Companies
1872. Interpretation note on the Brummeria judgment
October 2010 - Issue 134
When the judgment of the CSARS v Brummeria Renaissance (Proprietary) Limited & Others 69 [2007] (69 SATC 205) was released in 2007 there were a number of taxpayers and tax consultants experiencing restless nights. In order to restore some calm, the South African Revenue Service released a draft interpretation note which has now been replaced with the final Interpretation Note No. 58, dated 30 June 2010 (the Note).
By way of background, in the Brummeria case the taxpayer had granted life rights over units in a sectional title scheme operating as a retirement village to the life-right holders. As a quid pro quo, the life-right holders advanced interest free loans to the taxpayer for so long as they occupied the units. Ultimately, the court held that the right of the taxpayer to use the loans interest free in exchange for the use of the life-rights constituted "gross income" in terms of section 1 of the Income Tax Act No. 58 of 1962 (the Act).
In this regard, the Note provides that the following principles were enunciated by the SCA in the Brummeria judgment:
· The word "amount" in the definition of "gross income" is to be interpreted widely.
· The right to use the loan capital interest free has a monetary value. It should be appreciated that it is the "right" to an interest free loan, and not the receipt of an interest free loan itself, which may constitute "gross income" for purposes of the Act.
· Even though the receipt or accrual of the right is in a form other than money, which cannot be alienated or turned into money, it does not mean that the receipt of the right has no monetary value. It follows that the judgment overturns that part of the Stander v CIR [1997] (59 SATC 212) CPD 1997 case where it was held that if subjectively a taxpayer was not capable of turning a right into money it had no value. The test is now whether or not objectively a right has a monetary value.
· The value of the receipt or accrual in a form other than money constitutes an "amount" that "accrues" to the taxpayer and should be included in the gross income of the taxpayer.
· For a benefit of this nature to be taxable, the amount does not need to fall within paragraph (i) of the "gross income" definition in section 1 of the Act (ie. a "taxable benefit" as defined in the Seventh Schedule to the Act).
The Note highlights the fact that there are a number of issues which could not be pursued by the court and which were not argued by the taxpayer, including:
· The fact that the SCA did not, in the context of the appeal, consider the position of the life-right holders.
· Whether or not the nature of the rights under the transaction were of a capital or revenue nature. This issue was not raised before the SCA. However, the Note accepts that the value of a receipt or accrual in a form other than money would usually (other than in the present circumstances) be of a capital nature.
· The timing of the accrual in the hands of the taxpayer. The Note provides that the timing of the accrual in a form other than money must be determined in each individual case having regard to the law and the facts and circumstances of each case.
· The valuation method used to determine the value of the right to use an interest free loan. The Note specifically provides that the SCA neither accepted not rejected the weighted-average prime overdraft rate of banks applied to the value of the right to the interest-free loan as the appropriate valuation method. The Note accepts that in each case an appropriate value method should be adopted for the particular facts and circumstances.
In particular, taxpayers will be relieved to see that the Note provides that the right to receive an interest-free loan in the context of a group of companies and shareholder's loans will not necessarily be affected by the Brummeria judgment. It is important that the interest-free loan is not received in exchange for goods sold, services rendered or some other benefit by the borrowing company.
Since the publication of the draft interpretation note, most of the concerns regarding the application of the Brummeria judgment and its affect on interest free loans have been addressed. However, the release of the Note serves as a gentle reminder of the principles established in the Brummeria judgment, which may find application where one does not necessarily expect. In particular, it is important to take notice of the Brummeria judgment and the Note to the extent that one is receiving a right in exchange for goods sold, services rendered or some other benefit.
Editorial comment: The Note also deals with the valuation of the benefit to be taxed. Refer to the Interpretation Note 58 for full details.
Cliffe Dekker Hofmeyr
IT Act:S 1 "gross income"
Interpretation Note No: 58 dated 30 June 2010
