LAW OF TAXATION CASE SUMMARIES
GI: DEFINITION OF AN AMOUNT
Lace Proprietary Mines Ltd v CIR 1938 AD 267
Facts
At the end of 1933, LPM disposed the mineral rights of the farm Spaarwater to an existing
company on the 29th of November. The consideration was €250 000 to be paid in the form of
1 million shares valued at 5 schillings a share in the purchasing company.
In this assessment of LPM for the year ending on 30 June 1935, the CIR treated the above
consideration received by LPM for Spaarwater as a receipt on income but valued the 1 million
shares at 12 schillings per share.
LPM appealed against this assessment to the Special Court which dismissed the case. Thus,
LPM took the matter to the Supreme Court of Appeal.
Legal question
What should be included in the taxpayer’s gross income: €250 000 in cash or the 1 million
shares valued at 12s/share?
Court’s decision
The true intention of the parties was that the true consideration was 1 million shares in the
purchasing company. No cash consideration could be demanded from the purchaser who was
entitled and obliged to deliver these shares in fulfillment of its obligations to pay for the farm.
Thus, the shares will have to be valued.
The value of the shares on the 29th of November must, of course, be ascertained by enquiring
what price could have been obtained for them, by adopting some reasonable method of sale
on that date. However, to throw the whole 1 million shares on the Johannesburg market on
a given date would obviously be the worst possible way of gauging their value.
What has to be looked for is a person who is willing to buy wholesale at a price under the
retail price of the Stock Exchange quotation. He would get his profit over a period by retail
sales. Such a buyer would certainly be influenced by the stability and firmness of the Stock
Exchange daily quotation and would normally buy at something under that quotation.
Appeal was dismissed. Found in favour of the CIR.
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,C: SARS v Brummeria Renaissance (Pty) Ltd and others 2007 (6) 601 (SCA)
Facts
Brummeria Renaissance was a retirement village which, during 1996-2000, entered into
agreements with potential occupants of units still to be constructed in the village. In terms of
these agreements:
a) Brummeria would obtain an interest-free loan from a potential occupant in order to
finance the construction of a unit.
b) The lender (person lending the money) then received the right of lifelong occupation
of the unit, whilst ownership remained with Brummeria.
c) Furthermore, Brummeria was obliged to repay the loan to the occupant upon
cancellation of the agreement, or upon the occupant’s death.
During the assessment of Brummeria, the Commissioner included an amount equal to the
value of the rights of Brummeria to use the funds as interest-free loans were included in
Brummeria’s gross income.
It was argued by the Commissioner that the benefit received in exchange for the provision of
occupation rights has an ascertainable money value and accordingly falls within the definition
of “gross income” of the Act. Thus, the money value of the benefit of the interest free loans
accrues to the developers.
Brummeria objected to this arguing that the interest-free loans did not result in any
“amounts” being “received by” them.
The Johannesburg tax Court upheld the appeals by Brummeria and subsequently granted the
Commissioner leave to appeal to this court.
Arguments
The Commissioner
The Commissioner did not argue that the actual receipt of the loan capital resulted in the
receipt of amounts for the purposes of the definition of gross income. The commissioner’s
case is that it was the right to retain these loan capital, interest-free, for the relevant periods,
which constituted the rights which had an ascertainable money value, and which accrued to
the companies.
Brummeria
Argued that the rights sought to be included was of a capital nature, but this was not raised
before the Tax Court in accordance with the applicable rules. Argument was therefore thrown
out.
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, Court’s decision
Referred to the legal position regarding the word “amount” and the phrase “accrued to” as it
was set out in Cactus Investments v CIR which confirmed the findings in:
CIR v People’s Stores (Walvis Bay): Definition of gross income includes “not only income
actually received, but also rights of a non-capital nature which accrued during the relevant
year and are capable of being valued in money”. No more is required for an accrual than that
the person concerned has become entitled to the right in question.
In the modern commercial world, a right to retain and use loan capital for a period of time,
interest-free, is a valuable right.
Previous cases that stated that the taxpayers must be able to turn the property into money,
was wrong. This is NOT the test.
The question cannot be whether an individual taxpayer is in a position to turn a receipt or
accrual into money. If that were the law, the right to live in a house rent-free, or to drive a
motor vehicle without paying for it, for example, could be rendered tax-free by the simple
expedient of limiting the right to exercise such benefit to the recipient – which manifestly is
not the case.
Summary
The court found that an amount, in the form of a right to the interest-free use of money, had
accrued to Brummeria. It was plain that the amount had accrued otherwise than in cash, and
that the rights in question had an objective ascertainable money value: however, the right
was not capable of being turned into money by Brummeria. The court held that it is not a
requirement of the definition of “gross income” that a receipt or accrual otherwise than in
cash must be capable or being turned into money; it is sufficient that the right acquired has
an ascertainable value.
Criticism of the Brummeria judgment
Broomsberg – Brummeria and Rights Incapable of Being Turned Into Money
Judges in the Brummeria case misread the judgment of Hefer JA in People’s Stores. They have
understood it as laying down the rule that the principle in Tennant v Smith (even though a
right has a money value, it will only be treated as income if it is capable of being turned into
money = must have an ascertainable money value and must be capable of being turned into
money) does not apply in SA, whereas Hefer JA actually held the opposite.
States that the court made this error due to the way in which they dealt with the authority:
ignoring the judgments in Lategan and Delfos and then, instead of relying directly on the
relevant passage from the judgment of Hefer JA in People’s Stores, he chooses rather to rely
on a passage from a later judgment in Cactus Investment v CIR which did not deal with an
amount that had accrued otherwise than in cash.
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