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[2014] ZAWCHC 141
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Kluh Investments (Pty) Ltd v Commissioner for the South African Revenue Service (A48/2014) [2014] ZAWCHC 141; 2015 (1) SA 60 (WCC); 77 SATC 23 (9 September 2014)
THE
HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE DIVISION, CAPE TOWN)
Appeal
Case No: A48/2014
Tax
Court Case No: 13002
DATE:
09 SEPTEMBER 2014
In
the matter between
KLUH
INVESTMENTS (PTY)
LTD
............................................................
APPELLANT
And
COMMISSIONER
FOR THE SOUTH AFRICAN
REVENUE
SERVICE
.............................................................................
RESPONDENT
Coram
:
TRAVERSO DJP AND ALLIE & ROGERS JJ
Heard:
8 AUGUST 2014
Delivered:
9 SEPTEMBER 2014
JUDGMENT
ROGERS
J:
Introduction
[1]
The
is an appeal against the dismissal by the tax court (Davis J sitting
with two assessors) of an appeal brought in that court
against an
additional assessment levied by the respondent (‘SARS’)
in respect of the appellant’s year of assessment
ended 30 June
2004. By way of the assessment an amount of R109 932 321
was added to the appellant’s taxable income.
[1]
[2]
SARS issued the additional assessment on
the basis that a gross amount giving rise to the said taxable income
had accrued to the
appellant upon the disposal, during its 2004 tax
year, of a plantation as contemplated in para 14 of the First
Schedule to the
Income Tax Act 58 of 1962. The First Schedule applies
in the circumstances contemplated in s 26(1) of the Act.
[3]
It is common cause that the appellant
disposed of a plantation during the course of its 2004 tax year for
an amount which yielded,
if the said statutory provisions are
applicable, the taxable income forming the subject of the additional
assessment. The dispute
is, in essence, whether the amount accrued to
the appellant as a person carrying on farming operations. SARS says
yes, the appellant
says no.
[4]
Section 26(1) reads thus:
(1) The taxable
income of any person carrying on pastoral, agricultural or other
farming operations shall, in so far as it
is derived from such
operations, be determined in accordance with the provisions of this
Act but subject to the provisions of the
First Schedule.’
[5]
The First Schedule uses the word ‘farmer’.
This is clearly a short-hand reference to the expression ‘any
person
carrying on pastoral, agricultural or other farming
operations’ in s 26(1). I shall for convenience use the
phrase ‘farming
operations’ to cover the expression used
in s 26(1).
[6]
Para 14 of the First Schedule provides as
follows:
‘
14 (1)
Any amount received by or accrued to a farmer in respect of the
disposal of any plantation shall, whether such plantation
is disposed
of separately or with the land on which it is growing, be deemed not
to be a receipt or accrual of a capital nature
and shall form part of
such farmer’s gross income.
(2) Where any
plantation is disposed of by a farmer with the land on which it is
growing the amount to be included in such farmer’s
gross income
in terms of sub-paragraph (1) shall –
(a) if the amount
representing the consideration payable in respect of the disposal of
the plantation is agreed to between the parties
to the transaction,
be the amount so agreed to; or
(b) failing such
agreement, be such portion of the consideration payable in respect of
the disposal of the land and the plantation
as in the opinion of the
Commissioner represents the consideration payable for the
plantation.’
[7]
Para 16 of the First Schedule defines
‘plantation’ as meaning
‘
any
artificially established tree as ordinarily understood (not being a
tree of the nature described in paragraph 12(1)(g)) or any
forest of
such trees and includes any natural extension of such trees.’
[8]
Both
sides, in their written argument, devoted considerable attention to
the appropriate manner of assessing the evidence. The appellant,
represented before us (as in the tax court) by Messrs Kuschke SC and
Emslie SC, contended that the tax court had, without making
adverse
credibility findings against the appellant’s witnesses,
effectively discounted their evidence by attaching undue
weight to
recordals in various documents. In regard to the approach to the
assessment of the taxpayer’s
ipse
dixit
,
we were referred to
ITC
1185
35
SATC 122
and
Malan
v Kommissaris van Binnelandse Inkomste
1983
(3) SA 1
(A) at 18B-19A. SARS, represented before us (as in the tax
court) by Mr Sholto-Douglas SC leading Messrs Janisch and Cassim,
reminded
us of the well-known principle that an appellate court will
not reverse a trial court’s factual findings unless it finds
that the trial court committed a material misdirection or is
convinced that the trial court’s finding is wrong (see, for
example,
S
v Naidoo
[2002]
4 All SA 710
(SCA) para 26
[2]
).
[9]
It appears to me, however, that the
important facts for purposes of answering the question whether the
appellant was carrying on
farming operations were common cause. It
has been said that the questions whether a person is carrying on
farming operations and
whether particular income has been derived
from farming operations are questions of fact (
ITC
1630
60 SATC 59
at 61). But the
interpretation of s 26(1) and para 14 is a matter of law.
Once all the facts relevant to determining
whether the case does or
does not fall within s 26(1) and para 14 have been ascertained,
the question whether on those facts
there has been a carrying on of
farming operations seems to me to be a question of law. Even if it
were regarded as a question
of fact or a mixed question of fact and
law, it is not the sort of matter in regard to which an appellate
court would need to display
the caution or deference mentioned in
Mkhize
and
earlier cases to similar effect.
The
facts
[10]
Companies in the Thesen group (to which I
shall refer collectively as Thesen) previously owned property in
Knysna on which they
conducted forestry, timber growing and plywood
manufacturing businesses. The plantation at issue in the present case
is a plantation
which Thesen once owned and conducted.
[11]
During May 2001 Thesen and Steinhoff
Southern Cape (Pty) Ltd (‘Steinhoff’), the latter
represented by Mr D van der Merwe,
concluded written agreements in
terms whereof the latter was to purchase the former’s Knysna
assets as a going concern for
R45 million. The Steinhoff group is
involved in furniture manufacturing, here and abroad. However, the
transaction was blocked
by the board of Steinhoff’s holding
company because the group did not wish to own fixed property in South
Africa. (Van der
Merwe said that the group had disposed of all or
almost all of its African properties the previous year.)
[12]
Van
der Merwe wanted Steinhoff to have access to the plantation but
needed to find a third party to acquire the fixed property.
He had
discussions with Mr GA Evans of Fihag Finanz und Handels AG
(‘Fihag’), a Swiss company. He had met Evans at
the time
Steinhoff’s holding company was listed in September 1998. The
Steinhoff group had at that time obtained options
to buy certain
furniture factories in Europe from Fihag, some of which were
exercised in 2002 and 2003. Pursuant to discussions
between Van der
Merwe and Evans in mid-2001, agreement was reached that a
special-purpose subsidiary of Fihag which Steinhoff would
provide (in
the event, the appellant
[3]
)
would take Steinhoff’s place as the purchaser of the bulk of
Thesen’s Knysna assets and that Steinhoff would recommend
to
Fihag a trusted local director for the subsidiary (in the event, a
South African attorney, Mr J Pretorius). Steinhoff would
still
purchase Thesen’s machinery and equipment (for about R15,7
million) but the appellant would buy the other assets, including
the
plantation and the land on which it stood, for R29,5 million. The
appellant would keep the land and plantation but on-sell
the other
assets (a plywood business and certain trade marks) to a third party
with Steinhoff’s assistance.
[13]
Thesen agreed to the cancellation of the
contracts of May 2001. Although the substitute agreements were only
executed in October
2001, oral agreement had been reached by June
2001. On 29 June 2001 Thesen permitted the appellant to take
possession
inter alia
of
the plantation and the land. The appellant paid an advance of R19,5
million on the purchase price.
[14]
In terms of a written contract executed on
5 October 2001, Steinhoff purchased the machinery and equipment
(including the sawmill)
from Thesen for a price of R15 786 881.
Thesen sold these assets to Steinhoff as a business conducted as a
going concern
as contemplated in s 11(1)(e) of the Value Added
Tax Act 89 of 1991 (‘the VAT Act’). The contract
specified an
effective date of 29 June 2001.
[15]
The sale of the remaining Thesen assets to
the appellant was recorded in a written contract executed on 3
October 2001. This contract
likewise specified an effective date of
29 June 2001. The purchase price of R29,5 million was apportioned as
follows: R11 956 121
to the plantation (‘growing
timber’), R12 528 459 to the plantation land and the
balance to other assets.
It was recorded that the appellant had
already paid R19,5 million. (The remaining R10 million was lent to
the appellant by the
Steinhoff group.)
[16]
The assets collectively were stated to
comprise a business sold by Thesen to the appellant as a going
concern (clause 5.1). For
this reason, so it was recorded in clause
5.2, the sale would be zero-rated in terms of s11(1)(e) of the VAT
Act.
[17]
Although nothing turns on this, prior to
June 2001 the appellant was a subsidiary in the Steinhoff group and
conducted a sawmilling
business. According to the appellant’s
financial statements for the year ended 30 June 2001, the appellant
during that year
disposed of its pre-existing business as a going
concern (presumably to another Steinhoff company) and Fihag became
its holding
company.
[18]
The appellant retained the land and
plantation but forthwith sold the remaining assets (a plywood
business, certain trade marks
and an erf) to third parties. (In fact,
the on-sale of these residual assets had already been recorded in
contracts concluded in
July and August 2001.)
[19]
Within less than two years Van der Merwe
had persuaded Steinhoff’s holding company’s board that,
because of escalating
timber prices and the scarcity of plantation
resources, it would be desirable for the group to obtain ownership of
the plantation.
This cleared the way for Steinhoff to acquire the
plantation and land which the appellant had purchased from Thesen
during 2001.
Having regard to the price which Steinhoff was prepared
to pay (reflecting in part that the price paid to Thesen had been a
bargain
for the purchaser and in part that timber prices were
escalating), it is not surprising that the appellant agreed to sell.
[20]
The sale was recorded in heads of agreement
executed in February 2003 (the document was drawn up by Steinhoff’s
in-house lawyer).
In clause 2 the parties recorded that they had
conducted research into ‘the change of circumstances relating
to the business
of the [appellant]’ and that Steinhoff had
plans to erect a sawmill in the Southern Cape region. For these and
other reasons,
the parties had reached an agreement ‘for the
sale of the business of’ the appellant to Steinhoff. The
parties also
recorded that Steinhoff had ‘managed the business
on behalf of’ the appellant.
[21]
The
purchase price was to be determined by an independent valuer on the
basis, however, that if for any reason the valuer failed
or neglected
to provide the parties with a valuation prior to 31 August 2003, the
price would be R108,5 million.
[4]
The effective date was to be upon completion of the valuation but no
later than 30 June 2003. By the time the heads were signed
in
February 2003 Steinhoff had already paid the appellant a ‘deposit’
of R42 660 425 towards the acquisition
(this included, by
way of set-off, the sum of R10 million which the Steinhoff group had
lent the appellant in 2001 to fund the
purchase of the assets from
Thesen).
[22]
The subject of the sale was described as
being ‘the plantation business’, defined in clause 3.1 to
mean ‘the business
of commercial forestry operations, which
includes the plantation sale assets, machinery and equipment and
plantation contracts
carried on by the [appellant] at the plantations
and the plantation immovable property as defined, as a going
concern’. Clause
3.2 stated that the business was being sold as
a going concern and that the sale would thus be zero-rated in terms
of s 11(1)(e)
of the VAT Act. In terms of clause 6 all benefit
and risk in respect of the business was to pass from the appellant to
Steinhoff
with effect from the effective date.
[23]
Disputes arose between the parties
concerning the heads of agreement. One dispute was the valuation.
Another was whether the sale
had correctly been regarded as
zero-rated in terms of s 11(1)(e) of the VAT Act. The appellant
had received advice that the
business was not, in its hands, a going
concern and that VAT would thus be payable on the sale of the assets.
[24]
These and other disputes were resolved by
way of a settlement agreement concluded on 29 July 2004 (drafted by
external attorneys).
The settlement agreement stated that the new
effective date would be 1 June 2004. The description in the heads of
agreement of
the subject of the sale as being a plantation business
as a going concern was diluted in the settlement agreement. In terms
of
the settlement agreement, the subject of the sale was ‘the
Kota business’ (the appellant’s name at that time was
Kota Sawmills (Pty) Ltd). The immovable properties were listed in an
annexure. The ‘Plantation’ was defined as meaning
‘
the
Standing Timber on the Immovable Property and, for the purposes of
expressing the value thereof as part of the Purchase Price,
includes
the plantation business (ie the business of commercial forestry
operations) including the Plantation sale assets, machinery
and
equipment and Plantation contracts, all as a going concern.’
[25]
The purchase price of the combined assets
was agreed at R159,7 million, with R144,7 million being in respect of
the ‘Plantation’
as defined.
[26]
Clause 6.1 recorded that the parties had,
subsequent to the conclusion of the heads of agreement, received
advice that VAT ‘may
be payable’ at the standard rate of
14%. Steinhoff was to be liable for the payment of VAT on the
purchase price. The appellant,
which was a registered VAT vendor, was
to issue VAT invoices to Steinhoff in respect of the purchase price.
[27]
As part of the settlement agreement, the
appellant was to pay Steinhoff an amount of R12 million as a ‘Bonus
Management Fee’,
defined in clause 2.5.12 as ‘the
bonus…which [the appellant] has agreed to pay Steinhoff for
the exemplary manner
in which Steinhoff managed the forestry business
of [the appellant] in the period prior to Steinhoff acquiring the
Kota Business.’
Steinhoff was to issue a VAT invoice in respect
of the fee. The fee was to be paid by the appellant by way of
deduction against
the purchase price (ie by set-off).
[28]
In the additional assessment issued during
2010 in respect of the appellant’s 2004 tax year, the amount of
R144,7 million
was treated as part of the appellant’s gross
income in terms of para 14 of the First Schedule. The taxable income
adjustment
arising from this treatment was R109 932 321,
arrived at by deducting the initial cost of R11 956 121 and
the
capital gain of R22 811 558 already declared by the
appellant. (The management fee of R12 million had already been
allowed
as a deduction in the original assessment.)
[29]
Thus far I have described the sequence of
events with reference to the contracts for the acquisition and
disposal by the appellant
of the assets in question. If those were
the only sources of information, one might readily infer that the
appellant purchased
and later sold a plantation business as a going
concern and must therefore in the interim have conducted the farming
operation.
There is no dispute between the parties that the
cultivation, maintenance and harvesting of a plantation is a farming
operation.
[30]
However, there are important further facts
which are not in dispute. At the time Thesen disposed of the
plantation in 2001, it was
already a ‘mature plantation in
rotation’. In other words, the plantation had reached the stage
where it could annually
yield a steady and sufficient number of
mature trees for commercial felling, with younger trees taking their
place year by year.
The plantation thus comprised a range of trees
ranging from the very young to the fully mature with a cycle of about
30 years.
It had been very well managed by Thesen, which was regarded
by Van der Merwe as having one of the best plantation teams in the
country .
[31]
Steinhoff and Fihag orally agreed during
May/June 2001 that the former would be entitled to conduct the
plantation business for
its own profit and loss. The witnesses and
counsel sought to place varying labels on the oral agreement but its
actual substance
does not seem to be in dispute. Steinhoff was to
have access to the land on which the plantation stood. It was
entitled to harvest
timber for its own account. Steinhoff owned the
equipment for conducting the plantation operations and employed the
employees who
worked on the plantation (mostly taken over from
Thesen) and contracted with service providers. The appellant owned no
equipment
and had no employees. All operational income and
expenditure were earned and incurred by Steinhoff and reflected in
its accounts.
The appellant’s financial records and financial
statements for the period between acquisition and disposal reflected
no operational
income and expenditure.
[32]
The arrangement was of indefinite duration
though, in view of Steinhoff’s policy as it existed in 2001,
the arrangement was
expected to endure for a lengthy period. It was
accepted that in law either side could have terminated the
arrangement on reasonable
notice.
[33]
Upon termination the plantation was to
comprise trees of the same volume and quality as at commencement.
This meant that Steinhoff,
in conducting the plantation operations,
had to keep the plantation in rotation and perform such other
pruning, thinning and maintenance
as would ensure that, upon
termination, it could restore the plantation in the state it was in
June 2001. Planting was not needed
as seedlings grew naturally. The
appellant’s witnesses (who included Van der Merwe of Steinhoff
and Evans of Fihag) said
that Steinhoff was to manage the plantation
using best practice and that FSC (Forest Stewardship Council)
certification would be
obtained. This was to ensure that the timber
would qualify for export to Europe. Steinhoff was responsible for
fire protection.
Steinhoff insured the plantation against fire in the
light of its obligation to restore the plantation to the appellant at
the
end of the arrangement (the premiums, according Steinhoff’s
trial balances, exceeded R1 million annually). Steinhoff was not
obliged to render reports to the appellant regarding the plantation
operations.
[34]
Prior to the Thesen transaction, Fihag had
not conducted any operations in South Africa. It had interests in
pine furniture manufacturing
in Europe. It had no expertise in
plantation operations. The appellant could not itself have taken over
the operations without
acquiring equipment and engaging staff.
Although Evans could not speak of all matters from personal knowledge
(his expertise and
responsibilities were finance and investment and
he had no involvement in the manufacturing businesses), he understood
from Fihag
colleagues that the investment in the Knysna plantation
was viewed as strategically advantageous. The Knysna plantation in
particular
and Steinhoff more generally was a source or potential
source of timber for Fihag’s European interests. The Steinhoff
group
had options to buy some of those European businesses, options
it was likely to exercise if the European businesses were profitable.
[35]
Evans testified that Fihag acquired the
plantation and land as a long-term investment and without any
intention of involving itself
in plantation operations. The
transaction was, by Fihag’s standards, a small one (Evans said
that the price of R29,5 million
was probably less than 1% of its
investments at the time).
[36]
The indefinite transaction was terminated
by agreement, ultimately with effect from 1 June 2004, after the
Steinhoff group changed
its policy and became willing to purchase the
immovable property. Fihag and the appellant would not have been
obliged to sell the
land and plantation to Steinhoff. The appellant
could notionally have taken over the operations or sold the
plantation to someone
else. However, there was a relationship of
trust between the parties, reflected
inter
alia
in the fact that Steinhoff’s
right to operate the plantation and its further rights and
obligations in that regard were oral.
[37]
Regarding the R12 million fee for which the
settlement agreement provided, Van der Merwe said that from his point
of view it was
a ‘rebate on the value of’ the plantation,
because the value of the plantation ‘ran away from us’.
In negotiation
with Evans he said that Steinhoff had looked after the
appellant’s asset, which is why it was now worth so much, and
Steinhoff
wanted something for that. When asked why this was not
simply reflected in a reduction in the price, he said Evans, who
acted for
investors, claimed he needed to stick to the valuation.
The
disputed assessment
[38]
In its 2004 tax return the appellant
treated the disposal of the land and plantation as a capital
transaction. In respect of the
plantation, the appellants declared a
capital gain of R45 623 115, being the difference between
the disposal proceeds
of R144,7 million and a CGT valuation of the
plantation of R99 076 885 as at 1 October 2001. The
appellant also claimed
a s 11(a) deduction of R12 million in
respect of the bonus management fee.
[39]
In an additional assessment issued during
August 2010, SARS rejected the treatment of the plantation disposal
proceeds as a capital
transaction, claiming that s 26(1) read
with para 14 of the First Schedule deemed the disposal proceeds to be
part of the
appellant’s gross income. SARS stated that the
purchase price of R11 955 121 and the fee of R12 million
were
allowable deductions against the gross income. The appellant
objected to this approach.
[40]
In its grounds of assessment delivered in
terms of rule 10, SARS persisted in its stance. In the alternative,
SARS contended that,
if the appellant had been correct in treating
the transaction as being on capital account, the appellant’s
calculation of
the capital gain was incorrect. One of the issues in
that regard was whether the appellant had correctly treated the land
and plantation
as a so-called pre-valuation asset, ie an asset
acquired prior to 1 October 2001, the date on which the CGT regime
became operative.
(The litigants agreed in the tax court that the CGT
issue would stand over pending determination of the main issue. It is
not before
us.)
[41]
In its grounds of appeal delivered in terms
of rule 11, the appellant alleged that its intention had been to
acquire and hold the
land and the plantation as a long-term
investment. In terms of an oral agreement, Steinhoff was engaged to
manage the appellant’s
investment with a view to maintaining
and enhancing its value, on the basis that Steinhoff would be
entitled for its own benefit
to conduct the plantation operations.
The appellant conceded in its grounds of appeal that it should not
have claimed the deduction
of R12 million, given the capital nature
of the acquisition and subsequent disposal of the plantation.
SARS’
two bases for supporting the disputed assessment
[42]
Although the onus was on the appellant to
prove on a balance of probability that the proceeds from the disposal
of the plantation
in its 2004 year were not subject to tax (see s 82
of the Income Tax Act, subsequently substituted by
s 102
of the
Tax Administration Act 28 of 2011
), it is convenient to consider the
matter with reference to the two alternative bases on which SARS’
counsel submitted that
s 26(1)
read with para 14 of the First
Schedule applies to the proceeds.
[43]
The first basis is that, even if the
appellant conducted no other farming operations, the mere disposal of
an operating plantation
was itself sufficient to trigger the
statutory provisions in question. It was not necessary, so it was
submitted, to view
s 26(1)
as ‘a separate jurisdictional
fact that is required to be fulfilled
before
the deeming provision of para 14(1) can apply’.
[44]
The alternative basis is that, although
Steinhoff may have functioned as an independent contractor rather
than an agent in performing
plantation operations, such operations
were nevertheless physically being conducted on land which belonged
to the appellant. The
appellant retained a direct interest in such
operations, because Steinhoff was required to conduct the operations
in accordance
with agreed standards and to restore the plantation
with the same volume of timber upon termination of the arrangement.
The appellant
would not have acquired the assets unless it expected
that, upon termination, the plantation would be worth more than the
purchase
price paid and that it could then (if it so wished) sell the
plantation at a profit. There was, thus, a ‘sufficiently close
connection’ between the disposal proceeds and the conducting of
the plantation operations over the intervening two-year period
to
trigger the operation of
s 26(1)
and para 14 of the First
Schedule.
[45]
Both bases require, as a key element for
triggering the relevant statutory provisions, that the appellant had
a commercial interest
in the condition and value of the plantation
upon termination (whenever that might be) of the arrangement between
the appellant
and Steinhoff. SARS’ first basis is that this
interest in itself is sufficient. SARS’ alternative basis is
that this
interest, coupled with the performance of operations in the
intervening period by an independent contractor for its own profit
and loss but in accordance with agreed standards and with an
obligation to restore an equivalent plantation at the end of the
arrangement,
gives rise to the operation of the relevant statutory
provisions.
The
tax court’s findings
[46]
The tax court, according to SARS’
counsel, found in its favour on the alternative basis and thus did
not need to consider
the first basis. Whether the tax court
understood there to be two distinct bases does not clearly appear
from its judgment. It
is certainly so, however, that the tax court
accepted as correct SARS’ proposition that the key question was
whether there
was ‘a sufficiently close or direct connection to
the owner between the income generated and the farming activities
conducted
on the property’ (para 37).
[47]
The tax court did not find persuasive the
oral testimony of the witnesses who said that the appellant was not
conducting and did
not intend to conduct a plantation business. The
tax court placed considerable emphasis (i) on references in
contractual documentation
and resolutions of the appellant’s
directors and shareholders to the appointment of Steinhoff to manage
the plantation for
the appellant and to the effect that what was sold
to Steinhoff in 2003 was a plantation business as a going concern;
(ii) on
the provision in the settlement agreement for a
‘plantation management fee’; and (iii) on the
invoice issued by
Steinhoff to the appellant in that regard.
[48]
The tax court also referred (i) to a
note in the appellant’s financial statements for the year ended
30 June 2002 to
the effect that no plantation sales were being
recognised in the current year and that ‘sales will be
recognised when the
plantation is sold’; and (ii) to a
note in the same financial statements on ‘inventory’,
which stated that
‘the plantation is still growing and will be
sold in the future’ and that ‘growing of timber is one of
the main
objectives of the company’. As pointed out by the
appellant’s counsel in their written argument, the financial
statements
to which the tax court referred were drafts sent in
November 2002 by Steinhoff to the appellant’s Mr Pretorius. The
financial
statements as adopted by the appellant’s board on 15
March 2004 did not contain notes in the same form. The alterations
appear
specifically to have been directed at removing statements and
entries which would suggest that the appellant had been conducting
a
plantation business.
[49]
As foreshadowed earlier in this judgment, I
regard the critical question as being essentially a legal one which
arises from the
undisputed facts as to the oral arrangement by which
Steinhoff was permitted to conduct the plantation operations and the
further
undisputed fact that the appellant retained the ownership of
the land and had a commercial interest in the plantation’s
being
restored to it in good condition and with the same volume of
trees as in June 2001. If the facts concerning the oral arrangement
were disputed, the recordals in the heads of agreement of February
2003 and the settlement agreement of July 2004 and the contents
of
the resolutions, invoice and draft financial statements might have
been relevant in assessing the credibility of the witnesses.
However,
SARS accepts, and apparently accepted in the tax court, what the
appellant’s witnesses said about the oral arrangement,
at least
in the respects I have identified earlier. The appellant, for its
part, cannot dispute that it retained ownership of the
land on which
the plantation stood (Van der Merwe and Pretorius referred to it as
bare
dominium
)
and had a vital commercial interest in the restoration of the
plantation to it in due course in good condition and with the same
volume of trees. The appellant would not have paid R29,5 million for
the assets unless it expected that they would increase in
value to an
extent sufficient to justify an investment in that amount.
[50]
These being the undisputed facts, I do not
see how the answer to the problem can lie in the parties’
characterisation of what
was sold in 2003 any more than in what the
appellant’s witnesses claimed their understanding on that
question to be. If,
on the undisputed facts I have summarised, the
appellant is found to have been a person ‘carrying on pastoral,
agricultural
or other farming operations’, it is irrelevant
that the appellant and Steinhoff may have thought otherwise.
Conversely, if
the undisputed facts I have summarised lead to the
conclusion that the appellant was not a person ‘carrying on
pastoral,
agricultural or other farming operations’, the fact
that the parties characterised the subject matter of the sale in 2003
as the sale of a business as a going concern cannot justify a
different conclusion.
[51]
I nevertheless make the following
observation in regard to the characterisation contained in the heads
of agreement concluded in
February 2003. The final agreement between
the parties is reflected in the settlement agreement of July 2004. By
then the appellant,
it seems, had taken advice on the matter. If the
credibility of the witnesses concerning the oral arrangement were in
dispute,
one might take a jaundiced view of the changes made in the
settlement agreement. But if an analysis of the undisputed facts
points
to the conclusion that the settlement agreement stated the
matter more accurately than the heads of agreement, there would be no
reason to question the appellant’s motives or that of its
advisers.
[52]
The same observation may be made in regard
to the draft financial statements for the year ended June 2002
(prepared in November
2002) and the financial statements for that
year as adopted by the appellant’s board in March 2004. Since
the changes in
the financial statements were directed at eliminating
notes and entries suggestive of the conducting of business, one might
rightly
have been sceptical about the changes and attached more
weight to the draft prepared in November 2002 if the oral
arrangements
between the appellant and Steinhoff were in dispute. But
if the undisputed facts point to the conclusion that the appellant
was
not conducting farming operations, it was appropriate and indeed
necessary for its financial statements to be adjusted to reflect
the
true position.
The
two-pronged enquiry
[53]
Insofar as SARS’ argument rests on
the closeness of the connection between the disposal proceeds and the
conducting farming
operations, I consider that the argument (and thus
the finding of the tax court) conflates two distinct issues.
Section
26(1)
does not apply merely because there has accrued to the taxpayer
income which has ‘derived from’ farming operations;
the
section applies to a person carrying on farming operations to the
extent that his income is derived from such operations. Two
questions
must therefore be answered: (i) Was the person whom SARS wishes to
tax a person carrying on farming operations during
the year of
assessment in question? (ii) If so, did the particular item of income
in dispute derive from those farming operations?
[54]
The leading case on the direct-connection
test in the context of
s 26(1)
is
Commissioner
for Inland Revenue v D & H Promotions (Pty) Ltd
[1994] ZASCA 176
;
1995
(2) SA 296
(A). That case was concerned with the second of the two
questions I have identified. In
D &
H Promotions
the taxpayer was
undoubtedly carrying on farming operations (as a grower of sugar
cane). The question was whether certain items
of income derived from
the farming operation. Interest payable on the purchase price of
sugar cane in accordance with a statutory
scheme was held to be part
of the compensation for the sugar cane and was thus ‘derived’
from the farming operation.
[55]
However, where the first of the two
questions I have identified is in issue, it is impermissible to
proceed directly to the second
question as if it will also provide an
answer to the first. The question is not whether the accrual to the
taxpayer of a particular
item of income is directly connected to the
farming operations of any person but whether it is directly connected
to (ie derived
from) the farming operations of the taxpayer himself.
[56]
Certain tax court decisions which were
cited to us in argument appear to me, with respect, likewise to have
erred in conflating
the two questions. The first is
ITC
166
(1930) 5 SATC 85.
There the owner
of a farm had let out two portions to lessees at fixed rents and a
third portion to another lessee at a rental
of a half-share of the
proceeds of the crops grown on that portion. Davis QC held the fixed
rents from the first two portions were
not derived from farming
operations but from the letting of the farm. He regarded the rent for
the third portion as standing on
a different footing. He said that
the arrangement (a partiarian lease in which the ‘lessee’
is known as a
colonus partiarius
)
was
sui generis
,
partaking in some respects of lease and in other respects of
partnership. Because the landlord had a direct interest in the
farming
operations on the third portion, his share of the proceeds of
the crops constituted income derived from farming operations.
[57]
A similar view was reached by Galgut J in
ITC 1630
(1996)
60 SATC 59.
There the owner let his farm to another against payment
of rent equal to 15% of the gross proceeds of the lessee’s
crop.
Regarding the nature of a partiarian lease, Galgut J said that
in
Lubbe v Volkskas Bpk
[1992] ZASCA 97
;
1992
(3) SA 868
(A) the Appellate Division had accepted that the true
nature of such an arrangement was a lease rather than a partnership.
(This
accords with
Stevens v Van
Rensburg
1948 (4) SA 779
(T) at 783;
see also
LAWSA
2
nd
Ed Vol 14(2) §3; FH van den Heever
The
Partiarian Agricultural Lease in South African Law
1943
Ch 3).
He continued to say that the question which needed to be
answered was whether, by virtue of the partiarian lease, the income
which
the taxpayer earned was ‘directly connected to the
farming operations carried out by its lessee’ (at 62). He
considered
that the relationship between the rent and the farming
operations was a direct one, finding support for his conclusion in
ITC 166
and distinguishing his case from
ITC 732
18 SATC 108
in which fixed rent was
held not to be derived from farming operations.
[58]
In both these cases (
ITC
166
and
ITC
1630
) the court went directly to the
question whether there was a direct connection between the rent paid
under the partiarian lease
and the farming operations. I can
perfectly understand the distinction between a fixed rent and rent
linked to the proceeds of
farming operations if the sole test were
whether rent received by a taxpayer from a lease of agricultural land
is income ‘derived
from farming operations’. That,
however, is not the only question. There is an anterior question,
namely whether the taxpayer
to whom the income has accrued is a
person carrying on farming operations.
[59]
In
that respect, I can understand that, if a partiarian lease
constituted a partnership (a view on which Davis QC may have acted
in
ITC
166
),
the ‘landlord’, as a co-partner in the farming
operations, might be regarded as carrying on farming operations. On
the other hand, if a partiarian lease is viewed as a lease (which was
Galgut J’s approach in
ITC
1630
),
I do not understand why the landlord should be said to be conducting
farming operations merely because he takes his rent in the
form of a
share of crops or their proceeds rather than as a fixed rent. Such a
landlord seems to me to be no more conducting farming
operations than
a shareholder of a farming company whose dividends are related to
farming profits or an farm manager whose salary
is supplemented by
commission calculated with reference to the farming profits. The
contracts in
ITC
166
and
ITC
1630
differed
from the classic partiarian lease in that the landlord was to receive
a share of the proceeds from the crop rather than
a share of the crop
itself but in neither case did the landlord share in the tenant’s
profit and loss. The landlord’s
share of sale proceeds, as in
the case where he receives a share of the crops themselves, was
unrelated to the tenant’s operating
costs.
[5]
[60]
If, on the facts of the present case,
one were to conclude that the appellant was conducting farming
operations, I think it would
follow almost as a matter of course that
the proceeds of the disposal accrued to the appellant as a farmer.
Ordinarily such a disposal
would be of a capital nature but para 14
of the First Schedule deems it to be gross income. The real issue in
the present case
is not the second one (a sufficiently close
connection between the income and farming operations) but the
threshold enquiry whether
the appellant was carrying on farming
operations.
SARS’
first basis
[61]
I reject SARS’ submission that para
14 of the First Schedule itself provides the answer to the question
whether the appellant
was carrying on farming operations. The purpose
of para 14 is not to define what constitutes the carrying on of
farming operations
but to characterise a particular type of accrual
as gross income rather than capital. The question as to what
constitutes farming
operations is a threshold enquiry. Para 14 does
not stipulate in unqualified language that the proceeds of the
disposal of a plantation
constitute gross income. Para 14 states that
the disposal of a plantation constitutes deemed gross income if it is
an amount received
by or accrued to ‘farmer’, ie a person
carrying on farming operations as contemplated in
s 26(1).
[62]
I thus consider that there must be conduct
by the taxpayer apart from disposing of a plantation previously
acquired by the taxpayer
in order to constitute the carrying on by
him of farming operations.
[63]
Farming operations involve the performance
of a range of physical activities associated with the land with a
view to profit (see
Commissioner, South
African Revenue Service v Smith
2002
(6) SA 621
(SCA) para 22; see also, for the importance of the profit
intention,
ITC 1319
(1980)
42 SATC 263
at 264 and
ITC 1324
(1980)
42 SATC 288
at 294-295). Farming operations as contemplated in
s 26(1)
are a particular form of ‘trade’ within the
broad definition of that term in s 1 of the Act. ‘Trade’
in that sense embraces any activity or venture carried out with the
object of making a profit (
Burgess v
Commissioner for Inland Revenue
[1993] ZASCA 88
;
1993
(4) SA 161
(A) at 181H-182I; see also
De
Beers Holdings (Pty) Ltd v Commissioner for Inland Revenue
1986
(1) SA 8
(A) at 33E-37D). Profit-making as a hallmark of trade is
concerned with the generating of income of a revenue nature. A person
who buys an asset as an investment rather than as trading stock may
expect or hope, if and when he comes to sell the asset, that
he will
realise a capital profit but this expectation or hope does not make
him a trader in relation to the asset.
[64]
The cultivation, maintenance and harvesting
of timber with a view to profit plainly constitute farming
operations. Farming operations
in the form of plantation operations
would typically involve the harvesting of trees from year to year.
The proceeds from the annual
sale of timber constitutes gross income
of a revenue nature. The farmer would typically undertake the
plantation operations with
a view to his revenue from timber sales
exceeding his operating expenditure, ie with a view to profit.
[65]
I am prepared to go further and to accept,
without so deciding, that a person who acquires a plantation and
cultivates or maintains
it or performs other operations on the land,
not for the purpose of ongoing harvesting but in order to preserve or
enhance its
value with a view to profitable resale, is also
performing farming operations. However, and accepting the
proposition, it would
operate only where the owner of the plantation
is engaged in a profit-making venture, so that the proceeds of the
sale in due course
would on ordinary taxation principles be of a
revenue rather than a capital nature. In such a case the land with
the growing timber
would as an indivisible whole be the taxpayer’s
trading stock. And in such a case, of course, SARS would not need to
rely
on s 26(1) read with para 14 of the First Schedule in order
to treat the disposal proceeds as part of the owner’s gross
income (though other components of the First Schedule might come into
play in the computation of the taxpayer’s taxable income).
[66]
SARS did not allege in the present case
that the appellant was engaged in a profit-making scheme which would,
on ordinary taxation
principles, result in the plantation proceeds
being of a revenue nature. Para 6 of the tax court’s judgment
records that
the litigants were agreed that the appellant was not
engaged in a scheme of profit-making. If SARS had contended
otherwise, it
would have been irrelevant (at least insofar as the
taxation of the proceeds is concerned) whether or not the appellant
was, in
the course of its profit-making venture, carrying on farming
operations. Instead, it would have been necessary to enquire into the
circumstances in which the appellant acquired the plantation and what
its true intentions were.
[67]
Since SARS did not contend that the
appellant acquired the plantation and the land with a view to
profitable resale rather than
as a capital investment, I do not
think, insofar as intention is concerned, one can say that the profit
intention lay in the appellant’s
expectation that its
investment would in due course turn out to be a good one. Most people
make investments with that expectation.
[68]
Despite the fact that the purchase and
resale of the plantation was not alleged to be a profit-making
venture, the disposal proceeds,
despite their fiscal nature as
capital, would be deemed to be part of the appellant’s gross
income in terms of para 14 of
the First Schedule if, but only if, the
appellant was carrying on farming operations. As I have said, SARS
cannot, for that threshold
premise, rely on para 14 itself. I would
thus reject SARS’ first basis for invoking para 14.
SARS’
alternative basis
[69]
It thus becomes necessary to consider SARS’
alternative basis, which adds, to the appellant’s acquisition
and later
disposal of the plantation, the farming operations carried
out on its land by Steinhoff.
[70]
It is clear, on the undisputed evidence
concerning the oral arrangement, that Steinhoff’s operations on
the farm were not
conducted as an agent for the appellant. Steinhoff
was carrying on its own farming operations for its own profit and
loss.
[71]
It is so that Steinhoff was contractually
obliged to the appellant to maintain the plantation to a particular
standard and to return
it upon termination of the arrangement with
the same volume of timber as at June 2001. That is not enough,
however, to attribute
Steinhoff’s farming operations to the
appellant. If one reasons by analogy, it is at least settled law that
s 26(1)
does not apply to an owner of a farm who lets it out for
a fixed rent rather than for a share of the farming profits. The case
for treating the appellant as a farmer is weaker still than a
fixed-rent lease, because Steinhoff had effectively the same rights
as a lessee and the appellant was to receive no rent at all. Even if
the two tax court judgments which I queried earlier were correctly
decided, there is no question here of the appellant having had any
share of the profits from the farming operations conducted by
Steinhoff.
[72]
Most leases contain express terms regarding
the duties of the parties in regard to the maintenance of the
premises and the lessee’s
duty to restore the premises. It is
an implied term of a lease that the duty of maintaining the premises
in a condition reasonably
fit for the purpose for which they are let
rests on the landlord (
Poynton v Cran
1910 AD 205)
but, as with other implied
terms, it may be excluded or varied by the parties, and this is
typically done. The lessee might be
obliged to maintain the premises
in the same condition as they were received at the commencement of
the lease (see, for example,
Sarkin v
Koren
1950 (1) SA 495
(C) at 497-499)
or he may have to do so subject to fair wear and tear (see, for
example,
Bresky v Vivier
1928
CPD 202
at 203 and
ISEP Structural
Engineering and Plating Pty Ltd v Inland Exploration Co Pty Ltd
1981
(4) SA 1
(A) at 4
in fine
).
In
Henning v Le Roux
1921
CPD 587
the lease of a farm required the lessee to maintain the
buildings in good repair, to maintain and repair all fences, to keep
clean
and open all the water furrows and to cultivate the farm in a
proper manner.
[73]
The fact that the lessee has an obligation
to maintain premises and to restore them in the same good order
plainly does not mean
that the landlord can be said to be conducting
the business of the lessee. The landlord has an interest in the
maintenance of the
premises because the property constitutes an
investment and, upon termination of the lease, he might wish to
continue earning rents
from it or to dispose of it at a favourable
price. For example, if the owner of hotel premises lets them to an
operator for the
latter’s own profit and loss on the basis that
the latter must conduct the hotel operations to a certain standard
and restore
the hotel in good order at the end of the lease, it can
hardly be said that the landlord is carrying on a hotel business.
[74]
The oral arrangement between the appellant
and Steinhoff was not a lease because Steinhoff was not obliged to
pay rent. Although
it is unnecessary to place a precise legal label
on the arrangement, it could be described, I think, as a
quasi-usufruct in favour
of Steinhoff (
LAWSA
2
nd
Ed Vol 24 §§ 581-584). The duty of the usufructuary is to
maintain the property and to restore it to the owner at the
end of
the usufruct
salva rei substantia
(
op
cit
§§ 593 and 595).
[75]
The decision in
Sekretaris
van
Inkomste
v Aveling
1978 (1) SA 862
(A),
mentioned in passing in SARS’ heads on a different point,
appears to me to be of some assistance. The taxpayer had carried
on
livestock farming over the period 1952 to 1967. During November 1967
he made his livestock, implements and vehicles available
to a company
in terms of a ‘lease’ which would endure for five years.
He became the manager of the company. In terms
of the lease, the
company was to pay a specified monthly rent and was obliged to manage
the livestock properly, to use rams and
bulls of only the best
quality and upon termination of the lease to restore livestock of the
same quality and quantity. During
May 1972 the taxpayer agreed to
take back a portion of the livestock from the company and to reduce
the rent. The returned animals
were immediately sold. The ultimate
issue in the case was whether the sale proceeds constituted gross
income in the taxpayer’s
hands.
[76]
The tax court found that the taxpayer had
discontinued his farming operations upon the conclusion of the lease
in November 1967
and that as from that date he no longer farmed for
his own account. The company was the entity carrying on farming
operations.
On appeal Rabie JA said that this was a factual finding
by the special court and there was no basis on which the appellate
court
could interfere with it (877A).
[77]
Rabie JA proceeded to consider a further
contention by the Secretary that the tax court should, despite this
finding, have held
that s 26(1) and para 3 of the First Schedule
applied to the taxpayer. Para 3 of the First Schedule deals with the
manner
in which livestock on hand at the end of a tax year must be
dealt with in the farmer’s returns. Para 3(3) states that any
livestock which is the subject of a sheep lease or similar livestock
agreement is deemed to be held and not disposed of by the
grantor of
the lease. The Secretary contended that para 3(3) had the effect that
the taxpayer during the period of the lease had
to reflect the
livestock as his closing stock (which would thus increase his gross
income).
[78]
Rabie JA rejected this contention. He said
that it was obvious that s 26 and the First Schedule could not
apply to the taxpayer
after he discontinued his farming operations
and could at most apply up to the end of the 1968 tax year (because
for a part of
that year the taxpayer had still been conducting
livestock operations) (877B-E). He was not prepared to accept an
argument that
para 3(3) itself had the effect of making the taxpayer
a ‘farmer’, because that would be contrary to s 26(1),
which states that the First Schedule applies only to somebody
carrying on farming operations (at 877G-878B). What the learned judge
of appeal meant, as I understand it, is that para 3(3) could only
apply to a taxpayer who was as a fact carrying on farming operations
(for example, a person who farmed with some of his animals but made
others available to a third party in terms of a livestock lease).
[79]
Having found that s 26 and the First
Schedule did not apply to the taxpayer, Rabie JA went on to consider
whether, on ordinary
taxation principles, the returned livestock were
held by the taxpayer on capital or revenue account. He said that the
conclusion
of the lease had not been sufficient to convert trading
stock into capital assets. For this reason, the proceeds had
correctly
been taxed despite the inapplicability of s 26 and the
First Schedule.
[80]
As I have explained, in the present case
SARS did not contend that the proceeds of the plantation were taxable
on ordinary principles.
The reasoning in
Aveling
on s 26 and the First Schedule is,
however, relevant to the present case. The Appellate Division seems
to me to have accepted
that, on the basis of the tax court’s
factual findings regarding the arrangement reached with the company,
the taxpayer could
not be said, after the conclusion of the lease, to
have been carrying on farming operations as contemplated in s 26(1)
and
that a different conclusion could not be reached by having regard
to a paragraph in the First Schedule which required the value
of
livestock under an arrangement similar to a sheep lease to be
included as closing stock. In the context of s 26(1), the
paragraph in the First Schedule could apply only if the taxpayer was
in fact carrying on farming operations.
[81]
To the extent that
ITC
926
(1959) 24 SATC 254
, which Mr
Sholto-Douglas cited, held that para 3(3) could itself have the
effect of making the lessor under a sheep lease a farmer,
it is
inconsistent with the later decision in
Aveling
.
However,
ITC 926
does
not seem to say so. There the taxpayer did in fact continue to
conduct sheep farming, having concluded a sheep lease in respect
of
only some (albeit the bulk of) of his livestock. He was thus
admittedly carrying on farming operations.
[82]
If, in the present case, the appellant had
initially conducted timber operations on its plantation and had later
‘leased’
the plantation in its entirety to Steinhoff on
the basis that the latter could conduct the plantation operations on
its own account
but was obliged to restore the plantation in similar
condition at the end of the arrangement, one would have been dealing
with
a situation closely analogous to that in
Aveling
.
It is clear from what Rabie JA said at 877B-878B that his reasoning
was not dependent on the fact that, in terms of a sheep or
similar
livestock lease, the ownership of the animals strictly speaking
passes to the lessee, the latter’s obligation being
to restore
not exactly the same animals but animals of a similar quantity and
quality. Furthermore, although standing timber in
terms of common law
principles adheres to the land, so that strictly speaking the
appellant remained the owner of any unfelled
trees (see
Bourke’s
Estate v Commissioner for Inland Revenue
1991 (1) SA 661
(A) at 673D), paras 14 to 16 of the First Schedule
effectively create a separate fiscal asset in the form of a
plantation. As in
the case of a sheep or other livestock lease,
Steinhoff’s obligation was not to return the same trees but
trees of a similar
quantity and quality. Indeed, and as appears from
the decision in
Bourke’s Estate
supra
, where a taxpayer is engaged in
farming operations in which timber is from time to time felled and
sold, the trees, even prior
to severance from the land, will be
regarded on ordinary taxation principles as trading stock. What is
relevant is the fiscal character
of the trees, not their legal status
as adhering to the land (at 673F-I).
[83]
The inapplicability of s 26(1) is, in
the present matter, an
a fortiori
case.
In
Aveling
the taxpayer was conducting farming operations up to the moment he
concluded the livestock lease, so one could at least argue (though
the Appellate Division rejected the argument) that para 3(3) required
one to continue treating him as a farmer. Here, however,
the
appellant did not even start to conduct plantation operations. From
the outset the appellant made the plantation available
to Steinhoff
so that the latter could conduct plantation operations for its own
profit and loss.
[84]
Mr Sholto-Douglas sought to persuade us,
with reference to the documents mentioned by the tax court and
passages from the oral evidence,
that the appellant had appointed
Steinhoff to manage the farming operations for the appellant,
Steinhoff’s ‘fee’
for management being its right to
fell and appropriate mature timber. I have already explained why the
labels used in the documents
and in the oral evidence are not
decisive, having regard to the common cause facts.
[85]
One might just as well say that a lessee or
usufructuary is ‘managing’ the property for the owner,
because his use of
the property is subject to compliance with certain
standards. In the case of a lease, the extent of the lessee’s
maintenance
obligations (ie ‘management’ of the property)
will have an effect on the rent (the more onerous the lessee’s
maintenance obligations, the lower the market rent). But this
linguistic deconstruction does not lead to a conclusion that the
operations conducted by the lessee or usufructuary for his own profit
and loss are management operations performed on behalf of
the owner.
[86]
I think Mr Kuschke was correct in
submitting that, at most, Steinhoff was managing the appellant’s
investment while at the
same time managing its own farming
operations. I do not believe that the documents or witnesses intended
to convey more than this.
Steinhoff could not be regarded as having
been managing the farming operations on behalf of the appellant for a
fee (in the form
of felled timber) when the appellant stood to make
no profit or loss from the farming operations. The only risk which
the appellant
faced, if Steinhoff failed to conduct itself in
accordance with the agreed standard, was that its investment’s
value might
suffer, a risk which a landlord or bare
dominium
owner would also face if the tenant or usufructuary breached his
obligations.
Conclusion
[87]
For these reasons, I think that SARS’s
contentions must be rejected and that the tax court erred in
dismissing the appellant’s
appeal. As a result, the appellant’s
pleaded contention (raised in the alternative) that it should have
received a remission
of the interest contemplated in s 89
quat
falls away. In case this matter goes
further, I record that counsel were agreed that the s
89quat
issue was not addressed at the tax court hearing and that the tax
court should not be regarded as having dismissed the alternative
appeal on interest. This means that, if it were ultimately found that
SARS correctly succeeded in the tax court, the appeal on
interest
would need to be remitted to that court for decision.
[88]
The parties agreed in the tax court that
the correct capital gains tax treatment of the acquisition and
disposal of the plantation
and the land if the tax appeal on the main
point were to succeed should stand over for later determination.
Since the parties pleaded
their respective cases on the CGT point,
the appropriate order is to remit the CGT issue to the tax court for
determination rather
than to remit it to the Commissioner for
assessment.
[89]
I may perhaps mention, in conclusion, that
although my interpretation of s 26(1) in this particular case
happens to have an
outcome favourable for the taxpayer, the more
usual position is that it is the taxpayer who, because of certain
favourable allowances
granted in the First Schedule, seeks to bring
himself within s 26(1). Had SARS’s contentions in the
present case been
upheld, the result might have opened a Pandora’s
box for taxpayers.
[90]
The tax court made no costs order in
respect of the proceedings in that forum and there is no reason for
us to do differently. The
appellant is entitled to its costs in this
court, including those attendant on the employment of two counsel.
TRAVERSO
DJP:
[91]
I concur. The following order is made:
(a) The
appeal is upheld with costs, including those attendant on the
employment of two counsel.
(b) The order
made by the tax court on 19 August 2013 is set aside and replaced
with an order in the following terms:
‘
(i) The
appellant’s appeal against the additional assessment in respect
of its 2004 tax year, with a due date 1 September
2010, succeeds and
the said additional assessment is set aside.
(ii) The
capital gains tax treatment arising from the appellant’s
acquisition and disposal of the plantation and land
which was the
subject of the additional assessment is remitted to the tax court for
determination on the pleadings already filed
in the tax court on the
capital gains tax issues.’
ALLIE
J:
[92]
I concur.
TRAVERSO
DJP
ALLIE
J
ROGERS
J
APPEARANCES
For Appellant:
Messrs L Kuschke SC and TS Emslie SC
Instructed
by:
Werksmans
Attorneys
18
th
Floor
1
Thibault Square
Cape
Town
For Respondent:
Mr AR Sholto-Douglas SC and Messrs MW Janisch and H Cassim
Instructed
by:
The
State Attorney
4
th
Floor, Liberty Life Centre
22
Long Street
Cape
Town
[1]
The
additional assessment was for R97 923 321 but the tax
court recorded, and it is common cause, that to this must
be added
an amount of R12 million, because a deduction in that amount
had already been allowed by SARS in the original assessment.
[2]
Statements
in some of the earlier tax cases to the effect that a factual
finding of the tax court cannot be reversed unless it
is a finding
to which no reasonable court could have come do not reflect the
current position. That test was the one applied
at a time when a tax
court judgment could be appealed against only on a question of law.
It was said to be a question of law
whether the factual conclusion
reached by the court was one to which no reasonable court could have
come. The limitation of tax
appeals to questions of law has fallen
away so that the ordinary appellate test now applies.
[3]
The
appellant was, at earlier times relevant to this case, called
Malenge Sawmills (Pty) Ltd and later Kota Sawmills (Pty) Ltd.
[4]
See
clause 4.3. Clause 4.2 stated that valuation was to be ‘not
more than’ R98 million for the plantation and ‘not
less
than’ R10,5 million for the immovable property. There was a
difference of opinion between the appellant's witnesses
as to
whether the 'not more than' phrase should have read 'not less than'.
It is unnecessary to resolve this question, save to
mention that in
the event the parties settled on a price for the plantation of
substantially more than R98 million, which rather
indicates that the
plantation price was to be ‘not less than’ R98 million.
[5]
See
Van den Heever
op
cit
22-23:
‘A moment's reflection will show that in agricultural
partiarian leases profits do not enter into the contract at
all. If
the annual rental value of the land is £200 and the agreement
is to the effect that the tenant renders to the landlord
a third of
the crops [
or,
I would add, a third of the crops' gross proceeds
],
the economic results may vary infinitely. Conceivably the tenant may
employ machinery and labour and apply fertilizers on a
scale which
is ruinous; he may conceivably spend £800 to produce crops to
the value of £600. In partnership this
fact may affect the
return which the landlord derives from his soil; in the partiarian
agreement it does not. All that happens
is that the landlord's
return is
in
natura
and
that the amount is subject to a partly casual and partly potestative
condition, an amount certain but at present and ascertained.'