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Last Updated: 8 June 2005
THE SUPREME COURT OF APPEAL
OF SOUTH
AFRICA
Case number : 190/04
Reportable
In the matter between :
CHIPKIN
(NATAL) (PTY) LIMITED APPELLANT
and
THE COMMISSIONER FOR THE
SA REVENUE SERVICE RESPONDENT
CORAM : HOWIE P, CAMERON, NUGENT, CLOETE, PONNAN JJA
HEARD : 12 MAY 2005
DELIVERED : 20 MAY 2005
Summary: Income Tax Act, 58 of 1962 ─ recoupment by partner (in terms of s 8(4)(a)) of pro rata share (calculated in terms of s 24H(5)(b)) of allowance (granted in terms of s 14 bis) for purchase by partnership of aircraft, held to have occurred where partner disposed of partnership interest.
_________________________________________________________
JUDGMENT
CLOETE JA/
CLOETE JA:
[1] On
31 March 1989 the appellant and eleven others entered into a partnership named
The Southern Cross Air Partnership. The only
disclosed partner was Air Southern
Cross Management (Pty) Limited (‘ASCM’); the others, including the
appellant, were
partners en commandite.
[2] Clause 2.5 of the
partnership agreement provided that ‘Each partner shall share in the
profits, losses, rights and obligations
of this partnership in accordance with
his percentage interest, and in the manner provided for in this
agreement’. The appellant’s
contribution to the partnership was a
cash amount, for which it acquired a 30 per cent interest in the partnership.
The appellant
financed this contribution by taking out a loan with Investec Bank
Limited. ASCM acted as the manager of the partnership and its
contribution
comprised its skill, management and administration of the business and affairs
of the partnership. For this it received
a 0,1 per cent interest in the
partnership and, in addition, payment of a sum of money from the other partners.
The remaining nine
partners also made cash contributions to the partnership and
held the remaining 69,9 per cent interest in the partnership.
[3] The
business of the partnership was to purchase a particular aircraft and either by
itself or with other persons to conduct the
business of transporting by air and
for reward persons, livestock, goods or mail. In fact the aircraft had already
been purchased
by ASCM but it was paid for out of partnership funds and it
accordingly became a partnership asset. The partnership (on the same
day it was
formed) entered into a partnership with BOP Air (Pty) Limited (‘the
Southern-BOP partnership’). The purpose
of the Southern-BOP partnership
was also to use the aircraft to conduct air transportation business for reward
and it did so.
[4] Section 14 bis of the Income Tax Act, 58 of 1962
(‘the Act’), provides for an allowance to be deducted from
‘the
income of any person’ in respect of an aircraft acquired by
such person on or after the first day of April 1965. The definition
of
‘person’ in s 1 does not include a partnership and a partnership is
not a person at common law.
[5] Income that has accrued to partners in
common is deemed to have accrued to each of the partners individually in their
proportionate
shares by s24H(5)(a), which provides as
follows:
‘(a) Where any income has in common been received by or
accrued to the members of any partnership, a portion (determined in
accordance
with any agreement between such members as to the ratio in which the profits or
losses of the partnership are to be shared)
of such income shall,
notwithstanding anything to the contrary contained in any law or the relevant
agreement or partnership, be
deemed to have been received by or to have accrued
to each such member individually on the date upon which such income was received
by or accrued to them in common.’
[6] Where income has accrued to a
partner in terms of para (a) the partner is also entitled to deduct a
proportionate share of deductions
and allowances that are granted by the Act
─ thereby arriving at the partners’ taxable income ─ by s
24H(5)(b),
which provides as follows:
‘(b) Where a portion of any
income is under the provisions of paragraph (a) deemed to have been received by
or to have accrued
to a taxpayer, a portion (determined as aforesaid) of any
deduction or allowance which may be granted under the provisions of this
Act in
the determination of the taxable income derived from such income shall be
granted in the determination of the taxpayer’s
taxable income so
derived.’
[7] The appellant claimed its pro rata portion of the s
14 bis allowance during the 1989, 1990 and 1991 years of assessment. During
the
appellant’s 1992 year of assessment, the appellant transferred 99,9 per
cent of its 30 per cent interest in The Southern
Cross Air Partnership to ASCM.
In consideration for this disposal, Investec Bank Limited released the appellant
from the outstanding
balance of the loan which the appellant had originally
taken out to finance its capital contribution to the partnership. (The amount
of
the balance in fact exceeded the amount of the loan.)
[8] The
Commissioner held the view that by virtue of the disposal, the pro rata s 14 bis
allowances previously claimed by the appellant
were recouped in terms of s
8(4)(a) of the Act. That section at all material times provided, to the extent
relevant, that:
‘There shall be included in a taxpayer’s income
all amounts allowed to be deducted or set off under the provisions of
sections
11 to 20, inclusive ... whether in the current or any previous year of
assessment which have been recovered or recouped
during the current year of
assessment...’.
The Commissioner accordingly issued the
appellant’s original income tax assessment for the 1992 tax year on the
basis that there
had indeed been a recoupment. The appellant’s objection
was disallowed and the appeal to the Johannesburg tax court was unsuccessful.
(The judgment of the tax court is reported as ITC 1784 in 67 SA Tax Cases 40.)
Leave to appeal directly to this court was granted
by the tax
court.
[9] In my judgment, the approach of the Commissioner and the
conclusion reached by the tax court are undoubtedly correct. The
appellant’s
counsel stressed the distinction between the cost to a partner
of acquiring a share in the partnership and the cost to the partnership
of
acquiring an asset. That distinction was made by this court in Rane
Investments Trust v Commissioner, SARS 2003 (6) SA 332 (SCA) para
35:
‘The Commissioner argued further, however, that Rane’s
expenditure was in respect of its acquisition of its partnership
share, not in
the acquisition of the film. That argument loses sight of the principle that in
acquiring the share, Rane was also
acquiring, as part of the business of the
former partnership, a share in the film ─ already an asset. It was the
expenditure
on the film as an asset taken over by the new partnership that was
deductible, and not the amount of R90 000 paid to become
a
partner.’
The appellant’s counsel also emphasized the distinction
between the disposal by a partner of an interest in a partnership, and
the
disposal by the partners of a partnership asset. But it does not follow from
these distinctions that the appellant did not recover
or recoup (as envisaged in
s 8(4)(a)) a pro rata portion (calculated in terms of s 24H(5)(b)) of the
allowance deducted (under s
14 bis). The appellant made a capital contribution
to the partnership that gave it, simultaneously, a 30 per cent share in the
partnership,
and an undivided share in the aircraft. The acquisition of the
share in the aircraft entitled the appellant to a share of the s 14
bis
allowance for the cost of the aircraft. Because of the provisions of s
24H(5)(b), the acquisition of the 30 per cent interest
in the partnership
determined the appellant’s share of that allowance at 30 per cent. When
the appellant disposed of 99 per
cent of its 30 per cent interest in the
partnership, it disposed of a corresponding percentage of its undivided share in
the aircraft.
As Schreiner J (Maritz J concurring) said in Whiteaway’s
Estate v CIR 1938 TPD 482 at 491:
‘[E]ven when no change in the
membership of the firm took place, whenever there was a change in the proportion
in which the
partners were to share in the profits and losses of the business,
there was a change in their rights in the partnership assets.’
In
order to make its capital contribution and acquire its 30 per cent interest in
the partnership, which gave it its share in the
aircraft (and the right to make
the s 14 bis deductions), the appellant took out a loan with Investec Bank; and
in exchange for its
transfer of its partnership interest and thereby its share
in the aircraft, the appellant was credited with the amount owing on that
loan
(which exceeded the amount originally borrowed). The appellant accordingly
recouped the cost to it of its share in the asset
in respect of which it had
made the tax deductions ─ as Howie P said in Omnia Fertilizer Limited v
Commissioner, SARS 2003 (4) SA 513 (SCA) para 17:
‘Where unpaid
expenditure has been allowed as deduction from taxable income there is not just
an expenditure entry in the taxpayer’s
books of account reflecting the
relevant debt. There is, in addition, an assertion by the taxpayer, accepted and
acted upon by the
Commissioner, recognising the likelihood, if not the
inevitability, that the debt will be paid. That is the basis for regarding the
unpaid debts as actual expenditure. If the taxpayer later, in effect erases the
debt from its books and treats the amount concerned
as available for another
purpose, the questions which arise are:
(a) whether the debt has for some
reason ceased to exist and, if not,
(b) whether the amount unpaid, but
expended in the eyes of the tax law, has nevertheless, for all practical
purposes, reverted to
the taxpayer’s
“pocket”.’
[10] The appellant’s counsel submitted
that the allowances were recouped only when the partnership sold the aircraft in
1995.
The foundation for that submission was that the allowances had accrued to
the partnership (when it acquired the aircraft) and not
to the partners
individually (when they each acquired their proportionate shares in the aircraft
upon becoming partners) and by the
same token it was only when the partnership
disposed of the aircraft that the allowances were recouped. The argument was
advanced
on the basis of the following passage in the concurring minority
judgment of Trollip J in Van der Merwe v SIR 1977 (1) SA 462 (A) at
478G-H:
‘According to the fundamental provisions of the Income Tax Act,
58 of 1962, the “taxable amount” [now termed “taxable
income”] of the new partnership was its “gross income”, i.e.,
“the total amount received by or accrued to
or in favour” of it
during the particular years of assessment, less the permissible deductions for
expenses, and allowable
abatements and exemptions (see the definitions of the
respective expressions in sec.1 of the Act).’
The appellant’s
counsel submitted with reference to this passage (and I quote from the heads of
argument):
‘The provisions of section 14 bis of the Act, which provide
for the grant of the aircraft allowances, and the provisions of
section 8(4),
which require any recoupment of such allowances to be included in “gross
income”, are not exceptions to
this basic rule. In other words, if the
section 14 bis allowances were granted in the determination of the
“taxable income”,
not of the Appellant’s own trade, but in the
determination of the “taxable income” of the Southern Cross Air
Partnership,
in accordance with the “fundamental provisions” of the
Act as aforementioned, then any recoupment of such allowances
must, on the same
principles, be taken into account in determining the taxable income of the
Southern Cross Air Partnership. By the
same token, an amount received by the
Appellant itself, i.e. an amount not received in common, cannot be treated as a
taxable recoupment
of amounts expended by the partnership, and in respect of
which an allowance was granted in the determination of the partnership’s
“taxable income”.’
The appellant’s counsel went on to
point out three alleged anomalies which would arise if the approach for which it
contends
is not adopted.
[11] The passage quoted from Van der
Merwe is not to be interpreted as meaning that a partnership is a
‘taxpayer’ for the purposes of the Act, and that the Act
attributes
to individual partners a proportionate share of the partnership’s
‘taxable income’ (i.e. income after
allowing for deductions and
allowances). That is not correct. The Act does not recognise a partnership. It
recognises only income
(gross income after allowing for tax-exempt income) that
accrues to partners in common (in accounting terms, the income of the
partnership)
which it attributes to them proportionally, and it similarly
attributes to the individual partners deductions and allowances that
are granted
by the Act, with a resultant ‘taxable income’ of the partners
individually. A partnership cannot have a taxable
income, simply because it is
not a taxable entity. At the time when Trollip JA wrote his concurring judgment
in Van der Merwe, it was not necessary to emphasize this fact as s 24H
had not yet been introduced into the Act. (The section was inserted by s 21
of
Act 90 of 1988.) The approach followed by Trollip JA is not now appropriate
inasmuch as subsection (5) of that section makes it
clear that a pro rata
portion of a deduction or allowance shall be granted in the determination of an
individual partner’s
taxable income derived from the partnership ─
the entire deduction or allowance is not applied to the globular income of the
partnership, which was the approach of Trollip JA. The significance of the
difference is this. Because the partnership is not a taxpayer
and regard must
therefore be had to the taxable income of each individual partner, and because a
portion of the allowance is granted
in the determination of each individual
partner’s taxable income, it is possible for one partner to recoup the
amount of the
allowance previously granted to such partner even if the other
partners recoup nothing. It is to the individual partner that a proportionate
share of the allowance accrues when he becomes a partner, and it is the partner
who recoups that allowance when he disposes of his
interest.
[12] The
appellant’s counsel referred to a number of sections in the Act in support
of the proposition that the expenses and
losses of a partnership business cannot
be used in reduction of income derived by the partners from another trade. That
proposition
is obviously correct. But it is no justification for the further
proposition advanced by counsel that (notwithstanding the insertion
of s 24H
into the Act) what counsel termed ‘the taxable income of a partnership
trade’ must be determined separately,
and each partner’s taxable
income or tax loss is to be brought to account by the individual partners only
when the partnership’s
taxable income or tax loss for the relevant period
has been determined in the partnership’s own financial statements. Nor is
there any warrant, as counsel suggested, for reading the word
‘partnership’ into the definition of ‘gross income’
so
that that definition would (to the extent relevant to the present matter) be
understood as follows:
‘In the case of any partnership, the total
amount in cash or otherwise, received by or accrued to or in favour of such
partnership
... during such year or period of assessment ... including, without
in any way limiting the scope of this definition, such amounts
(whether of a
capital nature or not) so received or accrued as are described hereunder, namely
─
...
(n) any amount which in terms of any other provision of this
Act is specifically required to be included in the partnership’s
income,
and for the purposes of this paragraph all amounts which in terms of subsection
(4) of section eight are required to be included in the
partnership’s income shall be deemed to have been received by or to have
accrued to the
partnership from a source within the Republic notwithstanding
that such amounts may have been recovered or recouped outside the
Republic...’.
The fallacy of this approach is that it seeks to treat a
partnership as a taxpayer, which it manifestly is not. There is no such thing
as
‘the taxable income of a partnership trade’. Nor does the fact that
the income, deductions and allowances of the trade
carried on by each partner in
a partnership must be calculated separately from that of any other trade carried
on by such partner,
necessitate the approach urged on us by counsel. Section
24H(5)(b) itself expressly provides that the deductions and allowances may
be
granted in respect of the income each partner is deemed to derive from the
partnership business in terms of subsection (5)(a).
What must happen in the
ordinary course is that for tax purposes at the end of a partner’s tax
year (which may not coincide
with the interval agreed on by the partners in
sharing profits), the income of the partnership will be determined; amounts
exempt
from tax will be deducted; each partner’s share of the income will
then be calculated; and each partner will then be entitled
to that
partner’s portion of any deduction or allowance in respect of that
partner’s share to produce that partner’s
taxable income derived
from the partnership. The appellant’s counsel submitted that this approach
is divorced from reality
in that accounts are invariably drawn up according to
the method set out by Trollip JA in Van der Merwe. But the point is that
for the purposes of s 24H(5), the manner in which the calculation has to be done
is as set out above.
[13] It remains for me to deal with the anomalies
which the appellant’s counsel said would result from this
approach.
[14] First it was submitted that the s 14 bis allowances will
be recouped twice: when the appellant sold its partnership interest
and again
when the partnership sold the aircraft. The answer is that only such portion of
the s 14 bis allowance as had not already
been recouped by the appellant, would
be recouped by the appellant when the aircraft was sold.
[15] Second, it
was submitted that the Act does not contemplate a recoupment when an asset, in
respect of which allowances have been
deducted, is still in use. The answer is
that a recoupment occurs when a taxpayer recovers what the taxpayer expended and
for which
the taxpayer was allowed a deduction; and whether or not the asset is
still in use, is irrelevant.
[16] Third, it was submitted that if, at a
stage when the aircraft is still owned by the partnership, a partner is
individually subject
to tax on recoupment in respect of the aircraft in view of
what counsel termed ‘a mere change in the profit sharing between
the
partners’, it becomes impossible to apply the complex provisions of ss 14
bis and 8(4) on an ongoing basis as contemplated
in those sections. In the
present matter there is much to be said for the blunt comment by the court a
quo that ‘the disposal of the share in the partnership is a poorly
disguised manner of disposing, inter alia, of ownership of a
share in the
aircraft’. But taking the argument of the appellant’s counsel at
face value, the answer is that the calculations
are not impossible; and the fact
that in a particular case (unlike the present) it may be difficult to calculate
the different recoupments
and allowances, does not detract from the fact that an
individual partner may have recouped what such partner expended.
[17] The
appeal is dismissed with costs, including the costs of two counsel.
______________
T D CLOETE
JUDGE OF APPEAL
Concur: Howie P
Cameron JA
Nugent JA
Ponnan
JA
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.RTF of original document