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Last Updated: 7 December 2004
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/...
SCOTT JA:
[1] The appellant carries on business
as a bookmaker. The business is an ‘enterprise’ as defined 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
value-added tax (‘tax’). After deducting the tax payable for the
latter tax period
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 was entitled to a refund in terms of s 44(1) read with s 16(3) and s
16(5) of the Act. The respondent, on the other
hand, contended 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
appellant
(and other bookmakers who overpaid in similar circumstances) would be entitled
to recover the amount overpaid during a
period of five 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 subject to the
further proviso that the refund would be limited to the overpayment
made during
the preceding 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 judgment.) The respondent ruled that the payments in
question were made in accordance with a practice generally prevailing and
accordingly limited the amount repayable to the appellant
to R336 259,93. The
existence or otherwise of the practice is the second issue requiring
determination. The appellant appealed unsuccessfully
to the Special Court. 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 the appellant’s business he entered into betting transactions
with punters, each of whom paid
him a sum of money against an undertaking 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 appellant paid
out winnings to that
punter. When the circumstances were such that the appellant deemed it necessary
to limit his risk exposure in
relation to the bets he had received, he himself
would place ‘cover’ or ‘take-back’ bets with other
bookmakers
who would similarly be registered vendors in terms of the Act. When
these proved to be winning bets the appellant, of course, 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 provided in the Act, the 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 speaking, this involves the calculation of both his
‘output tax’ and his ‘input tax’
and deducting the
latter from the former. The result is the tax he has 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 from 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’.
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 the bet’. In the
result, the appellant is deemed to supply a service to punters
who place bets
with him and the appellant’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 the 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, what may be deducted is, first,
the input tax calculated on bets
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 that tax
period’.
The second deduction that may be made is the input tax
calculated on the winnings paid to successful punters. This 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 supplier of the
services contemplated in
section 8(13) as a prize or winnings to the recipient of such
services’.
[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 new section was to deem the tax fraction of
the winnings received by a bookmaker on take-back
bets placed by him with other
bookmakers to be output tax for the service rendered by him to the other
bookmakers. Prior to the amendment
there was, therefore, no provision in the Act
requiring take-back winnings to be included in the calculation of the
bookmaker’s
output tax and hence the tax payable by him. The tax he was
obliged to pay was the difference between, on the one hand, the amount
of his
output tax calculated on the bets he received from punters and, on the other,
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
provision such as that contained in the inserted s 8(13A) appears to have been a
hiatus overlooked by the Commissioner and bookmakers alike. Indeed, it
appears to have been common cause that, given the scheme of the Act,
one would
ordinarily expect such winnings to be taken into 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 winnings were,
however, dealt with
in the Guide for Vendors VAT 404 which 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) including in his
calculation of the tax payable by him the take-back winnings he had received
from other bookmakers.
In doing so he adopted a so-called ‘netting
off’ method which differed from the method contemplated in both the Act
and
the Guide. On the assumption that take-back winnings were required to be
taken into account in calculating the tax payable, the method
contemplated in
the Act and the Guide would be the following:
(i) Output tax would be calculated on the total 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 calculated on the total amount of the winnings paid to punters by the bookmaker plus the total amount of the take-back bets placed by the bookmaker.
(iii) The tax payable would be the result of the calculation referred to in (i) less the result 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 total amount of winnings he had paid to punters (subject to input tax), deducted from this amount the total amount of take-back winnings he had received 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 method
is employed, the result, of course, is the same. The appellant testified that
the sole
reason for adopting the method he did, was that the forms he had to
complete for his provincial betting 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 the appellant
submitted, however, that because of the fortuitous adoption 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 calculated 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 argument advanced by counsel
it is necessary to quote certain provisions 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 observe 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 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
calculation, as set
out above, was adopted by the appellant during the periods
in question, ‘take-back winnings’ were deducted from the amount
of
winnings paid to punters (subject to input tax) to arrive at the
appellant’s input tax. In the result, so the argument went,
there was an
under deduction of input tax. Accordingly, the amount of input tax not deducted
from output tax in respect 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 within the meaning of s 16(5) and
was accordingly refundable in terms of s 44(1).
[13] In my view the argument
is unsound. The first proviso to s 16(3) makes provision for the deduction from
output tax in a later
tax period of an amount in respect 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 appellant did was not to omit an amount subject to input tax but to
include in each calculation his take-back
winnings as an amount subject to
output tax. Input tax was not understated; output tax was overstated. It was
this that increased
the tax payable and resulted in the overpayment. This is so
because regardless of the method of calculation used, in substance the
take-back
winnings were treated as being subject to output tax. Whether these were
deducted from an amount subject to input tax or
added to an amount subject to
output tax their nature remained the same. That could not change simply because
one or other method
of calculation was used when both methods result in the same
tax figure. It follows that in my judgment the appellant’s reliance
on the
proviso in s 16(3) and hence the provisions of s 16(5) is misplaced. 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.’
It was not in dispute that if the
overpayment was not refundable under s 44(1), it would 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
contained
in s 44(3) but for the sake of completeness 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 with 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 course of 1996 it was
accepted by all in the revenue service that bookmakers’ winnings on
take-back
bets were subject to output tax. This, he said, was not only
consistent with the scheme of the Act but was reflected in both editions
of the
VAT Guide 404. He said that once the lacuna in the Act was discovered,
steps were immediately taken to have the Act amended to rectify the situation.
In the meantime, on making
inquiries, it transpired that nearly 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 including take-back winnings as an amount subject to output
tax in the calculation
of the tax payable by bookmakers. In terms of s 37 of the
Act the onus 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 somewhat vague
suggestion was clearly insufficient to discharge the burden of proof on the
appellant. Counsel also sought to
make something of the fact that the method
adopted by the bookmakers differed from that contemplated in the Guide. But
whether the
one or other method was employed is of little consequence; the
result was the same. The point is that the prevailing practice was
for
bookmakers to include in the calculation of their tax the take-back winnings
they received as being subject to output tax.
(16) The appeal is accordingly
dismissed with costs, including the
costs occasioned by the employment of
two counsel.
________________
D G
SCOTT
JUDGE OF
APPEAL
CONCUR:
FARLAM JA
MTHIYANE JA
CLOETE JA
ERASMUS AJA
SAFLII:
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.RTF of original document