10.4.4
in the event of a distribution of capital assets, to which beneficiaries and in what respective proportions such assets shall be distributed,
in accordance with the view taken by the trustees as to what is necessary or desirable for the welfare of the beneficiaries;
10.5
Mr Retief, alone among the trustees of the Trust, has had the right to nominate a replacement for himself
as trustee in the event of vacating his position as trustee.’
[4]
During 1995 and 1996 both respondents and in particular the first respondent experienced a strong
inflow of cash and a decision was then made to make use of these funds. It was decided that the Trust would acquire assets which
would be funded by way of loans by the respondents to the Trust. The idea was that for the purpose of estate planning the growth
in the investments would vest in the Trust. To this end ten policies were taken out with Sanlam. The premiums were paid by the two
respondents and recorded in the books of account as loans to the Trust. In addition a number of fixed properties were purchased in
the name of the Trust variously at Langebaan, Randburg and Durbanville, together with two farms. The funding was again effected by
way of loans from the respondents to the Trust. The statement of agreed facts recorded that according to the financial statements
of the first respondent, at the end of the 1996 year of assessment, the outstanding loans by it to the Trust stood at R254 000.
By the end of the 2000 tax year, the cumulative total was R43 009 380. No interest was payable by the Trust, save for the
year 2000 in which interest in the amount of R3 919 074 was levied in the books of account. Insofar as the second respondent
is concerned, the cumulative total at the same time was R14 557 290. Similarly, no interest was payable. In respect of
all the loans no terms of repayment were recorded.
[5]
The parties led evidence before the court a quo the judgment contains findings of fact on such evidence. The findings were not disputed before us. The following was the finding in
regard to the policies and immovable properties purchased in the name of the Trust:
‘3.7
Ten Sanlam policies were purchased by the trust with the advances made to it by Airworld and (Com)
Inter. Although the evidence on behalf of the appellants was to the effect that the intention was to utilise the trust policies to
provide security for the liabilities of the appellants, the documentation relied upon by the appellants indicates that only six policies
were ceded, and that the cessions were to secure the debts of the trust and not the debts of Airworld or (Com) Inter. The cessions
were to provide security for the debts of the trust. The trust’s financial statements do not reflect that the policies were
ceded in respect of any liabilities of either Airworld or (Com) Inter. The financial statements of (Com) Inter also do not reflect
that any trust policies were ceded or provided as security in respect of its liabilities. The financial statements of Airworld indicate
that certain trust policies and certain (Com) Inter policies were encumbered in favour of Stannic as security, but it seems that
only two of the relevant trust policies were in fact ceded to Stannic. The cession documents relating to the six policies which were
ceded to the appellants’ bankers were ceded
“as voortdurende dekkende sekuriteit vir enige bedrag wat die sedent nou of te enige tyd hierna aan die bank verskuldig is of mag wees’.
The ‘sedent’ is the trust. Two unlimited guarantees were however provided by the trust, one in respect of Airworld and
the other in respect of (Com) Inter. In these guarantees the trust bound itself as surety to Volkskas Bank in respect of the liabilities
of Airworld and (Com) Inter respectively. Both guarantees were signed on 8 October 1996.
3.8
The financial statements of the trust do not reflect that any of the immovable properties owned
by it were encumbered in any way in favour of a financial institution in respect of liabilities incurred by either of the appellants.
However, Van Heerden testified that in respect of some of the properties, covering bonds were registered. This evidence was not supported
by the trust’s financial statements.’
[6]
In 2003 the Commissioner in the case of the first respondent raised an assessment for payment of
STC for the tax years 1998, 1999 and 2000. The total amount, together with interest, was some R8m. The second respondent in turn
was assessed to be liable for an amount of R2,7m in respect of the tax years 1998 and 1999. The basis of the assessments as recorded
in a letter by the Commissioner dated 17 July 2003 was that the two respondents were liable for STC as the amounts of the loans made
by them to the Trust during the years in question were deemed to be dividends by virtue of the provisions of s 64C(3)(a) of
the Act. The Trust, it was contended, was a ‘recipient’ of amounts deemed to have been declared as dividends because
a shareholder of the company, Retief, was a ‘beneficiary’ of the Trust as contemplated by the definition of ‘recipient’
in s 64C(1)(c). By virtue of the definition of ‘shareholder’ in s 1 of the Act, a member of a close corporation
is a shareholder for purposes of s 64C. It was further recorded that according to the financial statements of both the first
and second respondents and their tax returns, the deemed dividends did not exceed the profits and reserves which were available for
distribution. An objection by both close corporations in terms of s 81 of the Act was disallowed and the appeal to the Tax Court
resulted.
[7]
The court recorded that the following issues were before it for decision:
‘5.1
Whether the trust was a “recipient” in relation to Marius Smit Retief, the sole member
of Airworld and (Com) Inter as contemplated in section 64C(1);
5.2
Whether the loans to the trust constituted “distributions” as contemplated in section
64C(3)(a);
5.3
Whether the loans fell within the exemption provisions of section 64C(4)(c); in particular whether
the loans exceeded the appellant’s profits and reserves which were available for distribution;
5.4
Whether the loans fell within the exemption provisions of section 64C(4)(d) in respect of Airworld’s
2000 year of assessment; in particular whether the rate of interest which was charged on the loan was not less than the official
rate of interest as defined in paragraph 1 of the Seventh Schedule of the Act.’
On this legal issue the president of the court, sitting with assessors, found in favour of the first and second respondents on the
first point. This finding rendered it unnecessary, in the view of the president, to decide the other points and accordingly in respect
of them no finding was made.
[8]
The conclusion reached was that the Trust was not a ‘recipient’ as contemplated in s 64C(1)(c)
because ‘beneficiary’ in that sub-section refers only to beneficiaries having vested rights. Neither Retief nor his wife,
though named beneficiaries in the Trust, had vested rights as the trustees had an absolute discretion to whom to distribute the income
and capital of the Trust. Neither was therefore a ‘beneficiary’.
[9]
Before dealing with the Commissioner’s attack on the judgment it is necessary, in order to
follow the argument, to quote the sections as they read during the relevant years. Section 64B(2) imposed the tax. It read:
‘64B(2) There shall be levied and paid for the benefit of the National Revenue Fund a tax, to be known as the secondary tax on companies,
which is calculated at the rate of 12,5 per cent of the net amount, as determined in terms of subsection (3), of any dividend declared
by any company on or after 14 March 1996.’
The deeming provisions were contained in s 64C:
‘(1)
For the purposes of this section ‘recipient’, in relation to any company, means –
(a)
any shareholder of such company;
(b)
any relative of such shareholder; or
(c)
any trust of which such shareholder or relative is a beneficiary.
(2)
For the purposes of section 64B any amount which is in terms of subsection (3) deemed to have been
distributed by a company to a recipient, shall, subject to the provisions of subsection (4), be deemed to be a dividend declared
by such company, notwithstanding the fact that such amount may have been so distributed by way of a loan or credit to the recipient
or that the recipient may in consequence of such distribution have assumed any other form of obligation to make a future payment
to the company.
(3)
For the purposes of subsection (2) an amount shall be deemed to have been distributed by a company
to a recipient if –
(a)
any cash or asset is distributed by the company to or for the benefit of such recipient;
(b)
the recipient is released from any obligation measurable in money which is owed to the company by
the recipient;
(c)
any debt owed by the recipient to any third party is paid or settled by the company;
(d)
any amount represents an amount which has been adjusted or disallowed in accordance with the provisions
of section 31.’
Section 64C(4) read:
‘The provisions of subsection (3) shall not apply–
. . .
(c)
to so much of any such amount distributed (other than . . .) as exceeds the company’s profits
and reserves which are available for distribution . . .: Provided that any prohibition or limitation on any such distribution contained
in the company’s memorandum and articles of association or founding statement or any agreement shall be disregarded in the
application of this paragraph.
(d)
to any loan granted–
(i)
which is denominated in the currency of the Republic, in respect of which a rate of interest not
less than the ‘official rate of interest’, as defined in paragraph 1 of the Seventh Schedule . . .
is payable by the recipient.’
To complete the discussion of the legislation it is necessary to quote the definition of ‘connected person’ in s 1:
‘Means –
(b)
in relation to a trust –
(i)
any beneficiary of such trust; and
(ii)
any connected person in relation to such beneficiary.’
And the definition goes on to record that
‘. . . in this definition the expression ‘beneficiary’ means any person who has been named in . . . the will or deed of
trust concerned –
(i)
as a beneficiary; or
(ii)
as a person upon whom the trustee of the trust has the power to confer a benefit from such trust.’
Of significance, as will later be seen, is that Part 7 (which contains s 64C) was introduced by the same amending legislation
in 1993 (Act 113 of 1993) as the definition of ‘connected person’.
[10]
Counsel were agreed that the word ‘beneficiary’, when used in relation to property and standing
alone is capable of any one of the three meanings attributed by Centlivres J in In Re Estate Scholtz CPD 146 at 147, namely:
‘(a)
[A]ny person whether born or unborn, certain or uncertain who has any interest, whether vested or
contingent, or
(b)
any living person who has a vested or contingent interest, or
(c)
any person who has a vested interest.’
They were further ad idemthat, as in a case of interpretation of all other statutes, fiscal legislation is to be interpreted by ascertaining what the Legislature
intended in using the words it chose to use (Glen Anil Development Corporation Ltd v Secretary for Inland Revenue1975 (4) SA 715 (A) at 727G-H). Of cardinal importance is the scope and purpose of the legislation and the context in which the words
or phrases are used (Standard General Insurance Co Ltd v Commissioner for Customs and Excise (2) SA 166 (SCA) para 25).
[11]
Counsel for the Commissioner attacked the findings of the court a quo a number of grounds. The first was that s 64C is an anti-tax avoidance measure and is designed to prevent circumvention of STC.
Accordingly the word ‘beneficiary’ must be given the meaning which will make the provision effective rather than ineffective.
In this regard reference was made to Gartside v Inland Revenue Commissioners ] 1 All ER 121 (HL) at 131d-e. Secondly, the Special Court’s reliance on the definition of ‘beneficiary’ in the
Concise Oxford Dictionary ed revised) as ‘someone who gains benefit from something, especially a trust or will’, did not support its view that ‘beneficiary’
should be confined to those with vested rights to income or capital. In the context of trusts, so it was submitted, the word ‘beneficiary’
extends naturally to those potentially entitled to enjoy proprietary benefits under the trust. Thirdly, by the use of the words ‘any
relative’ of a shareholder in the definition of ‘recipient’ the legislator made it clear that a direct proprietary
benefit was not required. An indirect benefit via blood or marriage would suffice. There is, so the argument went, no legislative
rationale for requiring a connection between the shareholder and the amount distributed to be a direct, immediate or ‘vested’
one. Fourthly, reference was made to s 25B of the Act to demonstrate that the Legislature, when it came to taxing income, distinguished
between the situation where trust beneficiaries have a vested right to income of a trust and the situation where they have no such
right. Reliance was placed on Minister of the Interior v Machadodorp Investments (Pty) Ltd (2) SA 395 (A) at 404D and Consolidated Textile Mills Ltd v President of the Industrial Court (1) SA 302 (A) at 308C-D for the proposition that there is a presumption or reasonable supposition that the same words or expressions
in the same Act are intended to bear the same meaning where no indication to the contrary is given. The remainder of the argument
on behalf of the Commissioner was devoted to an attack on the respondents’ reliance on the definition of the expression ‘connected
person’ and the subsequent amendment to the definition of ‘recipient’ in the year 2000.
[12]
In support of the argument that the word ‘beneficiary’, as used in the definition of ‘recipient’,
was intended to relate only to beneficiaries with vested interests, counsel for the respondents relied in the main upon the contrast
between the definition of ‘recipient’ in s 64C(1) and the definition of ‘connected person’. It was the
same amending legislation, as pointed out earlier, which introduced both provisions. It is principally on this issue which the respondents’
case turns and which persuaded the court a quo find in their favour.
[13]
I do not consider that merely because the section is an anti-tax avoidance measure the broadest possible
meaning must be given to the term ‘beneficiary’. It still remains a question of interpretation, regard being had to the
relevant provisions as a whole, to determine what the legislator intended to include in the anti-tax avoidance measure and what it
intended to exclude. STC is only payable once a dividend is declared by a company. Similarly, the deeming provisions are only triggered
once a benefit in one of the forms set out in ss (2) and (3) of s 64C accrues to a ‘recipient’. Absent such
benefit no liability for STC is incurred by the company. The accent in ss 64C(2) and (3) is on a monetary benefit being received
by a shareholder, whether directly or indirectly. A named potential beneficiary in a discretionary trust, such as Retief, where the
trustees have not exercised their discretion in favour of him, has no right to any benefit. It is common for discretionary trusts
to be formed with the intention of divesting the founder of the trust of his assets, the idea being that such person’s spouse,
children or other descendants may benefit as beneficiaries but not such person himself. Such a trust also serves the purpose of being
a vehicle for ‘growth assets’ in order that the growth in value of the assets should not take place in the hands of the
founder. It is regarded as sound estate planning. The person is often named as a potential beneficiary without there ever being any
intention that he will in fact receive any benefit from the trust. The reason is simple. There would be no point to the estate planning
if the advantage sought to be gained would be nullified by placing the growth back in the hands of the original person.
[14]
It is, to my mind, understandable that the legislature, realising that a potential beneficiary has no
right to income or capital of the trust until the trustees exercise their discretion and he or she adiates, intended to exclude him
or her from the concept of beneficiary. This would accord with a clear distinction in the definition of ‘connected person’
which includes ‘ . . . a person upon whom a trustee of the trust has the power to confer a benefit from such trust’ and
the absence in the definition of ‘recipient’ of the same words. The inescapable conclusion is that it was not intended
to include trusts as ‘recipients’ where the beneficiary, though named, has no immediate right to benefits. As argued
by counsel for the respondents, as soon as he or she accepts a benefit under the trust, he or she become beneficiaries, the trust
becomes a recipient, and the respondents will be liable to STC. This is so because the benefit then accrues.
[15]
In 2000 the definition of ‘recipient’ was amended to mean:
‘(a)
any shareholder of such company;
(b)
any connected person in relation to such shareholder.’
This is, to my mind, consistent with the conclusion that the legislature purposely omitted as ‘recipients’ those trusts
in which the shareholder had no vested rights but later decided to include them. It is not a case of interpreting legislation by
reference to subsequent enactments. It is simply a case of recognising that one category was excluded from the net and later included.
[16]
The argument on behalf of the Commissioner that, because the legislature in s 25B considered it
necessary to narrow down the meaning of ‘beneficiary’ to mean ‘vested beneficiary’, it follows that where
beneficiary is used elsewhere in the Act, it must be given its broader meaning, is to my mind unpersuasive. Subsection (1) does not
characterise a person who does not have a vested right to income as a ‘beneficiary’. All it does is to confirm that income
which is derived for the immediate or future benefit of the beneficiary with a vested right to such income accrues to such person.
Similarly it distinguishes a situation where the income is deemed to accrue to a trust. Subsection (2) deals with the position where
a beneficiary becomes such as a consequence of the trustee exercising his discretion and confirms, as submitted by counsel for respondents,
the established ‘conduit pipe principle’, namely that where income is awarded to a beneficiary by virtue of the exercise
of the trustee’s discretion in the same year in which the income arises, such income is regarded as accruing direct to such
beneficiary. The enactment in bringing about nothing new is of no assistance in the interpretation of the words with which we are
dealing. As stated by the president, the reference to vested rights in this section is necessary in order to fix liability for taxation
on persons having such rights.
[17]
The remaining arguments of the appellant do not persuade me that the interpretation contended for by
him is to be preferred. To conclude, I consider that the Tax Court correctly found that it was intended that ‘beneficiary’
as used in s 64C(1)(c) was restricted to a ‘vested beneficiary’ and did not include a person like Retief who was
at the relevant times a potential beneficiary. This finding renders it unnecessary to deal with the other issues.
[18]
I would dismiss the appeals with costs.
……………………
P C COMBRINCK
JUDGE OF APPEAL
Concur:
FARLAM JA
HURT AJA:
[19]
I have read the judgment prepared by my brother Combrinck. I find myself in respectful disagreement with
him in relation to his interpretation of s 64C of the Income Tax Act 58 of 1962. In the view which I take, the appellant (to whom
I shall refer as 'the Commissioner') was correct in treating the payments made by the first respondent ('Airworld') and the second
respondent ('RCI') as being, at least in part, subject to Secondary Tax on Companies ('STC') in terms of s 64B (2) of the Act. Where
applicable, I shall refer to Airworld and RCI collectively as 'the respondents'.
[20]
The judgment of Combrinck JA sets out the history of the formation of Airworld and RCI, the formation
of Die Marius Smit Retief Familietrust ('the Trust') and the transactions between them during the period between 1997 and 2000. The
main issue in the appeal concerns the interpretation of s 64C(1)(c) and, in particular, the meaning to be attributed to the word
'beneficiary' in that section.
[21]
Sections 64B and 64C were inserted into the Act by the Income Tax Amendment Act 113 of 1993. Their insertion
heralded the imposition, in terms of s 64B(2), of STC, a tax which was to be levied on all dividends declared by companies on or
after a specified date. The word 'companies' includes, within its scope, close corporations such as Airworld and RCI. The tax was to be levied at the source of payment, so that the company declaring the dividend would be liable for payment and treated
as the taxpayer. In terms of s 64B(7) read with the definition of 'dividend cycle' in s 64B(1), the tax was effectively payable within
one month of the date on which the dividend was declared or, if a subsequent date for payment of the dividend was specified, within
a month of that date.
[22]
Section 64C was headed 'Certain amounts distributed deemed to be dividendsand that represents a crisp summary of its contents. Subsections (1) to (3) read as follows:
'(1)
For the purposes of this section 'recipient', in relation to any company, means–
(a)
any shareholder of such company;
(b)
any relative of such shareholder; or
(c)
any trust of which such shareholder or relative
is a beneficiary.
(2)
For the purposes of section 64B any amount which is in terms of subsection (3) deemed to have been distributed
by a company to a recipient, shall, subject to the provisions of subsection (4), be deemed to be a dividend declared by such company,
notwithstanding the fact that such amount may have been so distributed by way of a loan or credit to the recipient or that the recipient
may in consequence of such distribution have assumed any other form of obligation to make a future payment to the company.
(3)
For the purposes of subsection (2) an amount shall be deemed to have been distributed by a company to
a recipient if–
(a)
any cash or asset is distributed by the company
to or for the benefit of such recipient;
(b)
the recipient is released from any obligation measurable
in money which is owed to the company by the recipient;
(c)
any debt owed by the recipient to any third party
is paid or settled by the company;
(d)
any amount is used or applied by the company in
any other manner for the benefit of the recipient; or
(e)
such amount represents an amount which has been
adjusted or disallowed in accordance with the provisions of section 31.'
[23]
In an ideal State, where every person, natural or juristic, is aware of the benefits which the population
derives from collected tax and of the consequent responsibility to contribute what is due, the legislator would presumably have been
content to let s 64B stand on its own. But the legislator in this imperfect world must be ever alert to thwart the relentless ingenuity
of accountants, tax consultants, lawyers and even the lay person, by anticipating possible ways and means by which the prescripts
of tax legislation might be avoided. And that was the obvious purpose behind the inclusion of s 64C. The legislator foresaw that
a company might find other ways of transferring its profits to its shareholders than by the process of distributing them directly
in the form of dividends. So the 'mischief' which the legislator sought to prevent by enacting s 64C was the avoidance by companies
of liability for STC, by disguising what was in truth a dividend distribution as some other form of transaction. In this regard the
legislator plainly foresaw two possibilities. Traditionally the recipients of a dividend declared by a company are the shareholders.
The first possibility was that the company might make the payment (or transfer the benefit measurable in money), not to the shareholder,
but to a person associated with the shareholder who would be in a position, informally, to pass it on to the shareholder. Such an
arrangement would make it difficult, if not impossible, for the Commissioner to identify the transaction as the distribution of a
dividend. This was plainly the reason for the broadening of the class of 'recipients' in subsec (1). The second possible 'loophole'
which the Legislature sought to close related to the type of transaction, under the guise of which what was effectively the payment
of a dividend, could be made. The result was the deeming stipulation in subsec (3), in which various means of transferring a benefit
measurable in money from the company to the recipient are listed.
[24]
The crucial question in this appeal is: What did the Legislature intend the word 'beneficiary' to mean
in subsec (1)(c)? There is, in fact, a definition of the word 'beneficiary' in the Act. It is to be found in the definition of the
term 'connected person' in s 1. For reasons which I intend to set out later, I do not think that this definition is of any assistance
in arriving at an acceptable interpretation of s 64C(1)(c). For present purposes it will suffice to point out that the defined meaning
in the definition of 'connected person' is prefaced by the words 'in this definition the expression "beneficiary" means'.
This is a clear indication of an intention to confine this defined meaning to the context of the definition of ‘connected person’.
[25]
The first part of the process of interpretation must be to consider the words of subsec (1) to decide
whether their meaning is clear. In this regard, counsel for the respondents submitted, and the court a quofound, that the word 'beneficiary' could have more than one meaning. That is by no means a novel situation when it comes to the interpretation
of language. But the question is whether the word, properly considered in its context, is nevertheless ambiguous. Most of the rules
of interpretation have been devised for the purpose of resolving apparent ambiguity and arriving at an interpretation which accords
as well as possible both with the language which the Legislature has used and with the apparent intention with which the Legislature
has used it. In recent years courts have placed emphasis on the purpose with which the Legislature has enacted the relevant provision.
The interpreter must endeavour to arrive at an interpretation which gives effect to such purpose. The purpose (which is usually clear
or easily discernible) is used, in conjunction with the appropriate meaning of the language of the provision, as a guide in order
to ascertain the legislator's intention. Thus, in Standard General Insurance Co Ltd v Commissioner for Customs and ExciseNugent and Lewis JJA said:
'Rather than attempting to draw inferences as to the drafter's intention from an uncertain premise we have found greater assistance
in reaching our conclusion from considering the extent to which the meaning that is given to the words achieves or defeats the apparent
scope and purpose of the legislation. As pointed out by Nienaber JA in De Beers Marine when dealing with the meaning of "export" for the purpose of s 20(4) – which draws a distinction between export and
home consumption – the word must "take its colour, like a chameleon, from its setting and surrounds in the Act".'
[26]
In following the precept to consider the word 'beneficiary' in its context, it is relevant, in this case,
to bear in mind that ss 64B and C deal with a type of tax which is sui generis in the Act. The 'setting and surrounds' of the word are therefore possibly more restricted than usual. It is also relevant to bear
in mind the circumstances in which s 64C will come into play. A company will have made a 'distribution' (I shall use this general
term for the purpose of referring to any of the various transactions falling within the ambit of subsec (3)). This may have been
done by a direct payment in cash or by any of the less direct transactions listed in subsecs (b) to (e) of subsec (3). The distribution
will have been made to the shareholder or some other person or entity. Where it is made to the shareholder, there can be little doubt
that it is made for his benefit, and there will be no difficulty in concluding that it is to be treated as the surrogate of a 'dividend'.
Where the distribution is made to a person or entity other than the shareholder, the question which immediately arises is: Why would
the company decide to confer a benefit on that particular person or entity? It must be borne in mind that the type of distributions
clearly in contemplation in the subsection are those which offer little or no quid pro quo to the company. If there isa quid pro quoeg the settlement of a debt owed by the company or a loan at a market-related rate of interest, the provisions of subsec (4) render
the deeming provisions of subsec (3) inapplicable.
[27]
But if the distribution does not fall within the class of genuine transactions envisaged in subsec (4),
the question why the distribution was made in the first place remains unanswered. Companies do not operate without motivation or
reason and ordinary commercial companies do not give their assets away capriciously. Applying these considerations, the purpose (and
accordingly the intention) behind subsec (1) becomes clearer. If an apparently gratuitous distribution is made to a relative of a
shareholder, the probabilities are overwhelming that the proceeds of the distribution are intended, by the company, to reach the
shareholder. Certainly that would be the view of the hard-bitten commercial cynic and I think that it is safe to accept that those
who are responsible for drafting tax legislation will by now, after nearly 50 years of tinkering with the Act, have an appropriate
measure of cynicism in their makeup. The word 'relative' is specifically defined in the Act. The relevant portion of the definition
reads:
.RTF of original document