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Last Updated: 17 October 2005
IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
REPORTABLE
CASE NO 353/04
In the matter between
LIBERTY INVESTORS LIMITED (IN MEMBERS’ VOLUNTARY
LIQUIDATION)
Appellant
and
THE COMMISSIONER FOR THE
SOUTH AFRICAN REVENUE SERVICE
Respondent
________________________________________________________________________
CORAM: HOWIE P, STREICHER, BRAND, LEWIS et PONNAN JJA
________________________________________________________________________
Date Heard: 22 August 2005
Delivered: 30 August 2005
Summary: Dividends from a subsidiary transferred to company’s share capital and share premium account and capitalisation shares issued – later liquidation of the company – sums transferred deemed by proviso (i) of definition of ‘dividend’ to be profits of revenue nature and thus not exempted from secondary tax on companies.
________________________________________________________________________
J U D G M E N T
________________________________________________________________________
HOWIE P
HOWIE P
[1] Between March 1995 to
August 1996 the appellant company received dividends in the amount of R156 831
000 from its wholly owned
subsidiary, DGI Holdings (Pty) Ltd. This amount was
capitalised in due course by transferring some of it to the appellant’s
share capital and the rest to its share premium account. Pursuant to these
transfers the appellant utilised the amount in issuing
capitalization shares to
its shareholders.
[2] On 5 July 1999, during the 2000 tax year, the
appellant was, in terms of a special resolution of its members, placed in
voluntary
liquidation. On the same date the appellant declared, in the course of
the liquidation, a dividend to shareholders of some R5 565
million.
[3] In terms of subsection (2) of s 64B of the Income Tax Act 58
of 1962, as amended, a tax known as the secondary tax on companies
must, subject
to certain exemptions, be levied on any dividend declared by a company on or
after 14 March 1996.
[4] One of the exemptions is provided for in
subsection (5)(c). The material terms of that provision exempt
‘so much
of any dividend distributed in the course of the liquidation ... of a company,
as is shown by the company to be a distribution
of ... profits of a capital
nature.’
[5] In calculating this tax in the present matter the
respondent regarded the amount of R156 831 000 as a distribution from revenue
reserves and, calculating the relevant net portion of that amount as R148 370
619, levied the tax, at the prescribed rate, on the
latter sum. The
appellant’s resultant secondary tax liability thus calculated was R18 546
327,38.
[6] The appellant appealed to the Transvaal Tax Court,
contending for the absence of any such tax liability. Essentially, the
appellant’s
case was that the amount of R156 831 000 comprised
‘profits of a capital nature’. That court dismissed the appeal but
granted leave to appeal to this court. The crux of its reasoning in dismissing
the appeal was that the dividends the appellant received
from its subsidiary
were profits of a revenue nature and never lost that character. In the Tax
Court’s view
‘the mere fact that the amount was capitalised to
the company’s share capital and share premium account did not change
its
nature nor can it render a subsequent distribution a distribution of profits of
a capital nature ...’.
[7] Counsel for the appellant relied
principally on the case of Commissioner for Inland Revenue v
Collins[1] for the proposition
that the amount of R156 831 000 (the amount in issue) had been
transferred from revenue profits to
capital. Accordingly, so the argument
went, when the amount in issue came to be included in what was distributed on
liquidation
it could not have constituted anything other than ‘profits of
a capital nature’.
[8] Although Collins’s case
demonstrates the flaw in the reasoning of the Tax Court cited above, what that
Court, the parties before it and counsel have
in any event overlooked are the
terms of paragraph (i) of the proviso to the definition of
‘dividend’ in s 1 of the Act.
[9] In the 2000 tax year the
relevant wording of the definition and the proviso was as follows:
‘
“dividend” means any amount distributed by a company to its
shareholders ... and in this definition the expression
“amount
distributed” includes –
(a) in relation to a company that is
being ... liquidated, ... any profits distributed ... other than those of a
capital nature,
earned before ... the liquidation ... ;
(b) ...
(c)
...
(d) ...
but does not include –
(e) the nominal value of any
capitalization shares awarded to a shareholder to the extent to which such
shares have been paid up by
means of the application of the whole or any portion
of the share premium account of a company; or
(f) ...
(g) ...
(h)
the nominal value of any capitalization shares awarded to shareholders as part
of the equity share capital of a company;
(i) ...
Provided that, for the
purposes of this definition –
(i) where a company has on or after 1
January 1974 transferred any amount from reserves (excluding any share premium
account) or
undistributed profits to the share capital or the share premium
account of the company without applying the amount in paying up capitalization
shares or has applied the amount in paying up capitalization shares the nominal
value of which did not in whole or in part constitute
an amount distributed as
contemplated in the foregoing provisions of this definition, the amount so
transferred (reduced by so much
thereof as constitutes such an amount
distributed) shall be deemed –
(aa) to the extent that such amount
(as so reduced) is shown to consist of profits of a capital nature, to be a
profit of a capital
nature available for distribution by the company to
shareholders who, in the event of a distribution by the company at any time
(whether
before or during the winding-up or liquidation of the company) of
profits of a capital nature would be entitled to participate in
such a
distribution; and
(bb) to the extent that subparagraph (aa) does not apply,
to be a profit which is not of a capital nature and is available for
distribution
by the company to shareholders who, in the event of a distribution
by the company at any time (whether before or during the winding-up
or
liquidation of the company) of profits which are not of a capital nature would
be entitled to participate in such a distribution,
regardless of whether in
either case the company in fact has or has not any profits available for
distribution;’
[10] Quite apart from whether the amount in
question, having been capitalised, could correctly be called profits, the terms
of sub-paragraph
(bb) of the proviso are destructive of the appellant’s
case. Plainly, that amount when received from the subsidiary comprised
profits
of a revenue nature and, despite capitalization thereafter, must nevertheless be
deemed to be profits of a revenue nature
available for distribution to
shareholders. It follows that the amount in question cannot be shown to
comprise profits of a capital
nature as required to establish the s 64B(5)(c)
exemption.
[11] The appeal is dismissed with costs including the costs of two
counsel.
CT HOWIE
PRESIDENT
CONCURRED:
Streicher JA
Brand JA
Lewis JA
Ponnan
JA
[1] 1923 AD 347
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