makgoka JJA
and Mokgohloa AJA
Heard:
23 August 2018
Delivered:
12 September 2018
Summary:
Value-Added Tax Act 89 of 1991 –
whether the supply of a building and related goods and services to an
educational institution
for use by its students under a written
agreement amounts to the supply of ‘commercial accommodation’
as defined in
section 1.
ORDER
On
appeal from
:
Gauteng
Division, Pretoria (Semenya AJ sitting as court of first instance):
1. The appeal is upheld with costs, including the costs of two
counsel.
2. The order of the court a quo is set aside and replaced by:
‘
The
application is dismissed with costs, including the costs of two
counsel.’
JUDGMENT
Ponnan
JA (Wallis, Mbha and Makgoka JJA and Mokgohloa AJA concurring):
[1]
This matter concerns the proper characterisation, for value-added tax
(VAT) purposes, of the supply of a building and related
goods and
services to an educational institution under a written agreement,
more particularly, whether that supply amounted to
the supply of
‘commercial accommodation’ as defined in s 1 of the
Value-Added Tax Act 89 of 1991 (the Act).
[2]
With the leave of this court, the appellant, the Commissioner for the
South African Revenue Service (SARS) appeals against a
judgment of
the Gauteng Division of the High Court, Pretoria (per Semenya AJ)
granting the respondent, Respublica (Pty) Ltd (Respublica),
declaratory relief as follows:
‘
1. . .
.[T]he letting of accommodation by Respublica to TUT in terms of the
lease agreement comprises of a taxable supply of commercial
accommodation for value-added tax purposes and Respublica is obliged
to levy and account for VAT in accordance with the Value-Added
Tax
Act 89 of 1991 on the rental payments it receives as consideration.
2. Respublica
is liable to account for VAT on only 60% of the rental it receives in
accordance with section 10(10) of the VAT Act.’
[3]
The facts are not in dispute. Respublica owns immovable property
situated within the Tshwane Metropolitan Municipality. The
immovable
property consists of 6 buildings configured into a number of
furnished apartment-style living units suitable for student
accommodation, as well as communal areas and facilities. On 9
December 2011 Respublica (as lessor)
[1]
concluded an agreement of lease with Tshwane
University of Technology (TUT) (as lessee) in respect of the
immovable property (the
lease agreement).
[2]
The lease period was five years, renewable for an
indefinite number of further periods of five years each. Provision
was made in
the lease agreement for the following:
(i) The premises were let to TUT for the sole
purpose of allowing it to offer student accommodation to its students
and for no other
purpose.
[3]
TUT was also permitted to use the premises to
accommodate holiday groups during university vacations.
(ii) TUT would allow students to occupy the leased premises pursuant
to valid lease agreements contemplated in clause 9.2. Clause
9.2
envisaged TUT issuing a letter to students confirming their
allocation to the residence for the academic year, without which
a
student might not occupy the accommodation. Presumably the terms upon
which TUT admitted its students to the residence, including
the costs
thereof, were contained in agreements concluded directly between
those students and TUT.
(iii) Respublica played no role in the selection and placement of
students at the residence. Nor did it select the holiday visitors.
This was done by TUT.
(iii) TUT undertook to take all necessary measures to control and
ensure the proper discipline of the students accommodated on
the
leased premises, including ensuring strict compliance with the house
rules.
(iv) TUT undertook to ensure that each student vacated the premises
by no later than the date on which he or she ceased to be a
student
or the date on which his or her right to reside there was terminated.
(v) TUT was liable to pay a monthly rental in respect of the leased
premises, calculated by reference to a minimum number of beds
to be
provided in the leased premises. The rental was payable by TUT
irrespective of whether or not the minimum beds were actually
occupied.
(vi) TUT undertook, on termination of the lease, to restore the
premises in good order and condition and not to make alterations
or
additions to the premises without consent or cause or permit damage
to the premises or the commission of any nuisance on the
leased
premises.
(vii) Respublica provided agreed furnishings and
amenities (such as internet connectivity and entertainment areas with
televisions)
as part of the leased premises, laundry facilities
[4]
and utilities (water and electricity) to the
leased premises.
(viii) Respublica was responsible for the routine maintenance and
repair of the premises and provided management services, including
security and cleaning.
(ix) Respublica was entitled to enter the leased premises at all
reasonable times for specified purposes.
(x) TUT was liable to pay holding-over rental if,
on the expiry of the lease, it failed to ensure that all students and
other persons
immediately vacated the immovable property and the
leased premises.
[4]
Respublica’s performance under the lease agreement was a
taxable supply for purposes of the Act, with VAT chargeable at
14% of
the value of the supply, unless one of the exemptions, exceptions,
deductions or adjustments contained in the Act applied
(s 7).
Respublica contended that the provisions of s 10(10) of the Act
applied and that it was only obliged to charge VAT on 60%
of the
total consideration received from TUT under the agreement. That
section provides:
‘
Where
domestic goods and services are supplied at an all-inclusive charge
in any enterprise supplying commercial accommodation for
an unbroken
period exceeding 28 days, the consideration in money is deemed to be
60 per cent of the all-inclusive charge.’
[5]
Section 10(10) of the Act in its current form was introduced by
s
152(1)(a)
of the
Second Revenue Laws Amendment Act 60 of 2001
. The
amendments to the definitions in s 1 of the Act consisted of the
insertion of a new definition for ‘commercial accommodation’
and the deletion of the definitions of ‘commercial rental
establishment’ and ‘residential rental establishment’.
According to the relevant explanatory memorandum issued by the South
African Revenue Service:
[5]
‘
These
proposed amendments, together with the amendment of s 10(10) and
12(c), are intended to simplify the provisions of the Value-Added
Tax
Act relating to the supply of accommodation in hotels, boarding
houses, retirement homes and similar establishments. In the
2001
Budget Review it was announced that these provisions would be
revised.
The Act provides that short-term
stays in accommodation establishments are taxed at the full value of
such supplies, while only
60% of such value is taxed where the
accommodation constitutes the dwelling of the occupant. The reason
for this is that persons
resident in their own or rented dwellings
are not subject to VAT on the full cost thereof. Mortgage interest
and municipal rates,
or alternatively, rent are exempt from VAT. The
South African VAT base is roughly 60 per cent of GDP. Natural persons
living in
accommodation establishments should be taxed at an
equivalent rate.
It should be
borne in mind that most people living in boarding houses, retirement
(old age) homes and homes for children or handicapped
persons do not
stay there as a matter of choice, but of financial or other
necessity. . . .’
[6]
Section 10(10) finds application, inter alia, where a vendor supplies
‘commercial accommodation’, which is defined
as:
‘
(a)
lodging or board and lodging, together with domestic goods and
services, in any house, flat, apartment, room, hotel, motel,
inn,
guest house, boarding house, residential establishment, holiday
accommodation unit, chalet, tent, caravan, camping site, houseboat,
or similar establishment, which is regularly and systematically
supplied and where the total annual receipts from the supply thereof
exceeds R60 000 per annum or is reasonably expected to exceed
that amount in a period of 12 months, but excluding a dwelling
supplied in terms of an agreement for the letting and hiring thereof:
(b) lodging or board and lodging
in a home for the aged, children, physically or mentally handicapped
persons; and
(c) lodging
or board and lodging in a hospice.’
[7]
The first, and perhaps, decisive question is whether Respublica can
be said to have provided lodging to TUT. The dictionary
meaning of
‘lodging’ is ‘a temporary place of residence’
[6]
or ‘a temporary residence; sleeping
accommodation,’
[7]
whilst a ‘lodger’ is ‘a person
who pays rent in return for accommodation in someone’s
house’.
[8]
As it was put in
Koffman
v Hercules Municipal Council
[9]
at 88:
‘
A
lodger is a person who occupies a room in the house of another of
which room that other person retains control’.
On
the ordinary meaning of the word, a ‘lodger’ is a natural
person who actually takes up temporary accommodation. If
so, lodging
cannot be provided to a juristic person that has ‘no body to
kick and no soul to damn’.
[10]
The notion that Respublica provides
‘lodging’ to a juristic person such as TUT, which is by
its nature incapable of
living in accommodation, is therefore
inconsistent with the ordinary meaning of the word as used in the
Act.
[8]
What is more, there may be a distinction between a ‘lodger’
and a tenant under a conventional agreement of lease.
[11]
In
S A Breweries Ltd
v Rent Control Board
[12]
at 71-72, Hathorn JP, writing for the majority,
explained:
‘
. . .
there is ordinarily no contract of letting and hiring between a hotel
keeper and a person who occupies a room in a hotel.
I will call him a
lodger. It follows that a lodger is not a sub-lessee, and
consequently the second essential is absent here because
the premises
are not occupied as a human habitation by the lessee in terms of the
lease . . . or by a sub-lessee. . . . The result
is exactly in accord
with the object of the Act, which was designed to protect lessees and
sub-lessees. It was not designed to
protect lodgers.’
Later,
the learned Judge President added (at 73-74):
‘
. . .
[W]hen one thinks of the extensive rights which a lessee acquires
under a lease and compares them with the limited rights
of a lodger
in a hotel it seems to me to be obvious that the contracts are not
the same. Thus, it is clear to me that a lodger
has no right to make
drastic alterations in the position of the furniture in the room he
occupies. Nor has he the right to call
in artisans to paint or to
attend to the water supply or to the lighting in the room. These are
matters for the hotel keeper. In
short, the hotel keeper retains
control of the room and gives to the lodger a very limited right of
use, which, although it be
an exclusive one, is not comparable to the
extensive rights of a lessee under a contract of letting and hiring.
There appears to
be little authority in our law on the subject but
the view I have expressed is supported by the case of
Pay
v Morton
18 CTR 819 . . . Morton was a monthly boarder. Maasdorp J, who
decided the case, took the view that the contract was of a special
nature, to which none of the authorities before him applied. These
authorities were authorities on letting and hiring. It is clear,
therefore, that the learned Judge was of opinion that a contract for
board and lodging, even if it was by the month, was not a
contract of
letting and hiring.’
[9]
We need not decide here whether the distinction drawn between a
contract of letting and hiring and one for the provision of
board and
lodging is correct. The matter was not dealt with in detail in
argument and the view expressed by Hathorn JP was in part
based upon
the English concept of a licensee, which is not known in our law. The
judgment highlights the fact that the provision
of board and lodging
is a very personal one and, if it is a lease, is one subject to
stringent terms not normally encountered in
a conventional lease. The
relationship between TUT and Respublica bears little resemblance to
conventional arrangements for the
provision of board and lodging.
[10]
That, however, is not the end of the matter. Respublica contends that
its supply to TUT met the definition of commercial accommodation,
because the accommodation supplied by it was used by the students,
who, so the contention goes, were in truth the ‘lodgers’.
In my view Respublica’s approach is analytically unsound. It
fails to take proper account of the nature of the contractual
arrangements and conflates two distinct supplies.
I
accept for present purposes that it may well be theoretically
possible for A to conclude an agreement with B for the provision
of
lodgings to C. On the facts outlined above, however, it is apparent
that two distinct legal relationships were contemplated.
The first,
between Respublica and TUT and, the second, between TUT and its
students and holiday visitors. In terms of the first,
there was a
5-year renewable lease of immovable property by Respublica to TUT,
together with an undertaking to provide specified
services and
utilities to the property. The second contemplated numerous shorter
term agreements between TUT and its students and
holiday visitors in
terms of which the former provided accommodation to those persons.
There was no contractual relationship between
Respublica and the
students or holiday visitors for the lease of the premises or the
provision of accommodation. The students looked
to TUT for a place in
the residence, which the latter hired from Respublica. TUT made a
separate supply of accommodation to its
students. That supply, ‘being
a supply necessary for and subordinate and incidental to the supply
of [educational services]
[and] supplied for a consideration in the
form of . . . payment for board and lodging’, was exempt from
VAT by virtue of
s 12(
h
)(
ii
)
of the Act.
[11]
Here, Respublica supplied the immovable property and leased premises
to TUT under an agreement of lease. It handed over possession
and
occupation of the property to the latter for the duration of the
lease period and in return received a specified monthly rental.
The
lease contained a full range of terms typically found in a property
lease.
It is so that Respublica was
required in terms of the lease agreement, in addition, to provide TUT
with residential management services
on the premises. These supplies
were plainly ancillary to the lease. They did not detract from the
core basis for TUT’s occupation
of the premises, namely a lease
of immovable property.
[12]
Respublica’s approach is contrary to the general principle (as
recognised in other VAT jurisdictions) that the VAT consequences
of a
supply must be assessed by reference, first and foremost, to the
contractual arrangements under which the supply is made.
In New
Zealand, whose Goods and Services Tax (GST) legislation influenced
our own,
Rotorua Regional Airport Limited v Commissioner of
Inland Revenue
held
:
‘
[t]he
nomenclature used by the parties is not decisive. Nor are the
economic or other consequences. What is crucial is the ascertainment
of the legal rights and duties which are actually created by the
transaction into which the parties entered’.
[13]
The
issue in
Rotorua
was whether an airport operator had to charge GST on a ‘development
levy’ paid by departing passengers. The operator
argued that it
was not so obliged because the levy was not consideration for a
supply, and was used to fund future facilities.
The court however
found that because the passengers had to pay the levy to the operator
in order to take flights from the airport,
the levy was consideration
for the use of the airport. It also held that (para 53): ‘because
the focus is on the legal relationship
between [the operator] and
passengers . . . the use to which the funds are in fact put is not
relevant’.
[13]
A similar approach has been adopted in English law, where the
majority of the Supreme Court in
Airtours
Holidays Transport Limited v Commissioner for Her Majesty’s
Revenue and Customs
[14]
para 47 observed: ‘when assessing the VAT
consequences of a particular contractual arrangement, the court
should, at least
normally, characterise the relationship by reference
to the contracts and then consider whether that characterisation is
vitiated
by [any relevant] facts’.
Likewise, in the
context of European VAT jurisprudence, the European Court of Justice
has stated ‘a supply of services is
effected for consideration
. . . only if there is a legal relationship between the provider of
the service and the recipient pursuant
to which there is reciprocal
performance.’
[15]
[14]
So viewed, one cannot legitimately attribute to Respublica’s
supply, governed as it was by its own contractual terms,
the
characteristics of an altogether different supply of accommodation to
third parties under separate contracts, with whom it
had no
contractual nexus. The test for whether Respublica supplied lodging
cannot be whether the end-use of the property under
the second set of
supplies by TUT was temporary in nature or constituted the supply of
lodgings to the students. The relevant contractual
rights and
obligations were those as between Respublica and TUT, and did not
involve the supply of temporary accommodation. The
fact that TUT
supplied temporary accommodation in the form of lodging to its
students is
res inter alios acta
and
is irrelevant. Accordingly, as the supply by Respublica to TUT does
not meet the first requirement of the ‘commercial
accommodation’ definition that suffices to determine the appeal
against it. It is thus unnecessary to consider whether the
other
requirements have been met. Nor, is it necessary to consider whether
the supply by Respublica is ‘a dwelling supplied
in terms of an
agreement for the letting and hiring thereof’, because counsel
were agreed that the exclusion did not find
application and
accordingly need not detain us.
[15] In
the result:
1. The appeal is upheld with costs, including the costs of two
counsel.
2. The order of the court a quo is set aside and replaced by
‘
The
application is dismissed with costs, including the costs of two
counsel.’
_________________
V M Ponnan
Judge of Appeal
APPEARANCES:
For
Appellant: MW Janisch SC (with him TS Sidaki)
Instructed
by:
Mothle
Jooma Sabdia Inc., Pretoria
Symington
De Kok Attorneys, Bloemfontein
For
Respondent: AR Sholto-Douglas SC (with him PA Swanepoel)
Instructed
by:
Cliffe
Dekker Hofmeyr Inc., Pretoria
Honey
Attorneys, Bloemfontein
[1]
Respublica was previously known as Midnight Storm Investments 399
(Pty) Ltd t/a Urban Nest. The original lease thus reflected Midnight
Storm as the lessor.
[2]
Although clause 3 of the lease stated that Respublica lets the
leased premises to TUT, which is defined as the buildings situated
at the immovable property, it is plain from the lease as a whole
(e.g. the preamble, clause 2 and clause 18.1) that what is let
is
both the leased premises and the immovable property.
[3]
Clause 10.2 of the lease agreement provided that TUT shall not use
the premises for any other purpose, or permit any student
or other
person to do so, without the written consent of the respondent.
[4]
I
n terms of clause 7.12 of the lease
agreement, TUT was also responsible for the cost of water and
electricity consumed by the
laundry.
[5]
www.sars.gov.za/AllDocs/LegalDoclib/ExplMemo/LAPD-LPrep-EM-2001-01-ExplanatoryMemorandumRevenueLawsAmendmentBill2001.pdf
accessed
28 August 2018.
[6]
Oxford South African Concise Dictionary.
[7]
Collins English Dictionary.
[8]
Collins English Dictionary.
[9]
Koffman v Hercules Municipal Council
1948 (1) SA 85 (T).
[10]
CIR v Richmond Estates Ltd
1956 (1) SA 602
(A) at 606.
[11]
Koffman v Hercules Municipal Council
(supra) at 88.
[12]
S A Breweries Ltd v Rent Control Board
1943
NPD 64.
Carlisle J concurred in the judgment of Hathorn JP. Although
Selke J arrived at the same conclusion, his reasons differed in some
respects from the majority.
[13]
Rotorua Regional Airport Limited v Commissioner of Inland Revenue
(High Court, Wellington) CIV-2008-485-2524 para 50, relying on a
number of Court of Appeal authorities.
[14]
Airtours Holidays Transport Limited v
Commissioner for Her Majesty’s Revenue and Customs
[2016] UKSC 21; [2016] 4 All ER 1 (SC).
[15]
Tolsma v Inspecteur der Omzetbelasting Leeuwarden
Case
C-16/93 para14.