Cape income tax special court case 11135
30 August 2005
Posted by: TaxFind™
Before The Honourable Justice JHM Traverso: President
Mr. I.Z. Willis: Accountant Member
Mr. B.B. Justus: Commercial Member
(Heard in Cape Town on 17 August 2005)
Case no: 11135
In 1998, the appellant entered into an agreement with an entity referred to in the judgment as B, in terms of which he would invest an amount just in excess of R6 million in a "life annuity" with B. This would give him an initial guaranteed monthly income which could be revised annually at the instance of the appellant subject to a certain limitation.
The appellant was taxed on the basis that the amount paid to him by B in terms of the contract was an annuity and thus gross income in terms of paragraph (a) of the definition of gross income in section 1 of the Income Tax Act 58 of 1962. He contended that he should have been taxed on the basis that the income generated on the capital amount invested by him constituted gross income under the general portion of the definition of gross income, and not in terms of section 1(a).
Held that the distinction between the payment of a capital debt in instalments and an annuity is a fine one. Generally, if what is being repaid is a debt, it is not an annuity whereas if the periodical payment is not in respect of a debt owing or in liquidation of a debt it is an annuity.
The evidence showed that although the appellant agreed to tie up his capital in order to obtain payment from his pension fund, in effect, the agreement provided for the return of all his capital plus the income derived therefrom until the capital was exhausted. Accordingly it was not an annuity.The appeal was allowed and the respondent was ordered to issue a revised assessment.
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