Interpretation of exemption provisions

The Tax Court gave judgment in the matter of ABC (Pty) Ltd vCommissioner for the South African Revenue Service (case number 13512, as yet unreported) on 30 March 2015.

Even though the case concerned secondary tax on companies (STC), which has been replaced by dividends tax, it is interesting to see how the court dealt with the interpretation of an exemption provision.

The South African Revenue Service (SARS) assessed the taxpayer for STC in terms of s64B(2) of the Income Tax Act, No 58 of 1962 (Act) on the basis that certain loans made by the taxpayer were loans as contemplated in s64C(2)(g) of the Act. In terms of s64C(2)(g) of the Act, loans made to shareholders or connected persons in relation to such shareholders, are deemed to be dividends.

The taxpayer was a wholly-owned subsidiary of trust X. The taxpayer was part of a group, and it was a property-owning company as well as a treasury company. Interest-free loans were made to the taxpayer, and the taxpayer in turn made interest-free loans to certain borrowers. The loans made by the taxpayer were the subject of the dispute.

The taxpayer did not dispute that the loans were made to its shareholders or connected persons in relation to its shareholders, but relied on an exemption contained in s64C(4)(bA) of the Act.

Section 64C(4)(bA) provided that there will be no deemed dividend:

“…to the extent of any consideration received by that company in exchange for –

(i).. the cash or asset distributed, transferred or otherwise disposed of; or

(ii). any other benefit granted as contemplated in subsection (2)…”

The court noted that STC was a tax imposed on the dividends distributed by a company, and a dividend is essentially a distribution by a company of its profits. The underlying principle of STC was therefore for the state to share in the profits of a company.

The taxpayer argued that, in extending the loans, it did not distribute any of its profits, but merely acted as a conduit of the incoming loans.

SARS argued that, for the loans to qualify for exemption, the loans had to comply with s64C(4)(d) of the Act, which provided that a loan would be exempt from being deemed a dividend where, “a rate of interest not less than the official rate of interest …is payable by the shareholder or any connected person in relation to the shareholder…”

SARS’s submission was based on the argument that s64C(4)(d) of the Act dealt specifically with loans, and only loans of this kind qualified for exemption. The other exemption provisions, such as that contained in s64C(4)(bA) of the Act, could not apply because of the application of the maxim expressio unius est exclusion alterius: the mention of one matter excludes the other.

However, the court ruled that the maxim could not be relied on in this matter, and that it does not always follow that the mention of one matter excludes all others. The maxim should only be used with great caution. The court held that without clear words to that effect, it could not have been the intention of the legislature that only loans contemplated in s64C(4)(d) could be exempt.

SARS also argued that s64C(4)(dA), on which the taxpayer relied, was not applicable because the loans were interest free and thus no consideration was received by the taxpayer.

However, the court held that due to the nature of the arrangement between the parties, the taxpayer received quid pro quo for granting the interest-free loans, being   interest-free incoming loans.

It was noted that the use of the taxpayer as a conduit was, according to a witness, rather bizarre. However, the court was quick to point out that SARS did not rely on anything to the effect that there was something sinister about the arrangements, and that “taxpayers are entitled to arrange their affairs in the manner they wish as long as the confines of the law are respected.” Accordingly, the appeal was upheld and the assessments were set aside.